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Economies of Note - 6th October 2017

Written by Howard Wilcox on October 6th, 2017.      0 comments

We have seen some mixed results for the “lucky country” this week. As expected, the RBA left rates unchanged at 1.5% while the accompanying statement saw little change in the wording. RBA Governor Lowe maintained the upbeat note on the state of the local economy, also as usual for central bankers, voicing concerns about currency (AUD) strength, which could become a drag for the economy and inflation. There was also positive news on the trade balance outcome, as the surplus was larger-than-expected, up to 989M in August, while previous month's result was upwardly revised to 808M, with the advance attributed to rising exports of iron ore to China. However, weighing on the AUD were local Building permits for August, which tumbled 15.5% on a yearly basis, less than market’s estimates, but nevertheless in negative territory. Also adding to AUD selling pressure were yesterday’s retail sales figures; these came in well below expectations at -0.6% for August against forecasts of +0.3% along with the previous month revised down by -0.2%. This was actually the worst retail sales figure since mid-2012. The AUD traded up around 0.7840/60 against the USD for most of the day, but once the retail sales data showed the Aussie economy still has some wobbles, sellers pushed the AUD/USD into the 0.7820/30 region. Further selling overnight saw a 0.77988 low. Given that tonight's US Non-farm payroll data is expected to be USD positive, look for AUD/USD support at 0.7785 to be tested and if broken an extension to first 0.7750 then 0.7710 is likely.

New Zealand
The New Zealand dollar has had a tough old week, sliding lower after the drop in prices at Tuesday night’s Global Dairy auction went against the 6% rise expected by the market and forecasted in dairy futures pricing. Business confidence data earlier this week was weaker. Also negatively impacting the NZD has been the ongoing uncertainty over the formation of a new government. Some clarity should be provided tomorrow after 2pm, when the special vote count result will be announced. This will enable coalition talks to begin in earnest next week and we should see the shape of the new coalition towards the end of next week. Expectations are that the National government will continue with NZ First, however this is not certain and if the Labour block look likely to become the government, initial market reaction would be to sell the NZD lower. Although economic fundamentals on the whole remain positive, the sense now appears that the NZ economy has lost some of its lustre, at a time when the tone of US data is looking increasingly solid. After starting the week at 0.7200 against the USD, the NZD has sunk to 0.7112 - a four-month low. Now at 0.7115 any recovery ahead of tonight’s USD data looks remote. Support is down at 0.7090 which is likely to be tested on a solid US payrolls figure tonight. Upside resistance at 0.7160 is now far away. The next week could be volatile as politics takes the driver's seat.

United States
U.S. equity markets extended higher, with an eighth straight gain, the dollar strengthened  as the latest raft of economic data added to optimism in the American economy ahead of tonight’s Non-farm payroll report. The S&P 500 continued its streak of gains to the longest since 2013 after jobless claims and factory orders beat expectations, reinforcing the positive trend. The US dollar touched July levels as data showed the U.S. trade gap narrowed to an 11-month low. Also helping the positive mood were comments from US Fed officials who were upbeat on the outlook for the US economy and said roughly the same thing, that the outlook warranted one more hike this year (December) and another three to follow in 2018. Tonight’s September non-farm jobs report is forecasted to show somewhere between 80-100k jobs created for the month, with the unemployment rate holding around 4.4%. The wide range and below trend expectation is due to hurricanes Harvey and Irma. Although underlying strength of the labour market remains solid, job creation is usually negatively affected following major hurricanes. Our call is for a rise in employment of around 90,000 in September (although uncertainty is higher than usual) against a 12-month moving average of 175,000 and look for a broad-based slowdown in job creation. Given the lower expectations, there should not be a sharp market reaction to a weaker jobs report since the Fed has explicitly stated that it does not expect the impact of hurricanes Harvey and Irma to play a role in its monetary policy decisions, as it expects them to impact economic activity only in the short term. Expectations are now firmer for the Fed to hike once more this year in December due to the focus on the unemployment rate and easy financial conditions. The EUR/USD weakened to 1.1700 overnight down from 1.1814 at the start of the week. Now at 1.1710 immediate supports is at 1.1695 then 1.1660, short term risk is to the downside ahead of tonight's data.

United Kingdom
It has been a rocky road for the UK pound this week as persistent pound weakness allied with ongoing US dollar demand pushed the pair to its lowest level in nearly a month.
Political uncertainty problems were not helped when PM May’s bid to reassert her dwindling authority was ruined on Wednesday when her keynote speech to the Conservative Party conference was interrupted by repeated coughing fits, a prankster, and even letters of her slogan falling off the set behind her. After starting the week up at 1.3400, the GBP hit a wall of selling over the week as Brexit concerns and the persistent uncertainty in the UK politics keeps taking a toll on the sentiment surrounding GBP culminating in a fall overnight to 1.3106, the lowest level since the 8th August. Not even better PMI services data yesterday could stem the tide, as after a rally to the 1.3290 level sellers quickly overwhelmed buyers and the GBP retreat continued. Also adding to Sterling weakness was a warning from the Federation of German Industries, which said that local companies with presence in the UK should be planning for a "very hard Brexit." -ouch..! The GBP/USD 1.3100 level is now critical, a break of which would likely extend to 1.3070 then 1.3030. Tonight US jobs data may provide the impetus for such a move. Immediate upside resistance is at a distant 1.3145.

Minutes from the European Central Bank released on Thursday showed members discussed how to adjust monetary stimulus next year as policy makers raised concern over the volatility and the speed of the recent appreciation of the exchange rate, while at the same time agreed that the economy of the region still required substantial stimulus. The ECB has to balance solid growth with continuously disappointing inflation. So far there hasn't been much concern about the stronger EUR's impact on growth, although the EUR's impact on inflation is a source of debate at the ECB. Most ECB members seem to be of the view though that the positive impact from stronger demand will outweigh the drag on inflation from EUR appreciation. Risk for the EUR is to the downside with immediate support at 1.1695 then 1.1660.

As the week progressed and risk-off sentiment abated the Japanese Yen has gradually weakened against the USD as its safe haven appeal declined. Although the Japanese elections are later in the month the main focus remains on economic issues. Domestic growth trends remain weak and the Bank of Japan remains far from achieving its 2% inflation goal. This is likely to mean policy accommodation remaining in place for an extended period vis-a-vis other central banks preparing to exit extra-ordinary accommodation or nudge policy tighter. These accommodative monetary policy settings and relatively weaker growth will continue to weigh on the JPY whoever is in power. Currently the USD/JPY is sitting around 112.85 in directionless trading, but with potential to break higher depending on how investors take the US NFP report, and how it could affect odds for a Fed's rate hike for December, a good US jobs figure tonight would see a break of 113.25 target major upside at 114.40.

Data earlier this week showed Canada's merchandise trade deficit totalled $3.4 billion in August, widening from a $3.0 billion deficit in July. Exports decreased 1.0% on lower volumes, while imports were unchanged. Following two months of large decreases, exports were down a further 1.0% to $43.6 billion in August—despite increases in 6 of 11 sectors.
The CAD has weakened against the USD as the better US data has outweighed that of Canada with the USD/CAD rising last night to a high of 1.2582, continuing the bearish tone seen earlier in the week. It is now at 1.2571 immediate resistance is at 1.2605 and should be under pressure if tonight's US NFP is solid.