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Economies of Note - 7th April 2017

Written by Howard Wilcox on April 7th, 2017.      0 comments

As expected the RBA kept interest rates on hold at 1.5%, amid pressure for an increase to hold soaring house prices. However the news from the economy continues to show a weak tone as underemployment increases as commodity prices have peaked and mining investment starts to wind down. The RBA has no easy choices as increasing rates to try and dampen down housing market gains would push inflation lower and the AUD higher, thus cancelling out some of the much needed stimulus that many sectors of the economy are benefiting from. Data continues to show a softening in the labour market with wages growth remaining subdued. The AUD has drifted lower over the last few days and has now broken through support at 0.7525 to now trade around 0.7517 Next stop is 0.7500 but given a strong US jobs figure expect a deeper move towards 0.7450

New Zealand
The New Zealand Dollar struggled to hold 0.7000 midweek falling away to a 3 week low of 0.6940 before consolidating around 0.6970 area. Global dairy auctions assisted the kiwi when another positive number was published on Tuesday with a 1.6% jump in prices, this suggests the world markets have found a base which could bode well for the next season starting on 1 June. Non-Farm payroll numbers are released tomorrow morning and will define the close of the week. With ADP employment change figures midweek showing good numbers of additional people joining the US labour market the expectation is for a good result for NFP which could push the New Zealand Dollar back above 0.7000

United States
US equity markets and the USD were higher with gold also rising, in financial markets nervous ahead of the US/China meeting and increasing geopolitical tensions over North Korea and Syria. Overnight there appeared to be a clear change in US policy over Syria, as US Secretary of State Tillerson said that he did not rule out military options to respond to an attack that he said violates international agreements and norms. The ADP jobs figure on Wednesday was higher than expected, showing an additional 263K new jobs for March well above forecasts of 187K. This has lifted expectations for tonight's Non-farm payroll to around 180K new jobs for March after 235K in February with the unemployment rate to stay steady at 4.7%. We are slightly more bullish and look for a figure close to 195K. USD trading has been choppy over the last few days with the Trump administration tax reform delayed and the Fed minutes release which indicated some form of tapering may occur later in the year. The USD headed lower but then tracked back on the increase in geopolitical risks and comments from a Fed official that whilst two more rate hikes were a “sensible starting point” a 3rd maybe necessary if inflation rose further. Expect markets to consolidate over the day heading into tonight's NFP figures with any move above the 200K mark to give a good USD bounce.

United Kingdom
More positive news from the UK economy, as data this week showed that UK productivity had increased in the final quarter of last year to surpass hourly output levels last seen before the financial crisis. Also this week PMI data showed an uptick in the services sector, rising to 55 in March, up from 53.3 in April. This raises hopes that the slowdown in the previous month could be a blip. Stronger demand from the US and other countries indicates that the lower GBP is helping exports sell more goods and services abroad. Currently the GBP is trading around the 1.2458 level, marking time ahead of tonight's US jobs data. A break of 1.2450 would target moves to 1.2420 then 1.2360, resistance is at 1.2485 the 1.2500. Given our views on a stronger US payrolls figure, the downside is favoured.

Latest opinion polls continue to show Marine LePen running second in the race to be French President, but chances of her winning in the second round remain long odds, although the “undecided” voters still remain at high levels. Yesterday ECB head Draghi warned that the Eurozone recovery was largely driven by low interest rates and it was vital that the ECB did not tighten rates too soon. The ECB is still injecting EUR 60bio/ month under its quantitative easing programme and its key deposit rate is at -0.4%, meaning it costs money to lodge funds with the ECB. Draghi reiterated that the ECB would keep printing money “until the end of December 2017, or beyond, if necessary”. These comments saw the EUR/USD slip below support at 1.0650 to a low of 1.0628, is now back around 1.0640 and we look for flat trading at current levels ahead of tonight's US jobs data. Immediate support is at 1.0620 with a break below targeting 1.0590 then 1.0565, if the jobs data is strong. Upside resistance at 1.0710 is unlikely to be seen.

The Japanese yen initially weakened back to 111.50 USD yesterday but came back to trade in the 110’s after the fed minutes were released. The Japanese consumer confidence improved to 43.9 above the expected 43.5 points but consumers remain pessimistic about the economy even though manufacturing and export numbers are still trending higher. The yen still looks ready to break long term support of 110.15 and the March low going into Non-Farm Payroll tomorrow, 108.30 is the 200 day moving average which could be tested.

The Canadian dollar remained range bound over the week against the US Dollar trading at 1.3400. Brushing off the 1.3440 high during last night’s North America trading the loonie recovered towards the end of the day supported by solid equity moves and Crude Oil trading through 51.70 up 0.6% a barrel. Building permit figures printed terrible yesterday at -2.5% way down on expectations of 1.4% growth putting further pressure on the CAD. We see continued steady demand to buy USDCAD on dips around 1.3400 with Friday’s employment data key. The bullish trend remains in place overall but with a weak Canadian job number along with a strong NFP release we could see the Canadian Dollar push towards 1.3600