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Economies of Note: 18th Dec 2015

Written by Sam Coxhead on December 18th, 2015.      0 comments

2.40PM (NZT)


A relatively featureless data schedule in Australia this week has meant that moves in the AUD have been dictated by offshore events. The decision by the Fed to move interest rates up (+0.25%) for the first time in nearly a decade was widely anticipated, although the USD has garnered support after the projected future U.S. interest rate path was not lowered as much as many had anticipated. The AUD has come under further pressure in trade overnight (in what is becoming a very familiar theme) on the back of sharp falls again seen in key commodities and commodity based currencies. Earlier in the week the AUD gained some brief respite after the release of the RBA minutes which delivered a slightly more positive assessment of the Australian economy than that expected. The minutes noted an improving growth outlook and trend in the labour market, and the generally positive flow of recent domestic data. It is a quiet lead up to the Xmas break in Australia, this will once again mean the AUD will take its cue from offshore developments.
New Zealand
The NZD took the Fed’s decision to raise rates in its stride this week, although experienced significant volatility in the thinning holiday markets over the announcement. The USD has been on the front foot since the announcement, particularly so overnight which has once again seen the commodity currencies bear the brunt of the losses. The latest GDT dairy auction release on Wednesday morning was disappointing after the GDT-TWI rose by only 1.9%, much less than the 6% gain implied by the NZX futures pricing leading into the auction. The NZ Q3 current account data that was released a few hours later came in slightly better than expectations but failed to ignite much interest. NZ Q3 GDP data released yesterday beat the market expectations (actual 0.9% q/q), although the downwards revision to the Q2 data meant the y/y growth met the consensus forecasts.The market reaction was naturally muted especially when viewed against the earlier volatility seen over the FOMC announcement. Direction for the NZD next week will come from offshore, the only local data of note is the November trade data release on Wednesday, this is likely to garner little market interest.
United States
The widely anticipated FOMC monetary policy meeting has dominated sentiment held towards the USD this week. The U.S. Fed raised rates by 0.25% at the meeting as expected by the majority of the market. This marks the first time since June 2006 that the Fed has raised the Federal-Funds interest rate target. The Fed did not shift the “dot plot” of rate expectations much lower however, this came as a surprise to many in the market. Especially to those who had expected a lower projected path for rates, given the recent market volatility and uncertainty evident in the high yield junk bond and energy markets. The path called for another four 0.25% hikes next year, on the way to “normal” rates of around 3.50%. Fed chair Yellen noted in a move aimed at calming nervous markets that any moves would be “data dependent”. Data releases during the week included slightly better than expected inflation data for November which showed core inflation in line with the FOMC’s 2% target and surveyed inflation expectations holding steady. Housing starts and building permits data posted solid gains in November, although the industrial production data for the same month missed expectations. Other U.S data was mixed and included deterioration in the Philly Fed manufacturing survey and improvement in weekly initial jobless claims. Highlights for next week include U.S. Q3 GDP and durable goods data.
United Kingdom
The GBP/USD trades near its lows for the week in trade presently, on the back of solid USD demand post the U.S. FOMC meeting. Data out of the U.K. during the week was upbeat but failed to make an impact on the strong USD sentiment, particularly after the Fed indicated expectations of another four rates hikes for 2016. The week started with U.K. inflation data which marginally surpassed expectations. ONS house price data released at the same time posted a 7% gain y/y. Strong labour market data which saw the unemployment rate fall to near 10-year lows of 5.2% failed to stem the tide of GBP selling. Dovish comments from the BOE Governor Carney and member Shafik (who noted the need for stronger wage growth) helped contribute to the weak GBP sentiment. Retail sales data released overnight which easily beat expectations failed to change the proceedings. Annual total retail sales growth is now 5% and reflects the strong domestic demand and momentum in economic activity. Next week will see the release of Q3 U.K. GDP data on Wednesday.
USD sentiment has been the primary driver of trade in the Euro this week. This sentiment took a boost yesterday after the U.S. FOMC meeting. When despite raising rates by 25 bps as expected, contained some surprises after the Fed chose to maintain its expectation that it will raise rates by a further 1% in 2016 (four 25 bps hikes). Data released out of Europe this week included firm European industrial production data which rose at double the rate forecasted in October. German ZEW confidence data posted rises for both the current and expectations components. The euro area-wide number also firmed and indicates a growing confidence in the sustainability of the unfolding euro area recovery. The German IFO survey of business sentiment was marginally disappointing however. The French and German PMI data also slightly disappointed, although the absolute levels remained sound overall. Euro area inflation data was better than expected, albeit current inflation levels in Europe remain a long way off those targeted by the ECB.
The JPY is ending the week on a soft tone after its fortunes have reversed during the course of the week. This was particularly so following the FOMC yesterday, which saw the Fed raise interest rates and surprise many in the market by sticking with its belief that it can raise rates a further four times in 2016. Data released in Japan included the Tankan survey on Monday which showed pessimism over the outlook, but a generally positive theme of current conditions. Trade data released on Thursday whilst better than expectations. was driven on the back of a slump in imports and these outweighed the decline seen in exports. Focus for the JPY now sits squarely on today’s BOJ monetary policy meeting where the vast majority of economists expect no further expansion in the BOJ asset-buying program.  Governor Kuroda’s comments on the inflation outlook will be keenly awaited.
Things have gone from bad to worse for the CAD this week after it once again lurched lower in trade overnight on the back of the now very familiar story of depressed oil pricing. Oil prices have once again returned to near their lows in recent trade on the back of fresh data which showed a surprise build in U.S. inventories on Thursday. Natural gas prices were also under additional pressure on the back of data which showed total U.S. storage at levels some 14% higher than this time last year as warm pre-winter weather in the U.S. significantly reduces demand for heating fuel. Canadian inflation data tonight is the immediate focus for the CAD, this will likely take a back seat however to the market’s obsession with energy market pricing.