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FX Update - Central Bank rate decisions draw focus

Written by Ian Dobbs on March 3rd, 2015.      0 comments

Market Overview:
Central banks once again draw the spotlight this week with close decisions expected from both the Reserve Bank of Australia (RBA) and the Bank of Canada (BOC) over the coming days. The Bank of England (BOE) and the European Central Bank (ECB) also hold meetings this week, although no change is expected from either of them. Over the weekend the Peoples Bank of China (PBOC) surprised with a 0.25% interest rate cut. This is the second cut in three months and is an indication of just how concerned Chinese authorities are about growth and inflation prospects. House prices in China’s major cities fell by four per cent in February, while the manufacturing sector contracted for a second month running. Chinese economic health is closely tied to that of New Zealand and Australia being one of the major trading partners for each economy.

The main event for Australia this week is coming up in the next couple of hours when the RBA release their monetary policy decision. It is a 50/50 call whether they cut rates again now, or wait for later, and as such we could get a good reaction in the Australian dollar either way. The Chinese authorities are concerned enough about their economic situation to cut rates again, announcing the second cut in three months over the weekend, and this point won’t be lost on the RBA. Once we have the RBA decision out of the way focus will turn to the key releases of GDP, retail sales, and the trade balance all set to hit the wires over the coming days.

New Zealand
Data late last week showing the New Zealand trade balance improved significantly helped to support the NZD to a degree as, did another record month of migration flows. ANZ business confidence data on Friday was also supportive with an improved reading of 34.4 up from the prior 30.4. This week is a quiet one for data. Yesterday’s overseas trade index came in better than forecast but had little market impact. The only other notable release will be the latest dairy auction from Fonterra out tonight.  

United States
We have seen a very mixed bag of data from the United States recently. Better than expected results from core inflation, durable goods order, and GDP late last week helped to support the economic outlook going forward. But countering these were softer than forecast readings from pending home sales and Chicago PMI, which fell below the 50 level for the first time in two years. So far this week the data has mostly undershot expectations as well. Personal spending, personal income, ISM Manufacturing PMI, and construction spending all came in a touch below forecast. The overall impact of this data has been limited with the USD largely remaining well supported. We still have the key release of non-farm payrolls to come on Friday night with the market expecting another healthy reading around +240k. Ahead of that data we have ISM non-manufacturing PMI and the trade balance to digest.

United Kingdom
Recent data from the UK has failed to impact the current optimistic economic outlook. Last week’s GDP release came in as expected at +0.5%, and while preliminary business investment figures were softer than forecast, it was largely down to lower oil investment. Last night we saw an improved reading from manufacturing PMI which jumped to 54.1 and beat expectations. This lent some support to the UK Pound and we now look forward to the construction and service sector PMI’s out over the coming days. Governor Carney is also due to speak tonight and then on Thursday we have the BOE rate decision. No change is expected and that is likely to remain the case until very late this year, or even into early 2016.

When ECB President Draghi spoke last week he said he is starting to see the first signs of confidence in the real economy. Data over the past few days supports this view with the majority of releases showing a small improvement and printing a touch better than forecast. Included in these were the key releases of Eurozone inflation and unemployment. Inflation printed at -0.3% vs -0.5% expected and unemployment fell to 11.2% vs 11.4% expected. There is obviously a lot of work left to do and the Eurozone has a long tough road ahead, but any improvement in the data will be welcomed by the European Central Bank who meet this Thursday to review policy settings. No change is expected from the meeting and Draghi will likely continue to suggest we are seeing the ‘green shoots’ of economic recovery.

Japan released a rash of data points on Friday and for the most part they made very average reading. Preliminary industrial production was the only positive surprise printing at +4.0% vs +2.9% expected. The other releases of household spending, inflation, retail sales, and housing starts all disappointed. Although the data didn’t immediately impact the Yen, we have seen the currency gradually weaken in the early stages of this week. The focus now turns to average cash earnings data set for release later this afternoon. Continued wage gains are critical if the economy is going to achieve the inflation and growth targets it needs to over the coming quarters.

Canada released inflation data late last week that came in a touch stronger than forecast. Core inflation printed at 0.2% vs 0.1% expected and this has reduced the risk of another rate cut by the central bank in March. Governor Poloz also poured cold water on the prospects of another near term cut last week when said that Januarys move (the bank surprised markets with a 0.25% cut) bought him some more time to gauge how the dramatic plunge in oil prices might will affect the economy. The Bank of Canada meet again this week and the market is now pricing in a much reduced chance of another cut. Also this week we get GDP data, the Ivey PMI, building permits and the trade balance.

Major Announcements last week:
  • US New Home Sales 481k vs 471k expected
  • NZ Trade Balance 56m vs -162m expected
  • Australian Private Capital Expenditure -2.2% vs -1.7% expected
  • UK GDP 0.5% as expected
  • US Core Inflation 0.2% vs 0.1% expected
  • NZ ANZ Business Confidence 34.4 up from 30.4 prior
  • US GDP 2.2% vs 2.1% expected
  • UK Manufacturing PMI 54.1 vs 53.5 expected
  • Euro Inflation -0.3% vs -0.5% expected
  • US ISM Manufacturing PMI 52.9 vs 53.4 expected