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FX Update - Commodity currencies find some support

Written by Ian Dobbs on August 11th, 2015.      0 comments

Market Overview:
It seems the Australasian currencies may have become a little overcooked on the downside early last week, and as such we are seeing something of a recovery in both the NZD and the AUD. The Australian dollar led the way last Tuesday after a very neutral RBA rate statement, but later in the week the NZD started to play some catch up. A lot of negativity has been priced into the New Zealand dollar recently and the failure to sell off further after Fonterra’s downward revision to its forecasted pay-out on Thursday was a signal that it may be overdone, at least in the short term. There is plenty of potential for the recovery in both currencies to extend a bit further this week, especially if commodity prices continue to bounce from the lows we have seen in the past 48 hours.

The Australian dollar saw gains on most crosses this past week buoyed by better than forecast data and a somewhat more ‘neutral’ sounding central bank. On the data front we saw better than forecast readings for retail sales, trade balance and employment change. The unemployment rate did jump from 6.1% to 6.3%, but this was largely the result of an increase in the participation rate. The Reserve Bank of Australia (RBA) released their quarterly Monetary Policy Statement on Friday and it’s fair to say they seem very comfortable with current policy settings and the broad level of Australian dollar depreciation seen so far. The chance of further interest rate cuts has certainly diminished, although they are not completely out of the question. This week to draw focus we get readings on business confidence and consumer sentiment, along with the wage price index and inflation expectations.

New Zealand
A lack of follow through selling on the back of softer than expected economic releases last week has seen the New Zealand dollar put in something of a recovery from recent lows. Falling dairy prices and Fonterra’s significant downward revision to its forecasted pay-out certainly weigh on the medium term outlook for the currency, but it seems the market was well positioned for negative news. The failure to break through recent lows has seen some short term profit taking emerge from sold positions and this acted to support the currency in recent days. There is potential for this move to extend further, especially in light of the lack of key releases scheduled over the coming week. Friday’s retail sales data will provide the only real focus with the market expecting a gain of 0.5%.

United States
The US economy continues to recover and the Fed are getting closer to raising interest rates for the first time since 2006. The market is very undecided on whether that lift off in rates will be seen in September or December. In the longer term picture, the timing is largely irrelevant, but it will certainly impact the shorter term performance of the USD. This issue the Fed need to debate is that there are some very mixed signals coming from the US economy. Although they desperately want to move away from zero interest rates, they are afraid to move too early and negatively impact the recovery. The bright spot of the economy is the job market and if it was down to employment alone, the Fed would have already hiked. At the end of last week we saw the US produce another solid employment report. The economy added 215k jobs which, when taken together with positive revisions, was pretty much in line with expectation. The unemployment rate remained steady at 5.3%, which isn’t far off the Fed’s definition of full employment. The problem the Fed has is employment is only half of their mandate. The other half is inflation and there is little evidence that inflation is going to pick up any time soon. Wage growth remains weak, as does consumer spending. Add to this the very soft commodities picture along with weakening indicators of global trade and it gets very hard to see where any inflation pressure will come from. Legendary bond investor Bill Gross summed it up best recently when he said the world is lurching dangerously close to deflation. The Fed has a very difficult decision on their hands and we can expect plenty of volatility in the USD as the ebb and flow of data releases swings opinion one way then another. This week the focus will be on unit labour cost data, retail sales, producer prices and consumer sentiment.

United Kingdom
Economic releases from the UK over the past week have undermined some of the recent support for the GBP and seen expectations for a rate hike pushed out into the first half of next year. Only one member of the MPC (Monetary Policy Committee) voted for a rate hike at last week’s Bank of England (BOE) meeting which disappointed the market who were expecting the two most hawkish members to put their hands up. Governor Carney then stuck a somewhat ‘dovish’ tone clarifying earlier comments he made about rate hikes coming into focus around the turn of the year. He said the media got it wrong and what he meant is that the BOE will start looking at rate hikes around that time, not actually make them. In recent days we’ve also seen comments from the BOE’s Broadbent is said there is currently no urgency to hike interest rates. Add to this last week’s small pullback in services sector PMI and there just haven’t been that many reasons to buy GBP’s recently. Longer term, as we get closer to an eventual interest rate hike, the UK Pound should continue to appreciate. But in the near term it might find further gains a lot harder to come by. The focus this week will be on employment data set for release on Wednesday.

Not having Europe dominate the headlines has been something of a refreshing change recently. Economic data over the past week suggests the region has continued its very gradual, and potentially fragile, recovery. Retail sales were a disappointment printing at -0.6% but this was countered by better results from German factory orders and the French trade balance. Investor confidence failed to make any gains last month printing largely unchanged from the prior number at 18.4. This week to draw focus we have the ZEW economic sentiment index, GDP data, and the final reading of inflation.

The Bank of Japan (BOJ) met on Friday and left monetary policy settings unchanged as widely expected. However, many in the market do believe the bank will be forced to add stimulus over the coming months in order to help achieve it’s 2% inflation target. BOJ Governor Kuroda said they “would consider adjusting policy if oil rates affect the price trends and impact on underlying price movements,” but he added “that’s not the situation right now.” Although last month the bank cut its economic growth and inflation forecasts, they still expect consumption and exports to gradually increase along with wages. The question is will that be enough to lift inflation from near zero currently. Yesterday we saw small declines in consumer confidence and the economy watchers sentiment index, and later this week we have producer prices, tertiary industry activity and core machinery orders data to digest.

The Canadian dollar continues to be held hostage to movements in the price of oil. In the past 24 hours that has helped to see the CAD make some gains with oil bouncing from recent lows, but longer term it’s been pressuring the currency badly. At the end of last week Canada produced some slightly more positive data with building approvals and the Ivey PMI both improving by more than forecast. However, the key employment numbers were pretty close to expectation with employment change printing at a very modest +6.6k and unemployment steady at 6.8%. That will have done little to support the central bank’s view that an economic rebound is on the cards for the second half of this year. The Canadian economy contracted in each of the first five months of this year, triggering two interest rate cuts from the Bank of Canada. Those cuts have underpinned an already hot housing market, but the rest of the economy has been struggling. The most positive aspect about the Canadian economy is that their large neighbour to the south, the USA, is growing steadily and this should support exports going forward. This week is looking pretty light in terms of economic data with just the new house price index and manufacturing sales of any note.

Major Announcements last week:
  • Dairy prices fall 9.3% at the latest auction
  • NZ Employment Change +0.3% vs +0.5% expected
  • UK Services PMI 57.4 vs 58.1 expected
  • US ISM Non-manufacturing PMI 60.3 vs 56.3 expected
  • Australian Employment Change 38.5k vs 10.2k expected
  • UK Manufacturing Production 0.2% as expected
  • Bank of England votes 8 to 1 to leave interest rates on hold
  • Canadian Building Permits 14.8% vs 5.1% expected
  • Canadian Employment Change 6.6k vs 5.3k expected
  • US Non-farm Payrolls Change 215k vs 222k expected
  • Canadian IVEY PMI 52.9 vs 51.8 expected