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FX Update - Recent ranges dominate trading

Written by Ian Dobbs on September 29th, 2015.      0 comments

Market Overview:
Although the USD has continued to see broad based support on the back of rate hike expectations, it hasn’t been enough to see a break out of recent ranges. In fact many currency pairs have spent the better part of the past month confined to now familiar trading ranges. This won’t last forever, but for the time being the market seems comfortable with the lack of overall direction. There are some key releases this week that could certainly shake things up, with US manufacturing PMI and non-farm payrolls change of particular interest. The Australasian currencies will also be paying close attention to Thursday’s release of Chinese manufacturing PMI numbers. Any sign of further weakness in the Chinese economy will pressure the AUD, and to a lesser extent the NZD. Equity markets continue to look vulnerable and this is hampering risk sentiment in the wider markets.

There has been little data of note released from Australia over the past week to influence the currency or economic expectations. The Reserve Bank of Australia (RBA) are cautiously optimistic and are firmly ‘on hold’ in terms of potential interest rate moves, but sentiment in the wider market is much more negative and many forecasters are expecting further interest rate cuts from the central bank. Data over the coming days could certainly influence with local releases of building approvals and retails sales along with China’s official purchasing managers index (PMI). The continued slowdown in China will act as a drag on the AUD for some time yet.

New Zealand
It has been a relatively quiet week for economic data from NZ. Fonterra’s upward revision to pay-out forecasts certainly supported the NZD to a degree but confidence indicators continue to print at very soft levels. The latest of which was the Westpac McDermott Miller employment confidence index for quarter 3 which came in at 99.3 from 102.8 prior. That’s the lowest reading in three years. Tomorrow we get building consents and ANZ business confidence data. The Reserve Bank of New Zealand (RBNZ) released their annual report and in it they said international forces remain a major influence on the economy. Those forces includes large declines in commodity prices, particularly dairy and oil, low international interest rates, and record levels of net migration. The bank does point out the NZ’s economy has performed better than many advanced economies in recent years. Data set for release tomorrow in the form of building consents and business confidence are the highlights of an otherwise sparse economic calendar.

United States
There were a couple of key releases toward the end of last week from the United States that both helped to support the USD. Fed Chair Janet Yellen gave her first speech since the FOMC left interest rates on hold back on September 18th, and in it she’s confirmed the she still expects the Fed raise interest rate this year. We have had a number of comments from other Fed officials over recent days, who have been mostly singing the same tune. We also had the final reading of second quarter GDP which was revised higher to 3.9% from 3.7% prior. It seems solid consumer spending and business investment is underpinning growth, although inflation is showing little sign of upward pressure. The market has moved toward pricing in a 50% chance of an interest rate hike in December, which is by far and away the most likely time for a rate rise. Over the coming days we have plenty of data to digest which will all add to the current economic picture. CB consumer confidence, ISM manufacturing PMI, and non-farm employment change will be the highlights. There are also a number of other Fed officials set to speak including Yellen herself.

United Kingdom
There has been little in terms of influential economic data released from the UK over the past week. Former Bank of England (BOE) and MPC (monetary policy committee) member Kate Barker was quoted in an article suggesting she believes the markets have got it wrong in regard to the potential timing of a BOE interest rate hike. She thinks markets have push expectations out too far. She said if the Fed doesn’t move it will make it harder for the BOE to hike, but assuming a December Fed tightening, then you’re looking at somewhere between February and May for a UK move. Wage outcomes in the UK are certainly supporting the prospect of an interest rate hike in the first half of 2016. On October 1st the minimum wage in the UK is going up but a number of big companies have already said they will be raising wages above the impending minimum. Starbucks and supermarket chain Lidl are just two of the latest firms to confirm wage rises and this is a sure sign of growing confidence not only in their businesses but also the broader economy. It will also help underpin inflation heading into 2016. Over the coming days we will hear from BOE Governor Carney himself along with data on the current account, consumer confidence, GDP, manufacturing PMI and construction PMI.

Confidence indicators in Europe are improving with readings from both German IFO business climate and French consumer confidence coming in above expectation in recent days. The French outcome was particularly impressive printing at it highest level since October 2007. These won’t have impacted expectations for further easing from the ECB however, after President Draghi made it clear last week that they are more than willing to extend quantitative easing if need be. The ECB are very alert to global risks and these were highlighted by a recent IMF report which has cut the German growth outlook on the back of a slowdown in emerging markets. The ECB have admitted that price growth is going to take longer to get back to their 2% target and this leaves them plenty of leeway to act if they desire. This week to draw focus we have German retail sales and French consumer spending along with Eurozone inflation and unemployment.

The Bank of Japan’s (BOJ) 2% inflation target is proving very difficult to achieve. Data released on Friday shows the core consumer price index dipped by 0.1% from its level a year earlier in August.  The core index measures inflation for a range of items including fuel costs but excluding fresh foods. The decline is the first seen for more than two years. Another measure of inflation, the headline consumer price index did increase by 0.2% from last August, but was flat month-on-month from the July level. Taking fuel costs out of the equation does improve the picture somewhat, but even then the BOJ still has a long tough road to reach it target. Governor Kuroda said the CPI data, ex energy, is positive, but that they will continue easing until 2% inflation is stable. He expects inflation to move around 0.0% for now, and hopes the government continues to take steps to boost Japan’s growth potential. Kuroda is also trying to put pressure on businesses to raise wages more aggressively, suggesting a failure to do so risks the bank missing its 2% target. He has said growth in capital spending and wages is ‘lacklustre in light of record profits’. Over the coming days we have data on retail sales, household spending, and unemployment along with the quarterly Tankan survey.

The only data of note over the past week from Canada was retail sales figures released last Thursday. The headline number showed a small improvement as expected, but it was mostly driven by autos. Stripping automotive sales from the data left the core reading at flat. This week we have the key release of GDP data for July. Canada entered a technical recession in the first half of this year, with two quarters of negative growth, but forecasts are for a turnaround in the third quarter. The market is expecting July GDP to come in at 0.2%, which if continued over the rest of Q3 would equate to annualized growth of somewhere between 1.5% and 2.0%. The Bank of Canada (BOC) certainly believes the worst of the oil price shock is behind them and that solid growth in the US will continue to support Canadian exports.

Major Announcements last week:
  • Australian House Price Index QoQ +4.7% vs 1.6% previous
  • UK Public Sector Borrowing 11.305B vs 8.65B expected
  • US House Price Index MoM +.6% vs +.4% expected
  • EUR Manufacturing PMI 52.0 vs 52.0 expected
  • US Manufacturing PMI 53 vs 53 expected
  • NZ Trade Balance MoM -1.035 B vs -850M expected
  • US Durable Goods Orders -2% vs -2% expected
  • Japan Inflation YoY -.1% vs -.1% expected
  • US GDP QoQ 1.9% vs 1.8% expected
  • US Personal Consumption YoY 1.3% vs 1.2% previous