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FX Update - The US dollar surprises with broad support.

Written by Ian Dobbs on September 22nd, 2015.      0 comments

Market Overview:
It’s been an interesting market reaction to last week’s Fed interest rate decision and dovish accompanying statement. The knee-jerk reaction was to sell the USD as you would have expected, but since then the US currency has been broadly supported and is now trading at stronger levels than just before the announcement. It’s a hard one to justify and something of a surprise, but it is what it is. We are now back to square one, looking at the October or December meeting for potential lift off dates. In deciding to keep interest rates at zero, where they have been since December 2008, the Fed highlighted low inflation and uncertainty about the global outlook. Inflation will tick up over the coming months as the base effects of previous oil price declines drop out of the data, but it’s hard to see the global environment improving much. We get PMI readings from a number of countries this week including China, Japan and Europe, and these will be closely watched as leading indicators of broader economic activity.

Last week was a very quiet one for economic data out of Australia. However, we did get a change of PM with Malcolm Turnbull taking over the reins of government. Turnbull says the government is focussing on restoring economic confidence and today’s release of ANZ’s weekly consumer confidence indicator should give us a the first reading of how voters feel about the change. Reserve Bank of Australia (RBA) Governor Stevens spoke on Friday and he was reasonably upbeat about the prospect for the economy. He said Australia could weather a serious Chinese downturn and that much of the local media coverage was more negative than the facts actually warrant. In terms of other data this week we only have the house price index and the CB leading index to draw attention.

New Zealand
Last week’s second quarter GDP data may have been a bit weaker than expected, but looking at current migration figures it seems there is plenty of confidence in the broader economic outlook. NZ recorded a net gain of 60,300 migrants in the year to August 2015. PM Key says that’s a vote of confidence in the economy and that business activity levels remain strong. The record high migration figures will add pressure to the housing market and could also see unemployment actually tick up over the coming months. Most forecasters expect migration figures to peak over the coming months then gradually decline. One of the main reasons for the high levels of positive migration continues to be the lack of people leaving NZ for Australia and that may take a lot longer to pick back up with the Australian economy still having a long way to go in transitioning away from mining. It’s a quiet week ahead in terms of economic data with just the trade balance on Thursday of any real note.

United States
The US dollar was volatile in the wake of the Fed’s decision to leave interest rates unchanged, but once that volatility subsided there was broad support for the currency. This is a tough move to explain especially in light of the very dovish nature of the statement and subsequent press conference. The US stock market also failed to find any real support from the continuation of zero interest rates with many suggesting the Fed’s inaction has actually generated concerns about the US and global economy. The failure of the stock market to make further gains is more likely an indicator of how overpriced the market currently is and one can only imagine what sort of reaction stocks would have had if the Fed had actually raised rates. Over the past few days there have been a number of hawkish comments from Fed officials which have helped to support the USD, and to be fair, 13 out of the 17 Fed committee members still believe a rate hike will happen this year. Only a few months ago however, 15 out of the 17 were expecting a rate hike this year. At this stage the market is focused on December, as opposed to October, as the more likely date for a rate hike, but here is plenty of water to flow under the bridge between now and then. This week we have durable goods orders, new home sales, the final reading of GDP and a speech from Fed Chair Yellen to digest.

United Kingdom
The highlight of last week's data was the the release of average earnings which came in much stronger than forecast. Although this would suggest there is less slack in the labour market and that inflation should start to pick up over the coming months. The prospect for an earlier than expected interest rate hike from the Bank of England (BOE) has been dealt a blow by the US Fed's decision to leave their rates unchanged. Their concerns about the global environment will no doubt be echoed by the Bank of England and as such they will also be in no hurry to raise interest rates. At this stage, expectations for a BOE hike range from late in Q1 2016 all the way out to the very end of 2016. There is little in the way of data this week that could influence. Public sector net borrowing will draw some attention and we also have a number of BOE officials set to speak.

Mixed data from Europe last week had little impact as the market was firmly focused on the US Fed’s decision. After some volatility around that decision the Euro has seen pressure, which is something of a surprise. The Euro is expected to depreciate over the long run with many forecasters expecting further easing measures from the ECB, but there was some expectation for near term Euro strength in the wake of the dovish Fed announcement. It wasn’t to be however, with the knee-jerk response toward a stronger Euro only lasting hours. Since then the Euro has been on the back foot with significant declines over the past 24 hours. This week we have manufacturing and service sector PMI’s to digest along with the German IFO business climate index and results of the targeted LTRO.

There has been nothing of significance released from Japan since last week’s monetary policy statement. A bank holiday there for the first half of this week also means there is little to focus on until Friday when we get inflation data. There is a school of thought that says the Fed’s decision to leave interest rates unchanged will have made it easier for the Bank of Japan to take additional easing measures over the coming months. If the Fed had raised interest rates the JPY would have weakened significantly against the USD and that may well have been a barrier to further BOJ easing. But with the Yen largely unchanged is means the BOJ don’t have to worry about weakening the Yen too far should they ease further. The market currently sees a 50% chance of further easing by the BOJ before the end of this year.

Inflation data from Canada at the end of last week came in bang on expectation at 1.3% year on year. There was little impact on the Canadian dollar with the market more focused on digesting the Fed announcement. Somewhat surprisingly, the USD has appreciated against the CAD in the wake of that announcement and even a 4% gain in oil prices last night failed to see the CAD outperform it closest neighbour. Bank of Canada (BOC) Governor Poloz has been on the wires saying the lower Canadian dollar is cushioning damage from the oil price shock. He said it’s very hard to say what oil prices will do and he is confident Canada will continue to manage well the adjustments caused by lower commodity prices. Last night we also got wholesale sales data which missed expectation printing at 0.0%, down from 1.3% prior. Later this week we get retail sales figures to digest.

Major Announcements last week:
  • BOJ leaves monetary policy unchanged as expected
  • UK Inflation +.2% MoM as expected
  • US Retail Sales MoM +.2% vs +.3% expected
  • US Industrial Production -.4% vs -.2% expected
  • UK ILO Unemployment rate 5.5% vs 5.6% expected
  • UK Ave. Earnings 2.9% vs 2.5% expected
  • European MoM Inflation 0.0% as expected
  • US Inflation Mom -.1% vs 0.0% expected
  • NZ Q2 GDP 2.4% vs 2.5% expected
  • US FOMC leave monetary policy unchanged (dovish)
  • BOC Inflation 0.0% as expected