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FX Update - The USD suffers as rate hike expectations fade

Written by Edited by Ian Dobbs on October 13th, 2015.      0 comments

Market Overview: (Tuesday only)
Current market pricing places only around a 25% chance of a Fed rate hike in December and this appears at odds with recent comments from Fed officials. In September, 13 of the 17 FOMC members indicated that they expected rates to be rising by years end, thoughts backed up the Fed’s Lockhart overnight. Arguments against raising rates centre around the current low levels of inflation in the U.S, sentiment shared by most of the major central banks currently. The markets will also continue to remain susceptible to swings in risk sentiment and commodity price movements ensuring that volatility should remain elevated for the foreseeable future.
Thursday’s release of the Australian September employment data is the key event this week. Market median forecasts centre around a rise of 7k jobs (down from 17.4 k the month prior) and a steady 6.2% unemployment rate. Chinese trade data out later today will also be keenly awaited as investors closely watch for any signs of a further slowdown with Australia’s largest trading partner. Later in the week the RBA Financial Stability Review will be released, investors will continue to closely monitor the RBA commentary surrounding the buoyant Sydney and Melbourne property markets. Volatility in key commodity prices will also continue to be a significant driver of the AUD over the coming week.
New Zealand
The 3rd quarter NZ inflation release on Friday will dominate the data calendar this week. The data will be key for the RBNZ ahead of the next OCR decision later in the month, with current RBNZ expectations centering on a print of +0.3%. Commentary this week from a leading NZ bank warned that cheaper borrowing costs may not solve the problem of low inflation as technology allows better consumer access to cheap goods and that cheaper mortgages will add more fuel to the already hot Auckland housing market. This week’s number and the strong rebound in dairy prices will give the RBNZ plenty to think about when considering their interest rate setting at the next meeting on October 29. RBNZ Governor Wheeler will speak at a private event on Wednesday.
United States
The release of September retail sales (Wednesday) and inflation data (Thursday) are the key data events of note this week. Retail sales are forecast to rise 0.2% on the month (0.2% last) as low petrol prices remain a significant drag. The headline inflation number is anticipated to fall 0.2% m/m as like retail sales energy prices have been a notable negative for headline inflation through 2015. The recent rally in oil prices should mean this bout of deflation will prove temporary as they provide a boost this month. After last week’s Fed meeting minutes. the current market pricing is for a 25% chance of a rate hike in December and only two hikes in total by the end of next year. Recent comments from Fed officials would indicate that the market is underestimating the timing of a Fed lift off in rate normalisation however. The larger data window before the December meeting and recent softer jobs data may favour a December move over October at present.

United Kingdom
U.K. inflation data later today is the first event of note. Today’s data is expected to confirm the markets perception that inflation is not a pressing concern. The market has recently pared expectations for a rate hike from the BOE, a rate hike is currently no longer fully priced within 2016. Trade data for August released on Friday showed the U.K. trade deficit narrowing to GBP 3.3bn (mkt. -GBP2.15bn) from -GBP4.4bn in July, gains were driven by the goods sector. August ILO unemployment data will be released on Wednesday, expectations are for the unemployment rate to remain at 5.5% as employment growth continues to moderate through 2015. Average weekly earnings are expected to remain firm at 3.0%.

Comments from the ECB president Draghi over the weekend further reduced hopes for a rise in the intensity of QE. Draghi said the ECB was satisfied with the current QE and that it had met and “even surpassed our initial expectations”. Draghi noted that the delay in inflation reaching 2% was largely because of the drop in oil prices. Comments from ECB member Lautenschlager echoed those of Draghi recently.  She noted the limitations of monetary policy when addressing the burden induced by the vulnerabilities of Eurozone countries with high stocks of debt and structural rigidities. German inflation for September and the ZEW survey of the German economy are scheduled for release later today, Friday will see the release of Eurozone inflation and trade data.
BOJ Governor Kuroda quashed mounting expectations for a fresh round of quantitative easing (QE) at the IMF meeting in Peru over the weekend. The Governor saying that Japan’s inflation rate was in line with the central bank’s expectations, reducing expectations of fresh additional monetary stimulus at the October 30th BOJ meeting. Core consumer prices showed at 0.1% contraction in August after July’s flat outcome. Governor Kuroda anticipates a move towards the 2% target next year, given the reduced output gap and tight labour market conditions as the negative impact from falling oil prices dissipates. Currently energy items are reducing the CPI rate by about 1 percent.
The release of September employment data has been the key data release since Friday's’ report. The report was disappointing as the unemployment rate rose to 7.1% (7.0% exp.) and now stands 0.5% higher than the 6.6% level seen at the start of this year. Whilst the headline number was marginally better than expectations (+12k vs. +10k exp.), it was the large fall in full-time jobs that led to the weakness as they saw their largest decline in nearly 4 years. Energy market developments will continue to be a large driver for the CAD, especially this week where other data events of note are lacking.
Major Announcements last week: (Tuesday only)
  • UK Markit Services PMI 53.3 vs. 56.0 exp.
  • US ISM Non-Manufacturing 56.9 vs 57.7 exp.
  • RBA rates on hold at 2%, as expected.
  • BoE rates on hold at 0.5%, as expected.
  • Canadian Housing Starts 230.7k vs. 200k exp.
  • US Jobless Claims 263k vs. 274k exp.
  • Canadian Unemployment rate 7.1% vs 7.0% exp.
  • UK Trade Balance -GBP 3.3bn vs -2.15 bn exp.