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FX Update - US rate hike expectations continue to decline

Written by Edited by Ian Dobbs on October 20th, 2015.      0 comments

Market Overview
Last week saw expectations for a Fed rate hike this year continue to be reduced as the market absorbed a disappointing U.S. retail sales release and a split among Fed Governor’s over the appropriateness of a rate hike this year. With key U.S. data lacking this week it is unlikely the dollar will trend significantly and focus will more likely turn to the ECB meeting on Thursday. An extension to the current stimulus program at the meeting has gained weight amongst investors although those forces that are giving the Fed reason to potentially delay rate hikes may well spur other central banks like the ECB to ease policy further, especially in light of data on Friday which confirmed that the Eurozone had slipped back into negative inflation.

Market expectations for a rate cut in November by the RBA increased last week from 25% to 40% after Westpac’s decision to raise the variable mortgage rate by 20 bps. This move garnered perhaps more attention from the interest rate market than even the Australian September employment release which saw a loss of 5.1k jobs for the month (exp. +5k), although the unemployment rate managed to remain steady at 6.2%. Data out of Australia’s key trading partner China did little to aid the Aussie last week as soft import and inflation data  (+1.6% y/y, +1.8% exp.) raised concerns of weakening demand and growing deflationary pressures from Australia’s largest export partner. Chinese Q3 GDP data released yesterday saw the economy slow to the lowest level since 2009, although at 6.9% y/y it exceeded the 6.8% forecasts. Other data showed a struggling Chinese manufacturing sector as Industrial Production undershot expectations at 5.7% y/y in September (vs. 6.0% exp.). RBA warnings over the risks present in the Australian housing and mortgage markets contained in the Financial Stability Review added to the weaker sentiment seen late in the week. The RBA minute release today will therefore be closely watched.

New Zealand
The NZD was the strongest performing currency amongst the G10 currencies last week. This comes on the back of strong gains which were seen after the market reduced expectations for further rate cuts post the RBNZ Governor’s comments last week. Governor Wheeler noted a need for further capacity to cut rates should the global economy slow significantly, he also remains wary of the damage that may be done to inflation and housing demand should rates be lowered materially. Q3 inflation data released on Friday confirmed that inflationary pressures remain well contained overall presently and remaining near 16 year lows in the year to September (+0.4% y/y). Later today will see the release of the latest Fonterra GDT auction where current futures pricing points to more modest gains after the last four strong auction results. A very light local data calendar will see offshore developments drive trade later in the week.

United States
Data out of the U.S. last week was somewhat of a mixed bag which started with an underwhelming September retail sales report which showed headline sales rising at just 0.1% vs. the +0.2% expectations. 2015 Fed rate hike expectations fell after various Fed member comments questioned the need for raising rates this year. This placed the dollar under pressure early in the week. An improved data tone towards the end of the week (particularly inflation and jobless claims) helped minimise the USD losses. The University of Michigan consumer sentiment index released on Friday saw a jump to 92.1 in October (89.0 exp.) and reflects the recent reduction in equity market volatility. Data released overnight also showed rising confidence in the U.S. homebuilder market as the NAHB housing market index rose to 64 in October. Friday’s releases of the JOLTs job openings at 5.37 million fell well short of the 5.77 million estimate however.  Data out of the U.S. this week is light, focus will therefore continue to remain on various talks by Fed speakers, including Dudley and Powell on Wednesday morning.

United Kingdom
Last week’s key data releases in the U.K. were the latest U.K. inflation and employment reports. The inflation reading saw a 0.1% y/y decline in September which comes on the back of August’s flat reading and shows inflationary pressures in the U.K. economy continue to be light.  The employment data by contrast which saw unemployment fall to a new 7-year low (5.4%) shows a continuation in the trend of falling unemployment and a reduction of spare capacity in the labour market. This should help to support wages growth going forward after last week’s slight disappointment in average hourly earnings growth (3.0% y/y, vs. 3.1% exp). September retail sales on Thursday dominates the data calendar this week, investors will also keenly await a speech by the BoE Governor Mark Carney later today.

Data out of Europe last week was light. Tuesday saw the release of the German ZEW economic sentiment index which fell to 12 month lows (55.2 from 67.5), sentiment was not helped by the recent VW scandal. Eurozone inflation data released on Friday showed that the Euro-zone continues to struggle with low inflation, the latest reading saw the Euro-zone slip back into negative inflation (-0.1% y/y) in September. This release will place additional importance on this week’s ECB monetary policy meeting on Thursday and perhaps raises the prospect of further easing by the ECB, although structural reform continues to be important for the prospects of stimulating inflation growth in the Euro-zone. The week is rounded off with the release of Eurozone Markit PMI data on Friday.

Inflation expectations continue to dominate thinking in the BOJ which sees inflation returning towards 2% next year as the disinflationary effects of the current weak energy market pricing dissipate. Governor Kuroda quashed expectations of further easing at the month end BOJ meeting. Data last week showed firms remain cautious about increasing capex spending on the back of concerns over domestic and global growth. A continued reduction by speculators of short JPY positions as shown by the latest IMM positioning data released on Friday when combined with bouts of safe-haven demand have helped support Yen demand against the dollar.

In a week lacking key data releases trade in the CAD was dominated by commodity price movements and sentiment towards the USD in general. Reducing expectations of an imminent rise in Fed rate hikes helped bolster CAD demand last week although a fall in oil prices overnight have put it on the back foot once again. Results from today’s Canadian general election are yet to filter through although polls tip the Liberals to win in a close run race. Currency markets are more interested in this week’s Bank of Canada interest rate decision on Wednesday where rates are expected to be kept on hold at 0.5%. Inflation data to be released on Friday will also be keenly watched.

Major Announcements last week:
  • German ZEW survey, current situation -55.2 vs 64.7 exp.
  • U.K. Inflation -0.1% y/y vs flat exp.
  • China Inflation 1.6% y/y vs 1.8% exp.
  • China Trade Balance $60.34B vs $46.79B exp.
  • U.K. ILO Unemployment 5.4% vs 5.5% exp.
  • U.S. Retail Sales +0.1% m/m vs 0.2% exp.
  • Australian Unemployment rate 6.2% vs 6.3% exp.
  • Australian September Employment Change -5.1k vs +5k exp.
  • U.S. Inflation flat y/y, vs -0.1% exp.
  • N.Z. Inflation 0.4% y/y vs +0.3% exp.
  • Euro-zone Inflation -0.1% y/y, on expectation
  • U.S. Industrial Production -0.2% m/m, on expectation
  • U.S. JOLTS Job Openings 5.37M, vs 5.625 M exp.