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FX Update - A big week for economic releases

Written by Ian Dobbs on August 4th, 2015.      0 comments

Market Overview:
Commodities in general continue to remain under pressure with Brent oil recently dropping below $50 a barrel for the first time since January. This is keeping the commodity currencies broadly under pressure, although sellers aren’t comfortable pushing the New Zealand and the Australian dollar’s through recent lows at this stage. Both currencies have lost a lot of ground over recent months and are much closer to fundamental value. That’s not to say we won’t see more pressure, but it’s a much more dangerous game shorting (selling them) at these levels. Data from the US isn’t doing a good job of supporting the prospect for a September interest rate hike by the Fed. Another good jobs report this Friday will certainly help, but if it disappoints we could also see a good clean out of bought USD positions. The coming week should prove volatile in general with a raft of key releases from a number of countries.

Last week was a quiet one in terms of market moving data from Australia. This week should prove a lot more interesting with a number of key releases. Later this afternoon we get retail sales data and the trade balance along with the Reserve Bank of Australia (RBA) rate statement. On Thursday we get employment data, then on Friday the RBA release their quarterly monetary policy statement. Although the RBA maintain a slight easing bias, they are widely expected to leave the cash rate unchanged after their meeting today. Over recent weeks Governor Steven’s has made hints the that bar for further interest rate cuts is now set pretty high. On top of suggesting that cuts below the current 2% level are unlikely to support the economy as much as previous interest rate reductions, he has also hinted that the bank is starting to believe the trend growth rate for the economy is a lot lower than previously. The Australian dollar is also trading a lot closer to fair value and continued softness in commodity prices will keep the pressure on the downside for now. The central bank is still likely to try and talk the currency lower in their statement.

New Zealand
In the second half of last week the New Zealand dollar unwound all the gains it made in the wake of Governor Wheeler’s speech on Wednesday morning. His speech was less ‘dovish’ than many in the market had expected and it saw the NZD move sharply higher. Those gains were short lived however, as the currency ground its way lower again. Friday’s release of ANZ business confidence did help either with a big decline to -15.3 from -2.3 prior. That’s effectively means a net 15% of respondents are now pessimistic about the economy, which is the lowest level since March 2009. Business may be getting a little too pessimistic though. With all the focus on weakness in the dairy sector is easy to overlook other areas of the economy that are doing ok. In the three months to June exports of meat were up 11%, fruit up 28% and timber up 4.1%. Add to this the tourism sector which is literally booming. In fact tourism is on track to overtake dairy as NZ’s biggest export earner. Visitor arrivals are growing significantly particularly from the US and China. The lower NZ dollar will support this sector further and see tourists spend more while in the country. Dairy prices will continue to draw the headlines, and potentially move the currency this week with another Global Dairy Trade auction tonight. Tomorrow then sees the release of employment data with the market expecting the unemployment rate to tick up to 5.9%.

United States
Although data from the United States has been very mixed recently, the market continues to be a happy to buy US dollars on any period of weakness. The Fed gave little away, in terms of potential timing for an interest rate hike, when they released the statement following their rate meeting last week. GDP came in a touch below expectation, but the market took heart from the details of the report which were more positive. Friday saw a slight downward revision to University of Michigan consumer sentiment data and a better than forecast outcome for Chicago PMI, but the big surprise was the employment cost index. It’s not usually a big market mover, but it certainly got a reaction this time. Employment costs for the second quarter were up just 0.2% which was well below the expectation of 0.6%. That’s also the slowest pace of gains in wages and salaries since records began in 1982 and it’s going make for a very tough decision for the Fed come September. They desperately want to start raising rates, but they need to be confident inflation will pick up. The Fed believes as the unemployment rate drops, and spare capacity in the economy is used up, this will put upward pressure on wages and inflation. But Friday’s data suggests the only jobs the US economy is adding are low paid ones. The US dollar snapped lower after the release, but did eventually recover around half its losses heading into the close. Last night’s release of ISM manufacturing PMI will also complicate the Fed’s decision. The market was expecting a reading in line with last month around 53.5, but the index fell to 52.7. Friday’s release of non-farm payrolls is shaping up to be a key figure. If it disappoints it could be the straw that breaks the camel's back and see a significant negative reaction in the USD. Ahead of that release we have ISM non-manufacturing PMI and the trade balance to digest.

United Kingdom
This week should be an interesting one for the UK economy and the UK Pound. There are a number of key releases scheduled that all have the potential to move the market. The highlight will be the Bank of England's (BOE) rate meeting on Thursday. Although they are not expected to adjust policy settings at all, many in the market expect we will see one of two of the nine member MPC (monetary policy committee) vote for a hike. The Bank will also release its quarterly inflation report on Thursday and this should be consistent with interest rate hike coming around the turn of the year. Last night we got manufacturing PMI data which improved a touch to 51.9 from 51.4 prior. Although not a stellar result at all, the gains do put an end to the declines we have been seeing in the index for the past four months. Manufacturing is also only a small part of the UK economy. We get construction PMI tonight and service sector PMI tomorrow. Other data to watch out for this week comes in the form of manufacturing and industrial production as well as the trade balance.

Data out of Europe recently has been mixed at best. Late last week we saw disappointing readings for German retail sales, French consumer spending, and Eurozone unemployment which remains stagnant at 11.1%. On the positive side core inflation was a touch stronger than forecast at 1.0%. The headline inflation reading came in on forecast at +0.2%. Eurozone manufacturing PMI data last night was also a touch better than forecast at 52.4, but it was completely side-lined with the market focusing on the Greek stock market that re-opened after a lengthy period of non-trading. It was absolute carnage with Greek stocks opening down 22%. By the close of trading the market had recovered a touch to be down ‘only’ 16%. The true cost of the protracted Greek negotiations is only really starting to hit home. Their economy was in poor shape earlier this year, but it’s been decimated now. There is a raft of second tier data set for release over the rest of this week, the highlights of which will be Spanish unemployment and German factory orders and Eurozone retail sales.

Japan released a rash of data on Friday that overall has done little to suggest the central bank's 2% inflation target will be achieved any time soon. Although there are some signs inflation is picking up slightly, consumer spending is very weak having fallen to the lowest levels since last year’s sales tax hike. The Bank of Japan (BOJ) has been expecting a strong rebound in demand, which would eventually flow through to support inflation, but recent data suggests that’s just not happening. Many economists expect the central bank to add stimulus at some stage over the coming months. The BOJ’s Kuroda was on the wire saying there is ‘no immediate need for additional monetary easing’ with the underlying trend for prices steadily improving, but even he must be starting to have doubts. Later today we get average cash earnings data and toward the end of the week the BOJ release their monetary policy statement.

At the end of last week Canada released GDP data for May and the risks were there that is could print negative again. Unfortunately for Canada that’s exactly what happened with economic activity falling by 0.2%, marking the fifth straight month of negative growth. Barring a ridiculously strong reading for June, it looks like Canada was officially in recession in the first half of this year. May’s GDP decline was lead by manufacturing (-1.7%) along with mining and oil and gas extraction (-0.7%). Goods producing industries also fell 0.6% while the service sector declined 0.1%. The Bank of Canada (BOC) is expecting growth to return in the second half of this year as other exports start to offset weakness in the energy sector. For the time being however, the Canadian dollar will find it difficult to make gains with oil prices continuing to see pressure.

Major Announcements last week:
  • FOMC leave rates unchanged at 0-0.25%
  • Australian Building Approvals -8.2% vs -0.8% expected
  • US GDP 2.3% vs 2.5% expected
  • NZ Business Confidence -15.3 from -2.3 prior
  • Canadian GDP -0.2% vs 0.0% expected
  • US Employment Cost Index +0.2% vs +0.6% expected
  • UK Manufacturing PMI 51.9
  • US ISM Manufacturing PMI 52.7 vs 53.6 expected