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FX Update - Another round of central bank focus

Written by Ian Dobbs on April 28th, 2015.      0 comments

Market Overview:
Central bank expectations are playing a key role in driving currencies at the moment, with a number of key meetings set for this week and next. First up we have the US Federal Reserve’s FOMC statement early on Thursday morning and after the recent run of soft US economic data the market is expecting the Fed to signal the lift off in rates is likely to be pushed out until later this year. This expectation has weighed on the USD recently and confirmation from the Fed could well spark further selling. The Reserve Bank of New Zealand (RBNZ) will release their rate statement a few hours later and here too the market is looking for a slightly more dovish stance than previously. This will be followed by the Bank of Japan’s BOJ) monetary policy statement, which shouldn’t contain any surprises or change in overall tone. Next week we have what may be the toughest central bank decision yet when the Reserve Bank of Australia (RBA) meet on Tuesday. The chance of an interest rate cut from the RBA has declined recently, but is still a very close call.

The Australian dollar has found some support over the past week helped by stronger than expected inflation data and increasing doubt about a interest rate cut from the central bank in May. Minutes from the Reserve Bank of Australia’s (RBA) last meeting show that the decision not to cut in April was to allow officials more time to assess how the economy was tracking and responding to the cut in February. Over recent weeks we have seen some key data come in better than forecast, notably employment and inflation. These results have really muddied the waters in terms of expectations for another cut when the RBA meet on May 5th. Many forecasters are still calling for another 0.25% interest rate reduction, but the reality is it’s now a very close call. Governor Stevens delivered a speech this morning and although he declined to comment on monetary policy he did say that unemployment rates look quite healthy now. Still to come this week we have import prices, private sector credit, and producer prices data.

New Zealand
The focus this week in NZ is squarely on the Reserve Bank of New Zealand's (RBNZ) rate statement set for release on Thursday morning. No change in interest rates is forecast although the market is now expecting the central bank to strike a somewhat ‘dovish’ tone. Expectations for this softer stance have really come about after deputy Governor McDermott delivered a speech last week in which he spent a significant amount of time outlining the conditions under which the bank would cut rates. He also said specifically that the bank was not considering any rate increases. His comments completely undermined support for the New Zealand dollar which lost ground across the board in the second half of last week. Ahead of the RBNZ statement, which is out on Thursday morning, we have trade balance and business confidence data to digest.

United States
For the most part US data has continued to disappoint over the past week and this has kept the USD under some pressure ahead of this week’s Fed meeting. Friday’s key durable goods orders data suggested that manufacturers are struggling to deal with the broad appreciation of the USD over the past year. Although the headline number was stronger than expected, this was dramatically affected by aircraft and defence orders. A better gauge of overall factory conditions is the core reading and this declined by 0.5% versus expectations of a 0.3% gain. The prior reading was also revised significantly lower. This core number has been negative for a number of months now and it adds credibility to the argument that March’s soft jobs report had as much to do with deteriorating economic conditions as it did to the impact of poor weather. The Fed has said that any potential rate increase will be data dependant and the reality is current data does not support the case for a rate hike in June. We get the FOMC (Federal Open Market Committee) statement on Thursday morning and the market is expecting the Fed to be somewhat dovish, signalling a later lift off in rates. Ahead of the Fed statement we have consumer confidence and GDP data to digest. Then toward the end of the week ISM manufacturing PMI data will draw focus.

United Kingdom
Although the UK Pounds is still suffering from uncertainty around the upcoming general election, it did manage to make significant gains last week. These gains were driven by the release of the Bank of England (BOE) minutes which were more upbeat on the economic outlook than expected. The minutes also suggested we could well see a couple of the MPC (monetary policy committee) members once again start to vote for interest rate increases over the coming months. In terms of the election, it has been reported over the weekend that Labour leader Ed Miliband has said he is not interested in any coalitions deals with the Scottish National Party (SNP). A potential Labour/SNP coalition was viewed as the most market unfriendly outcome of the election. Although we all know to talk a politician's pre-election statements with a large grain of salt, it will certainly help sentiment toward the GBP to a degree. The latest poll results are still showing a very close race with the most likely outcome at this stage a hung parliament. Political uncertainty is also very ‘market unfriendly’ and therefore the chance of a hung parliament will limit potential near term gains for the GBP. Tonight we get preliminary GDP data for the first quarter with the market expecting a result of 0.5%. Later in the week we have manufacturing PMI data to digest.

Although last week’s PMI readings from both the manufacturing and service sectors in Europe were disappointing, other confidence indicators are more encouraging. Both the ZEW economic sentiment and German IFO business climate readings have shown solid improvement over recent months. The IFO business climate index is now at its best level in 10 months and is consistent with improving economic activity in Germany. The IFO say prospects for the German economy remain very good and that the low Euro exchange rate is compensating for sluggish growth in other parts of the world. We are yet to see any agreement between Greece and its creditors, although prospects of a deal look to have increased in the wake of a reshuffle of the negotiation team. Greek PM Tsipras has side-lined controversial Finance Minister Varoufakis who it’s fair to say didn’t have much of a working relationship with European officials who described him as an amateurish time-wasting, gambler. This week to draw focus we have data in the form of inflation, unemployment, German retail sales, French consumer spending, and Spanish GDP.

The past week has seen a mixed bag of data from Japan with positive readings from industry activity indicators and the trade balance, countered by a fall in manufacturing PMI data to 49.7, below the key 50 level which denotes contraction in the sector. In the past couple of hours we have also seen the latest retail sales figures and these too were disappointing. Retail sales for March fell by 1.9% against expectations of a 0.6% rise. There has been little market impact from the result as it seems base effects in the data are largely to blame. Still to come this week we have the industrial production, the BOJ monetary policy statement, household spending, inflation and employment data.

The only piece of economic data released from Canada in the past week was wholesale sales for February which printed on the soft side at -0.4%. There is no doubting that growth in the first quarter in Canada was extremely poor and dramatically impacted by the sharp decline in oil prices. In response to this the Bank of Canada (BOC) cut interest rates at their January meeting in what Governor Poloz described as ‘taking out insurance’. Since then however, and in particularly recently, Governor Poloz has been surprisingly upbeat about the economic outlook going forward. On Friday he delivered another speech in which he said that the oil price declines were a “front-loaded, one time shock” and that starting in the second quarter positives should start to outweigh negatives. He also believes by the second half of the year the oil shock should be fully behind them. This positive outlook is helping the Canadian dollar regain some ground although the market will want to eventually see hard data back Poloz’s optimism. The Governor is set to deliver two more speeches this week and we also have the raw materials price index and GDP data to digest.

Major Announcements last week:
  • Australian Inflation +.2% as expected
  • BOE leave monetary policy unchanged as expected
  • Chinese HSBC Manufacturing 49.2 vs 49.6 expected
  • European Manufacturing PMI 51.9 vs 52.6 expected
  • US manufacturing PMI 54.2 vs 55.5 expected
  • US Durable Goods Sales +.2% vs +.3% expected
  • Japanese Retail Sales (YoY) -9.7% vs -7.3% expected