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FX update - Australasian currencies see downward pressure

Written by Ian Dobbs on March 1st, 2016.      0 comments

Market Overview
The Australasian currencies see increased pressure so far this week. This builds on the solid U.S. data inspired losses from Friday which began after the U.S. Q4 GDP numbers were revised significantly higher and the Fed’s preferred inflation measure surprised to the upside. The latest NZ ANZ Business Confidence released yesterday took a dive from the month prior as local businesses were seen to be more circumspect over profitability and the investment and global outlook. Also, NZ building consent numbers for January released yesterday also fell unexpectedly returning to levels last seen a year ago. The cooling outlook, weakening export prices and tightening financial conditions flag an increased likelihood of data weakening moving forward accordingly to the ANZ, who have moved from expecting no RBNZ rate cuts in 2016 in December to now expecting two in 2016. In Australia, the RBA monetary policy meeting convening today is of obvious focus. They are expected to continue to monitor financial conditions closely and confirm they are ready to ease further should indicators warrant at any point in 2016.

The AUD has fallen since our report on Friday, a move which came later in Friday’s session after a series of better than expected U.S. data-flow. This led to a broad based lift in the USD which saw all the AUD/USD’s weekly gains eroded by the close. It is a busy week in Australia this week for economic news. It starts today with January dwelling approval numbers and the Q4 current account. These numbers come prior to the RBA interest rate decision at 4.30 pm. The RBA is widely expected to leave rates on hold at 2.00% and maintain its mild easing bias. A key area of interest for the RBA is the job market. The recent lift in the unemployment rate is unlikely to concern them given the inherent volatility in the monthly data and positive overall trend lower in unemployment. Other key data of note this week will be tomorrow’s Q4 GDP report and January retail sales on Friday. Some analysts may have lowered their expectations for the GDP data tomorrow after yesterday’s weaker than expected inventory and company profit data, the latter being unsurprisingly affected by the mining sector and declining commodity prices. However, housing and private sector credit numbers also released yesterday both met the market’s consensus forecasts.

New Zealand
The NZD has started the week’s trade on a soft footing which is a continuation of the tone of trade set late on Friday after a raft of positive U.S. data sent the USD higher during offshore trade. Sentiment towards the local currency was undermined further yesterday on the back of weak data releases and a bearish release note from the ANZ which downgraded its assessment of the NZ economy, in the process calling for two rate cuts (none prior) from the RBNZ in 2016. Their business confidence data released yesterday showed a sharp fall from the month prior on the back of deteriorating sentiment which was backed by fears of slower world growth and the recent financial market turbulence. NZ building approval numbers for January also released yesterday fell sharply from the month prior returning to levels last seen a year ago. A large decrease in the numbers out of Canterbury led to the decline. Terms of trade data released this morning again disappointed. Offshore influences will again have a large influence on the NZD this week with just the overnight GDT dairy price auction being the only release of any note.

United States
The USD advance gathered additional momentum into the end of last week’s trade after the release of a raft of better than expected U.S. data on Friday. Previous data released earlier in the week had been largely soft, aside from the strong durable goods print which displayed a strong rebound from the month prior in the opening month of 2016. Friday’s solid dataflow included an unexpected upwards revision in the Q4 GDP print, better than expected personal income, spending and consumption numbers and a rise in the Fed’s preferred measure of inflation (the PCE deflator). The University of Michigan survey was also universally positive across all the indicators. The data supports the Fed’s move to hike interest rates in December last year and keeps additional hikes in 2016 firmly in view. Weaker than expected Chicago PMI, Dallas Fed manufacturing and pending home sales numbers released overnight have so far failed to make any impact on the upwards trajectory of the USD seen so far this week. A very busy U.S. data calendar this week will culminate with the all important non-farm employment numbers on Saturday morning Australasian time.

United Kingdom
The GBP has drifted higher in trade so far this week, although the muted rally comes on the back of a poor showing last week. This saw the GBP/USD fall ~3.7% from its highs to its closing levels on the back of elevated fears over the economic fallout from a potential British exit from the E.U. These fears heightened over the course of the week as the political support for an exit gathered momentum. Data releases since Friday included the overnight release of better than expected mortgage lending/approval numbers and rising 1 year inflation expectations data. These releases had little impact however as did the comments from BoE Governor Carney over the need for accommodative monetary policy and the requirement for stronger wage and economic growth before rate hikes. These comments come on the back of last week’s which reiterated the lack of BoE tolerance for further downside surprises. The U.K. economic calendar for the remainder of week starts with manufacturing PMI data tonight which is expected to show a modest decline in still expansionary territory.The construction and service prints will follow later in the week and will be accompanied by house price data on Thursday.

The EUR has continued on it’s downwards trajectory in trade so far this week. Pressure mounted on the Euro last week on the back of fears over the economic consequences of a British exit from the E.U. and to a lesser extent data-flow which included an easing in the euro-zone and German composite PMI numbers and decline in the German IFO business sentiment data. The poor week was rounded out on Friday with much better than expected U.S. data-flow and further disappointments in the European data. These included misses in the euro-zone business climate and consumer confidence numbers and the latest German/Spanish and French inflation prints. The soft regional inflation numbers signalled the weak euro-zone inflation print witnessed overnight. Markit manufacturing PMI data is set for release tonight, the data is expected to show a slowing in activity and when combined with the other recent soft data should ratchet pressure on the ECB to respond at next week’s monetary policy meeting.

The JPY has firmed in trade against the USD this week having rallied notably from its lows set on Friday after the series of better than expected U.S. data-flow. Safe haven JPY demand has lifted in recent trade on the back of the late falls seen in U.S. equities. The losses come on the back of sizeable declines posted by key Asian bourses yesterday which included the Shanghai Composite which fell 2.9%. This came after the Chinese central bank (PBOC) set the Yuan at the lowest level since February 3rd, this despite pledging they wouldn’t devalue the Yuan further at the weekend G20 meeting. Recent data releases out of Japan have included inflation numbers on Friday which beat the market’s consensus expectations and industrial production data for January released yesterday which also exceeded expectations. Other data release’s yesterday were more mixed and included a miss in the latest retail sales print, an upside surprise in the housing starts numbers and decline in the latest vehicle production data.

The CAD continues to trade with a firm tone against the USD in trade this week, with current pricing seeing it retain all of last week’s gains. Oil market developments continue to set the tone of trade, the price of which again lifted overnight  in part on the back of a Reuter’s survey which showed that OPEC oil output is expected to have dropped by 280k barrels per day in February. Prices received additional support after comments from Saudi Arabian oil officials whom pledged to work with other country producers to limit oil market volatility. Data released on Friday again showed another decline in the weekly count of U.S. drilling rigs deployed in the field; the decline was the 10th straight weekly loss. Canadian raw materials price and Q4 current account data released overnight topped the market consensus although failed to make any market impact. Other data set for release includes the Q4 GDP numbers tonight, although again look for the emerging oil market news to dominate trade prior to Saturday mornings data flow.

Major Announcements last week: (Tuesday only)
*EU Markit PMI Composite, 52.7 vs. 53.3 exp. (Feb.)
*German IFO Business Climate, 105.7 vs 106.7 exp. (Feb.)
*US Existing Home sales change, 0.4% m/m vs. -2.9% exp. (Jan.)
*US New Home sales change, -9.2% m/m vs. -4.4% exp. (Jan.)
*US Markit Services PMI, 49.8 vs. 53.5 exp. (Feb.)
*Australian Q4 Private Capital Expenditure, 0.8% vs. -3.0% exp.
*UK Q4 GDP, 1.9% y/y on exp.
*US Durable Goods Orders, 4.9% vs. 2.5% exp. (Jan.)
*EU Consumer Confidence, -8.8 vs. -6.7% exp. (Feb.)
*US Q4 GDP, 1.0% ann. vs. 0.4% exp.
*US Michigan Consumer Sentiment, 91.7 vs. 91.0 exp. (Feb.)