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FX Update : Central banks back in focus

Written by Sam Coxhead on November 1st, 2016.      0 comments

1:30PM (NZT)
This week will again be a busy one for the FX markets with central bank focus again dominant. Decisions start today with the RBA where the vast majority of analysts expect rates to remain on hold at 1.5%, although a few point to the recent soft labour market data and weaker growth in China as giving the potential for a surprise move. Decisions from the BoJ (today) and BoE (Thursday) are expected to offer little surprise with both central banks expected to keep policy on hold, although recent data points to further stimulatory measures from the BoJ in the not-too-distant future. With the US presidential election next week few expect the FOMC to upset by changing policy on Wednesday. Current pricing strongly points to a December move from the Fed, especially should this week’s US employment data on Friday not materially disappoint.
Local inflation data for the third quarter was the key item of interest in Australia last week. The stronger than expected headline number was largely due to rises in fruit & vegetable, electricity, tobacco and property rate prices. Albeit underlying inflation was slightly lower than expected during the quarter and largely in line with RBA forecasts. Rising commodity prices lead to the second consecutive gain in the terms of trade in Q3 and further recent strong gains in coal and iron ore bode well for the series in Q4. New home sales rose again in September and remain strong, whilst producer price inflation remained subdued. This week started with private sector credit yesterday which rose in line with expectations. The main focus will be today’s RBA interest rate decision, although the chance of a surprise rate cut appears remote, at least as far as market pricing goes (4% probability priced). Friday will also be an interesting day with the RBA monetary policy statement and Q3 retail sales data both due.
New Zealand
Last week was a particularly quiet one in NZ for local news which saw just data on the September trade balance received by the market. The deficit which was worse than expected and was the largest since the series began in 1951, although garnered little attention from the market. The lack of local news saw the NZD take its lead from offshore with demand for the USD and a sharp reversal in the fortunes of the AUD being the key contributors to the overall mixed performance. Look for a much more interesting week this week. Events of interest includes today’s RBA cash rate announcement, the overnight GDT dairy auction, NZ employment tomorrow, the US FOMC announcement on Thursday and US employment on Friday. The week began with building consents (the annual rate rose to its highest in a decade) and ANZ business confidence data yesterday (which dipped from the month prior but remained elevated), neither of which had any market impact.
United States
Trade in the greenback was positive for most of last week as expectations continued to mount for a December move in US rates. The FOMC meets this week to decide on rate settings. Wednesday’s announcement is expected to deliver no change in rates ahead of next week’s Presidential election, although markets will closely scrutinise the wording of the statement. US data last week was largely good. Manufacturing and services PMIs lifted solidly, home sales were strong and home pricing continued to rise. Unemployment claims remain low, look for further key data from the labour market on Friday (Nonfarm payrolls). Core durable goods orders met expectations (is trending sideways currently), although consumer confidence numbers disappointed, likely largely due to next week’s election. Q3 GDP numbers reached 2.9% annualized, although the details were mixed given the one-off nature of a large chunk of the exports and the weaker domestic demand indicators. Data so far this week has started with personal spending and personal consumption expenditure numbers which met expectations and a weaker than expected Chicago PMI.
United Kingdom
Focus last week was on Thursday’s Q3 GDP report which registered stronger than expected growth for the quarter. The 0.5% growth in the three months came on the back of the 0.7% growth delivered in the previous quarter. The data was far better than the Treasury’s referendum campaign claim that a vote to leave the EU would result in a 0.1% decline in the quarter. Other indicators coming to market during the week included a soft CBI industrial trend survey, a better than expected lift in BBA mortgage approvals and easing consumer confidence. The easing confidence likely reflects anxiety over the effect of the sterling’s decline on prices and UK living standards. Data this week has started with numbers on mortgage approvals which lifted by more than expected in September, although the level remained below that seen in the months preceding the EU referendum. Consumer lending lifted by 1.4B pounds in the same month, although the growth was slightly below expectations and less than that seen in August. Focus for this week will be on PMI indicators (starting with manufacturing today) and Thursday’s BoE meeting.
Last week was a relatively quiet one in Europe for key economic leads. Eurozone manufacturing and service conditions PMIs lifted solidly in October and point to moderate growth ahead. Growth numbers released yesterday which rose 0.3% in Q3 (1.6% y/y) across the eurozone were in line with expectations and look unlikely to exert any upward pressure on inflation. HICP inflation data for October showed a small 0.5% year-on-year rise. The headline data was the highest level since June 2014 but remains well below target. Core inflation also continues to be well below the ECB’s target and points to an extension of QE. Regional inflation reads released on Friday included small upticks in those levels seen in Spain and Germany, and unchanged levels in France. Other data released last week included a better than expected German IFO and various eurozone confidence and sentiment indicators on Friday which exceeded expectations. PMI reads will continue again this week, although look for direction on the Euro to be set by events in the US.
Trade in the Yen has been understandably quiet so far this week ahead of this afternoon’s BoJ monetary policy announcement. Data this week started with numbers on industrial production which stalled in September as private consumption and soft overseas demand pressured. Retail sales (Sep.) slumped 1.9% from a year earlier, although housing starts which rose 10% y/y registered almost twice the size of gain expected. Construction orders delivered a strong gain from a year earlier which was the strongest lift since May. Indicators last week pointed to strong manufacturing conditions, a small rise in business confidence, a lift in household spending and solid indicators from the labour market. Deflation continued in September however as core inflation fell to zero year-on-year.
Last week was a particularly quiet one in Canada for fresh economic leads as the market received numbers on wholesale sales only which rose above expectations but failed to have any impact. Trade for the CAD has begun this week poorly on the back of a sharp fall in the price of oil which has moved lower in recent trade on the back of mounting scepticism over the ability of OPEC to implement a production deal. Talks amongst major producers in Vienna over the weekend yielded little more than a promise to keep on talking. Discussions are set to continue at the end of month ahead of the supposed production accord implementation which is now looking increasingly unlikely as Iraq and Iran both look set to increase production sharply. Data of interest this week started yesterday. Industrial product prices lifted by more than expectations in September, whilst raw material pricing eased against expectations of a gain. In focus today are GDP numbers for August, although expect Friday’s data and energy pricing to carry the most weight.