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FX Update - Central Bank’s in Focus

Written by Ian Dobbs on March 15th, 2016.      0 comments

Market Overview:  
Look for another busy and volatile week in FX markets this week with central bank meetings from Japan, the US and the UK all due. Later today will see the conclusion of the BoJ meeting in Japan. Consensus expectations are for no further stimulus from the BoJ, although some in the market think further stimulus is warranted given the large gulf between current and targeted Japanese inflation rates. Later in the week the US FOMC meeting announcement will take centre stage. Expectations are also for a lack of move from the US Fed, although expect Fed Chair Yellen to say rate hikes are firmly on the agenda should the data remain resilient. The BoE (UK) will round out the week’s central bank meetings on Thursday (UK time). Economists are unanimous in their expectations that the bank will leave both its bank rate and asset purchase target levels unchanged. The recent moves by the ECB may raise the pressure on the BoE to hint towards further quantitative easing however, especially given the recent deterioration noted in credit markets.

It has been a story of mixed fortunes for the AUD since our last report on Friday. Last week’s solid showing continued well into trade yesterday and came on the back of a continued solid appetite for risk currencies and currencies with exposure to commodities. Oil prices again led the charge on Friday, this saw the CRB commodity index close up 1% on the day. Crude prices were helped by an IEA report which said crude prices may now be on the path to recovery, a view which was based on shrinking supplies outside OPEC and disruptions from within the OPEC cartel. Prices (and the AUD) have lurched lower in trade overnight however, after Iran said it would shun a proposed production freeze and that it would increase production until it reached 4 million barrels per day (nearer pre-sanction levels). It is a much busier week for the AUD this week on the data front. This follows last week’s quiet release schedule which saw a drop in both the Westpac consumer sentiment index and the latest home loans data. Of immediate interest will be the minutes of the March RBA board meeting (this afternoon). Thursday will see the release of the February employment numbers, these are expected to show a gain of 12k jobs and steady 6% unemployment rate.
New Zealand
Offshore influences have dominated interest in the NZD since our last report. These influences helped the local unit recover on Friday after last week’s RBNZ inspired slump which saw the NZD fall notably after the surprise announcement of a move to cut interest rates to 2.25% (-25 bps). Two key factors were seen as the reasoning by the RBNZ to pre-empt the market; the more challenging global environment and the risks posed by falling inflation expectations. Post the RBNZ, the strong close to the week came on the back of a positive finish to global equities for the week and on the broad gains seen in commodities which saw the CRB index finish 1% higher on the day. This week has been a different story so far for the NZD which has declined in overnight trade, again on the back of a commodities influence. Weaker than expected Chinese numbers (retail sales and industrial production) released over the weekend had a more limited influence on trade; most notably so on the week’s open. Highlights for this week for the NZD will be the GDT dairy auction (tonight), current account data tomorrow, and the Q4 GDP release on Thursday (exp. +0.7% q/q).
United States
The USD has risen in trade overnight ahead of key data tonight and the all important FOMC interest rate decision on Thursday (NZ time). Last week was a particularly quiet one for the USD ahead of this week’s much busier schedule which starts with producer price and retail sales numbers tonight. Last week’s releases included an unexpected rise in wholesale inventories and a decline in initial jobless claims numbers for the week ended March 4. Expectations for this week’s FOMC meeting are for rates to remain on hold at 0.50% (6% probability of a hike only) and for Fed chair Yellen to keep open the possibility of rate hikes in coming months should the data remain buoyant. The strong labour market should ensure that their focus is on inflation, officials are likely to be more confident that annual inflation is tracking towards their 2% target. Additional  insight will come earlier in the day after the release of the US inflation numbers for February.
United Kingdom
The GBP has drifted lower in trade so far this week. This comes in an environment which has seen the USD gain ground overnight on the back of more positive sentiment ahead of the FOMC announcement (Thursday morning NZ time). Last week was a quiet one for UK data, this saw the GBP take its lead from Brexit sentiment and a stronger EUR, which jumped after the ECB meeting. Data released during the week included weaker than expected industrial production numbers which underperformed on the back of the weak energy and mining sectors, the better than expected manufacturing numbers helped mitigate the extent of the miss however. Key events of interest on the calendar this week included the 2016 budget and employment data (tomorrow), and the BoE interest rate meeting policy announcement due for release on Friday (NZ time).

The EUR has drifted lower in trade so far this week, although still sits significantly higher than levels that were observed running into last week’s ECB monetary policy announcement. This saw the Euro move sharply higher after president Draghi indicated that the ECB would not need to cut the deposit rate further following Friday’s 10 bps move (to -0.4%). Draghi emphasised other tools at his disposal however, a point which may have helped the Euro ease from its highs in recent trade. Data points of interest last week included better than expected German factory order and industrial production (IP) numbers, the overnight euro-zone IP release also exceeded the consensus forecast. Recent exit poll results from the weekend German regional elections suggest defeat for Chancellor Merkel in two out of three regional elections, a result which has been highly influenced by her support for an “open door” policy on refugee immigration. Dataflow for the euro-zone is light this week with inflation numbers on Thursday being the only real highlight.

Trade in the JPY has been subdued since our last report, an understandable result in the lead up to this afternoon’s BoJ monetary policy announcement. Expectations for the decision are nearly unanimous. They include the decision to leave asset purchases unchanged at 80 trn yen per annum, and for rates to remain at -0.1% for excess balances held at the BoJ. The gap between the BOJ’s inflation target and their measure of current inflation has led some in the market to think more easing may occur, most likely through the form of another cut to the deposit rate. Data out of Japan last week included a slightly better than expected final read of Q4 growth and a weak consumer confidence print. Core machinery orders numbers released yesterday easily surpassed the market consensus, although failed to garner much market interest. Industrial production and capacity utilization numbers are due this afternoon, although expect them to take a major back seat to the BoJ monetary policy decision.

Fortunes for the CAD have been mixed since our last report. Prices finished last week on a firm note, although off their highs, after news that Canada’s job market had got worse as the unemployment rate hit a 3-year high at 7.3%. The employment change was worse than expected and included a large drop in the number of full-time positions. Other data from last week included a fall in building permits and miss in the new house price index data, although the housing starts number was better than that forecast. The central bank meeting saw the BoC leave rates on hold at 0.5% as expected, although the statement was more positive than many had anticipated. Oil influences have again been strong over recent hours. This has seen the CAD ease in trade overnight after Iran said it would snub the proposed country production cap. Look for the energy market influence to again be strong this week, key data will come at the end of the week (inflation and retail sales).
Major Announcements last week: (Tuesday only)
  • Australia ANZ Job Ads, -1.2% (Feb.)
  • Canada Building Permits, -9.8% m/m vs. -2.5% exp. (Jan.)
  • Australia Home Loans, -3.9% vs. -2.3% exp. (Jan.)
  • NZ Cash rate, 2.25% vs. 2.5% exp.
  • Canada Cash rate, 0.5% as exp.
  • US Initial Jobless Claims, 259k vs. 275 k exp.
  • Euro-zone, ECB deposit rate, -0.4% as exp.
  • Canada Employment Change, -2.3k vs. +9.0k exp. (Feb.)
  • Canada Unemployment rate, 7.3% vs. 7.2% exp. (Feb.)
  • UK Industrial Production, 0.3% m/m vs. 0.5% exp. (Jan.)