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FX Update - Data suggests the US remains on track to hike rates

Written by Ian Dobbs on February 9th, 2015.      0 comments

Market Overview:
Friday’s US employment data was strong in every facet. The headline number was better than forecast, there were positive revisions to prior numbers, and average hourly wages increased. This has served to reinforce expectations for an interest rate hike from the Fed in June, but it’s looking increasingly likely they will be the only country to hike rates this year. Most other central banks are either very neutral or have recently cut. The Peoples Bank of China are the latest to ease policy after they took action at the end of last week. They were however quick to add that this is not the start of strong stimulus. The standoff with Greece’s new government re their debt pile and bailout conditions has shown no signs of easing and this week could prove to be key. The market will want to see some work towards a solution at Wednesdays Eurogroup meetings and a failure to do so should increase pressure on the Euro.

After Tuesday’s interest rate cut the Reserve Bank of Australia continued to draw attention in the latter part of last week with the release of their Statement on Monetary Policy (SOMP). The market is expecting at least one more cut from the RBA over the coming months and there was nothing in the SOMP to alter that view. Although the statement didn’t contain anything in the way of direct forward guidance, the central bank has lowered GDP forecasts and they continue to suggest the Australian dollar is trading above most estimates of fair value. The RBA’s expectations for GDP, inflation and unemployment are certainly consistent with the current outlook for another 0.25% cut. The other release of note late last week was that of retail sales. Although sales did rise 0.2% in December this was below the forecast of +0.4%. Later today we will hear from RBA Governor Stevens with an on the record speech set for release, then later in the week we get business confidence, consumer sentiment, inflation expectations and employment change.

New Zealand
There have been no releases of note from New Zealand since last Wednesday’s encouraging employment data. The New Zealand dollar has been driven by offshore factors, and in particular the demand for US dollars seen in the wake of the non-farm payroll report. This week the only release to draw attention will be the Business NZ Manufacturing Index on Thursday.

United States
As is always the case in the first week of every month, the market turns its focus to the release of key US employment data. Friday’s release of non-farm payrolls numbers didn’t disappoint either with an unequivocally strong report. The headline number was stronger than forecast coming in at 257k versus expectations of 230k. More important were the significant positive revisions to prior readings. The November and December numbers were revised up a total of 147k. Although the unemployment rate ticked up to 5.7% this was driven by an increase in the participation rate which is actually an encouraging signal. As the outlook for employment increase more people are drawn back into the labour market which pushes up the participation rate. Wages are also continuing to grow with average hourly earnings up 0.5% versus 0.3% expected. This data is certainly consistent with market expectations for an interest rate hike from the Fed in June or soon thereafter. This week to draw focus we have retail sales and consumer sentiment data out on Thursday and Friday respectively.

United Kingdom
Data from the United Kingdom last week suggested the economy is starting 2015 on a firm footing. The construction, manufacturing and service sector PMI readings all increased by more than expected and are consistent with healthy growth in the sectors. The Bank of England met on Thursday and as widely expected left rates unchanged at 0.5%. Expectations for a rate hike from the BOE have been pushed out into 2016 at this stage and they could well get pushed further into the future after the release of this week’s BOE inflation report. The bank looks set to cut is current forecast for inflation to 0.0%, or possible even take it negative, from the current level of 0.5%. A negative inflation forecast would be the first since the bank started forecasting inflation in 1993. While Governor Carney has stated that falling inflation is ‘good news in the short term’ and they are likely to ‘look through’ this weakness, the bank will be concerned about the potential re-emergence of Euro concerns at the same time as inflation takes a dive. This has the potential to see weak inflation expectations become entrenched and the bank would have to act if they thought that was the case. The BOE inflation report hits the wires on Thursday and Governor Carney is also scheduled to speak that same day.

There were tentative signs of a small pickup in growth out of Europe last week. A number of regional PMI readings were encouraging, particularly those of the service sector, and retail sales gained 0.3% against expectations for a small fall. German factory orders were also stronger than forecast at +4.2%, while German industrial production gained a more modest +0.1%. The focus however remains on Greece and potential for the standoff between Troika (EC, ECB and IMF) and the new Greek government to push Greece closer and closer to an exit from the Euro. Both sides seem very polarised and someone is going to have to back down on their core beliefs about what is the right course of action if any agreement is going to be reached. Although a Greek exit in itself would probably be manageable the risk is that once you’ve fractured the Eurozone, the whole thing become more unstable. We may already be starting to see some contagion from the hard line approach that Greece is taking in negotiations, with recent news that Troika have been unable to reach an agreement with Cyprus on their programme review. We have the Eurogroup meetings on Wednesday and these could be critical to see if there is any moderation on the stance of Greece or Troika.

The only data of note from Japan last week was average cash earnings and this came in as expected at +1.6%. This week should prove more interesting with a number of releases for the market to digest. Today we have current account and consumer confidence data, then later in the week we get tertiary industry activity and core machinery orders.

Canada produced some soft data last week in the form of the raw material price index and Ivey PMI. The latter in particular showed a very weak reading and it really helped to justify the recent surprise easing from the Bank of Canada. On Friday evening however the central bank would have been pleased to see the employment situation appears a little better than forecast. Canadian employment gained by 35.4k versus expectations of just +4.7k, with the unemployment rate dropping to 6.6%. It wasn’t entirely good news however with all the gains made up in part time work. Full time employment actually fell 11.8k. The focus now turns to the new house price index and manufacturing sales data due out toward the end of the week.

Major Announcements last week:
  • RBA cut rates 0.25% to 2.25%
  • UK Construction PMI 59.1 vs 56.9 expected
  • Fonterra Global Dairy Auction +9.4%
  • NZ Employment +1.2% vs +0.8% expected
  • UK Services PMI 57.2 vs 56.6 expected
  • Canadian Ivey PMI 45.4 vs 53.8 expected
  • Australia Retail Sales +0.2% vs +0.3% expected
  • Bank of England leaves rates unchanged
  • Canadian Employment +35.4k vs +4.7k expected
  • US non-farm payrolls 257k vs 230k expected