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FX Update - Financial storms envelop the markets- the JPY surges, the NZD and AUD dive

Written by Sam Coxhead on February 9th, 2016.      0 comments

3:00PM (NZT)

Market Overview:
Last week’s dream run by the NZD/USD and AUD/USD appear to be a distant memory this week after another spike in global fear and anxiety levels overnight. Financial market jitters have been a constant theme so far in 2016. These jitters have been elevated by fears over a China slowdown and deteriorating emerging markets, many of which have budgets which are heavily dependent on a recovering oil price. Concerns in the credit markets over energy related loans spread to the financial credit sector overnight after rumours circulated that a large German bank would be unable to meet payments on some of its riskiest debt securities. The uncertainty has increased the appeal of key safe haven government bonds whilst in Europe a further deterioration has been seen in the peripheral spreads of deeply indebted countries versus German bunds. As is typically the case during such periods the JPY has also been a large beneficiary of the safety flow and has surged over 5% against the USD since the start of last week.

After a strong performance during the week the AUD surrendered much of its gains in late trade on Friday post the release of the latest U.S. employment report. The report was mixed, although the miss in payrolls growth garnered much of the market’s attention. This led to decent declines in the U.S. equity bourses, a lead which was mimicked by other offshore exchanges in opening trade this week. Trade in the AUD was mixed on Friday prior to the data, this despite a miss in the latest Australian retail sales data. The simultaneous release of the RBA statement on monetary policy created little fuss after the RBA made no material changes to its GDP or inflation forecasts. It also noted solid employment growth and reasonable prospects for continued growth in the economy. The bank highlighted the part played by a falling Australian dollar in helping rebalance the economy and repeated that the low levels of inflation may provide scope for easier monetary policy if required. Earlier in the week the RBA left the cash rate unchanged at 2 % as expected. Other data releases included better than expected building approvals numbers and a rise in the NAB business confidence series. Of interest this week will be business confidence (today) and consumer sentiment (tomorrow) numbers. The low impact nature of the calendar will however mean offshore events and risk sentiment will again be the primary drivers.

New Zealand
The NZD has begun the week on a softer footing after much of last week’s gains were erased on Friday post the release of the latest U.S. employment report. Earlier the NZD had put in its best weekly performance of 2016 after local data which showed the unemployment rate falling to its lowest levels since March 2009, in the final quarter of 2015. Comments from the RBNZ Governor also played a part in the rally after he highlighted the other RBNZ considerations aside from inflation when assessing monetary policy settings (inflation, last 0.1% in Q4 vs. the 1-3% RBNZ target). The U.S. employment data release was mixed as a miss in the creation of new jobs for January was offset by a better than expected unemployment rate and surprise rise in average earnings. U.S. equities fell after the report as did the odds for another Fed rate hike in March. The decline in investor sentiment saw key ‘risk’ currencies like the NZD and AUD fall sharply on the day. Other key global equity exchanges followed the U.S. lead in trade yesterday and overnight (Japan aside). A largely empty local calendar should ensure that trade in the NZD again takes its cue from offshore events this week, Of key influence will be Fed Chair Janet Yellen’s semi-annual monetary policy report.

United States
The USD continues to trade with a soft tone this week, although the losses have tempered somewhat after last week’s poor showing. Last week’s misses in the U.S. data flow were numerous and culminated in a decline in January non-farm payrolls to 151k from a revised 262k the month prior. The number failed to meet the consensus forecast, although the unemployment rate again fell reaching a fresh cyclical low at 4.9%. A rise in average hourly earnings will be welcomed by the Fed especially in light of its underperformance in the face of the steadily improving labour market(which saw unemployment peak at 10% during the height of the GFC). Questions will remain over its durability however, and most in the market continued to reduce their expectations after the data of a Fed rate hike at the next meeting in March. PMI data released last week was underwhelming and was joined by a miss in the factory order and jobless claims numbers. Focus for the USD this week will centre on a speech by Fed Chair Yellen to congress on Thursday, where a tactile approach will be needed so as to not heighten the already elevated financial market nervousness.

The EUR is trading on a solid footing again this week and retains most of last week’s gains seen against the USD. The currency was in solid demand in overnight trade on the back of a flight to safety in key government bonds as the elevated financial market uncertainty again took a turn for the worse. Credit market concerns were to the fore during trade, these concerns shifted to European banks and helped the Euro Stoxx 50 close some 3.3% lower, other global equity bourses also fell heavily in overnight trade. EUR gains last week were fuelled by general USD malaise, in part after continued softer U.S. data-flow but also on the back of more guarded comments from Fed officials. European data showed euro-zone unemployment at 4-year lows and composite PMI numbers which just topped consensus forecasts. Comments from ECB president Draghi again focussed on the case for easier monetary policy, although failed to make much impact on the EUR demand. Data scheduled for release this week includes the euro-area GDP and industrial production releases although talk from Fed Chair Janet Yellen is likely to have a more far reaching effect on sentiment.

United Kingdom
The GBP has shifted lower since our last report in part on the back of a move out of more risky currencies, this as credit, global growth and emerging market concerns weigh heavily again on investor sentiment. These issues also have many considering the wisdom of central bank interest rate hikes in 2016. Adding to the move is questioning whether the BoE may shift to adopt an easing bias should the heightening financial market volatility continue. This comes on the back of last week’s decision by the BoE to unanimously leave rates on hold at 0.5% and express a belief that the next move in rates would be higher. Data released during the week included better than expected manufacturing and services PMI data, the construction number declined however and failed to match expectations. It is a quiet week this week in the U.K., trade data due for release tonight is unlikely to trouble, whilst manufacturing and industrial production numbers slated for released tomorrow are likely to have more impact (still limited). House price data is due for release on Thursday.

The JPY has continued to surge in trade so far this week adding to the already impressive gains seen last week. Those gains were helped by a softer USD overall, which declined on the back of further soft data flow and reducing expectations of a Fed rate hike at the March FOMC meeting. A sharp deterioration in ‘risk’ sentiment and correlated surge in JPY ‘safe haven’ appeal has seen the JPY appreciate sharply in recent hours. The move was backed by declining equity bourses, weakening commodity prices (precious metals aside) and heightened credit market concerns. Japanese data releases last week included a decline in household confidence and marginal miss in the latest manufacturing PMI data. Labour cash earnings released yesterday showed just a 0.1% y/y rise for December, much less than the 0.7% expectations. The data just adds to the case for the recent move by the BOJ to shift interest rates below zero. The outlook for the JPY this week will continue to depend on swings in risk sentiment, this sentiment is currently being undermined by deteriorating corporate credit markets and sharply lower global equity bourses as global growth and emerging markets concerns weigh heavily on investor outlook.

Weakening oil prices have once again placed the CAD under pressure in trade this week. The lower prices come after reports that a meeting between Saudi Arabia and Venezuela over the weekend have accomplished little headway towards reaching an agreement to curtail production. Canadian data released on Friday didn’t help the sentiment towards the CAD either, this after net employment failed to reach the market’s expectations and the unemployment rate ticked higher to 7.2% in January. The simultaneous Ivey PMI release easily exceeded the consensus forecast however. Building permits data released overnight showed a large improvement on the month prior and also easily exceeded forecasts. House price data on Friday is the only other release of interest, this should once again leave CAD pricing vulnerable to swings in the oil price. Supply data from the American Petroleum institute and monthly reports from OPEC and the IEA are awaited by the oil market this week.