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FX Update - Interest rate expectations drive the USD higher

Written by Ian Dobbs on February 3rd, 2015.      0 comments

4:00pm(NZT)
Market Overview:
Divergent monetary policy between the United States and most other developed nations is driving the push toward a stronger USD. The US look set to stay on track for an interest rate hike around the middle of this year, while many other central banks are actively erasing or adjusting to a more ‘dovish’ policy stance. The latest bank to adjust its stance will likely be the Reserve Bank of Australia when they release their statement this afternoon. There is plenty of talk about a potential cut, but failing that a move to an easing bias is extremely likely. Significant uncertainty remains around Greece and its debt pile and this poses a real risk for the Euro over the coming weeks. We are yet to see this translate into broad based Euro weakness, but that remains a distinct possibility if some middle ground between the new Greek government and Troika (IMF, ECB and EC) can’t be reached.  
 

Australia
Although the political scene in Australia is getting a lot of media coverage at the moment with the risk of Tony Abbott becoming another PM to be ousted, the markets focus is squarely on the Reserve Bank of Australia (RBA) and their rate decision this afternoon. It seems it is a very close call as to whether we get a cut or not and we can expect plenty of volatility around the announcement. Those calling for a cut are sighting continued weakness in commodities and the collection of other central banks that have recently eased policy. The Bank of Canada (BOC) in particular is one that surprised markets recently describing their cut as an “insurance” policy against further weakness. The RBA could easily decide to do a similar thing today and move the cash rate to 2.25%. The more prudent thing to do however, would be to signal a move to an easing bias at this meeting, while not actually cutting. Recent inflation data was nowhere near soft enough to consider a panic move and the Australian dollar is trading much weaker than it was only a month or two ago, which in itself is stimulatory. In the past couple of hours we have seen building approvals data which came in a touch better than forecast. The other key data to digest this week will be retail sales on Thursday.
 

New Zealand
There has been no economic data or releases of significance since last Thursday’s RBNZ rate statement. In the wake of that statement, and the central banks move to a neutral bias, the New Zealand dollar has been under a fair amount of pressure across the board. If data over the coming 24 hours is encouraging we could see a corrective bounce in the currency develop. Tonight we have the latest dairy auction from Fonterra to digest and tomorrow morning employment data hits the wires. There have been tentative signs of a bottom in dairy prices over the last couple of auctions and further gains tonight would certainly be welcome. Employment data tomorrow is expected to show a gain of 0.8% with the unemployment rate dropping to 5.3%. We will also hear from RBNZ Governor Wheeler tomorrow with a speech scheduled for around midday.
 

United States
The Fed statement last week suggested they are still very much on track to hike rates around the middle of this year and a number of comments from officials since then have only reinforced that view. GDP data on Friday was a little softer than forecast coming in at 2.6% versus expectation of 3.0%, but there were some positive signs in the detail of the report. The personal consumption component did show strength and this bodes well for consumer spending going forward. This point was not lost on the Fed’s Williams who said he is not concerned about GDP. He said consumer spending is strong and he sees strength in the economy with a lot of momentum. The Fed’s Bullard said he would like to get of zero rates sooner rather than later. He said zero rates are not right for the current economy and it’s reasonable to expect a hike in June or July. Last night we got the latest reading on the manufacturing sector with the ISM Purchasing Managers Index (PMI). It was a little disappointing come in at 53.5 down from the prior reading of 55.5. This was also the softest result since March 2014. On Thursday we get non-manufacturing PMI data and then on Friday the all-important monthly employment report is released. Market forecasts are centred on a gain in non-farm payrolls of 230K.
 

United Kingdom
Data from the UK over the past week has been somewhat mixed. GDP printed a touch weaker than forecast at 0.5% in the fourth quarter, although the annual rate is still running at the best level since 2007. CBI realized sales printed at an encouraging 39 which was significantly better that the 31 expected. Net lending to individuals was weaker than forecast falling to GBP 2.2 bln in December from Novembers GBP 3.1 bln. Consumer confidence improved in January and the latest reading on mortgage approvals also showed gains. Last night we saw manufacturing PMI which was very close to expectation at 53.0. That is a small improvement over the prior reading of 52.7 and suggests a mild expansion in the industry continues. Over the coming days we will get readings from the construction and service sectors and then on Thursday the Bank of England (BOE) hold their latest rate meeting. No change is expected with the bank likely to keep rates on hold until at least late this year.
 
 
Europe
European data hasn’t had a big impact over the past week as the market keenly awaiting negotiations between Troika officials (EC, IMF and ECB) and the new Greek government. The war of words ahead of those negotiations hasn’t relented at all with Greek Finance Minister recently saying that Troika officials are not welcome back in Greece. He said Greece will repay its debts to the IMF and ECB and will negotiate with the euro-area nations that funded most of the countries bailout package. Some ECB officials have suggested that if no deal is reached with Troika by the end of February the central bank would stop lending to Greek banks. This would likely lead to a collapse of the Greek banking system, an all-out default on debt, and an eventual exit from the Eurozone. In terms of recent data we have seen a slightly softer than forecast inflation result for the Eurozone at -0.6%, but countering this was a small improvement in unemployment to 11.4%. The final reading on manufacturing PMI was unchanged at 51.0 which is a slight improvement on the prior month’s outcome of 50.6. There are tentative signs that the gradual improvement will continue over the coming months. Later this week we get the final reading from Service sector PMI, retail sales and German factory orders, along with the EU economic forecasts.
 

Japan
Japan released a raft of economic data on Friday afternoon which didn’t make great reading. The best result came from unemployment which improved to 3.4% from 3.5% previously. Countering this however, were softer than expected readings from industrial production, household spending and inflation. These results came on the back of Thursday’s poor retails sales figures which increased just 0.2% year on year. The market was expecting a gain of 1.1%. There is little to get excited about this week with the highlight being average cash earnings data on Wednesday.
 

Canada
The Canadian dollar has remained under pressure in the wake of the recent surprise Bank of Canada easing. The only data released last week was monthly GDP which showed a contraction of 0.2% versus expectations for a flat reading. Year on year GDP was 1.9%, compared to 2.1% expected. Over the coming days there is a raft of data scheduled for release starting with the Raw Materials Price Index tonight. Tomorrow we get Ivey PMI then later in the week the trade balance, building permits and employment change are all set to hit the wires.
 

Major Announcements last week:
  • US Durable Goods Orders -0.8% vs +0.6% expected
  • Australian CPI 0.2% vs 0.3% expected
  • FOMC leave rates unchanged
  • RBNZ leave rates unchanged but move to a neutral bias
  • Eurozone CPI -0.6% vs -0.5% expected
  • Canadian GDP -0.2% vs 0.0% expected
  • US Q4 GDP 2.6% vs 3.0% expected
  • Chinese Manufacturing PMI 49.8 vs 50.3 expected
  • US Manufacturing ISM 53.5 vs 54.9 expected
 

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