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FX Update - Merry Christmas

Written by Sam Coxhead on December 22nd, 2015.      0 comments

2:30PM (NZT)
Market Overview:
Holiday trading days : We will be working through the holidays- excluding the statutory non banking holidays of the 25th and 28th December, and 1st and 4th January.

All the team here at Direct FX wish you a safe and fun holiday period. Merry Christmas and a happy New Year!

The widely anticipated U.S. FOMC meeting passed last week and as widely expected saw the Fed increase the target funds rate from 0-0.25% to 0.25-0.50%. The decision is the first time since June 2006 that the Fed has raised rates and marks seven years since the FOMC took the rate to zero. The road back to a more normal rate setting will be a long one however. Despite indicating a path which would see a further 4 hikes in 2016 the Fed made it excessively clear that the pace of increases would be gradual and dependant on the quality of incoming economic data. All but three members expect rates to be at or below 1.5% by the end of 2016; members expect the funds rate to be 2.4% in 2017, down from the 2.6% projection in September. U.S. equities took the move in their stride, the prolonged period of low rates coupled with $3.7 trillion in quantitative easing have boosted U.S. equities by over 200% since the 2009 March lows, although during the period the U.S. economy has had the worst recovery since the great depression.

A quiet local calendar saw the AUD take its cue from offshore events last week. The U.S. FOMC meeting was the main event of the week, this saw the Fed raise rates by 0.25% as expected. Interestingly, the USD received an additional boost after the Fed failed to lower their forward interest rate path as far as many had expected. Last week’s RBA minutes delivered a relatively upbeat assessment of the Australian economy. The minutes noted an improving growth outlook and positive trends in the labour market. Weaker U.S. data and consolidating commodity pricing on Friday has helped the AUD lift marginally since our last report. The local data schedule is quiet over the holiday break, private and housing sector data will feature on New Year’s Eve day, building approvals and trade data will feature on January 7 prior to November retail sales on the 8th.

New Zealand
The NZD sits marginally higher in trade this week as the markets begin to wind down for the holiday break. Last week’s trade was dominated by the U.S. FOMC meeting. This saw the Fed hike rates for the first time in nearly a decade and issue a forward path which included another 4 hikes for 2016. The main local event was the NZ Q3 GDP release, which marginally beat the market’s expectations. The numbers included encouraging strength in services and investment demand. Softer U.S. data releases and improving ANZ Business Confidence data helped support the NZD into the end of the week. Immigration data released yesterday showed immigration inflows which continue to hit record highs. The local data calendar is largely empty over the holiday break, although November trade data will be released on Wednesday this week. The 2016 NZ calendar begins with November building consents on January 11. Market liquidity and commodity/risk sentiment will be the primary drivers of NZD moves in the New Year.

United States
Sentiment for the USD last week was dominated by the FOMC monetary policy meeting which saw the Fed raise interest rates by 25 bps. This was the first U.S. rate hike seen since June 2006. A further four hikes were indicated for next year, although Fed chair Yellen indicated the hikes would remain data dependant. Data released last week was mixed. It included a core inflation rate which printed in line with the FOMC’s 2% target, solid housing starts and building permit data, and a miss in the services sector PMI data amongst others. Tonight sees the release of the Richmond Fed manufacturing data and existing home sales numbers. The third read of the Q3 GDP is unlikely to elicit a significant market response. Christmas Eve day will see the release of durable goods data and the Fed’s favored inflation measure (PCE inflation); this is expected to remain subdued at 1.3% y/y for the core index.

The EUR has firmed marginally in trade this week after easing late last week post the U.S. FOMC meeting. Data releases were mainly second tier and took a back seat to the predominant USD sentiment, which took a boost after the Fed surprised many in the market by pointing to a further four rate hikes in 2016. European industrial production data was strong and rose at double the rate forecast in October. Other data was mixed and included a rise in the German/European ZEW confidence data and a slight miss in the French/German PMI data. Misses in the U.S. PMI data on Friday helped the Euro lift from its weekly lows. The market chose to ignore the deadlock in the Spanish elections ,which sees no clear proposition for the formation of a coalition government. The local data calendar is relatively light weight for the euro-area over the holiday period.

United Kingdom
The GBP continues to ebb lower in trade this week, despite generally solid local data-flow last week.The data included labour market numbers that showed the unemployment rate at near 10-year lows and retail sales data which exhibits annual growth of 5%. Concerns over the inflation outlook and wages growth were brought into focus after dovish comments from BOE board members last week. Weak U.K. public finances are also in focus presently, data released later today is expected to show a further increase in public borrowing. U.K. GDP and current account data will feature tomorrow. Of note is the fact that the U.K. current account deficit is currently one of the widest in the developed world. Data in the New Year prior to our next update includes consumer credit, trade and mortgage approvals data.

The JPY has firmed in recent trade on safe-haven demand and after the BOJ announced a surprise shift in its asset-buying program on Friday. The program is to now  include purchasing new exchange-traded funds, longer-dated bonds and more risky assets. The moves are further measures which are aimed at addressing the BOJ’s inflation problem, although on current trends the BOJ likely has little chance of meeting its 2% target in the next couple of years. The latest Tankan survey last week showed that Japanese firms expect prices to rise just 1% next year. Concerns over the credibility of Governor Kuroda’s policy response and difficulty in implementing effective larger asset purchases to address the persistent inflation problem were key factors behind the Yen surge. The holiday period sees the release of inflation data on Christmas day and retail sales/industrial production data on Monday next week.

The CAD continues to trade near its multi-year lows this week as the continued weak sentiment shown towards countries with a heavy oil exposure shows little signs of abating. Brent crude oil prices have traded to 11-year lows this week on the back of continued supply concerns. Data released on Friday showed an uptick in the U.S. weekly oil rig count. This came on the back of data earlier in the week which showed U.S. commercial crude inventories rising to their highest levels in more than 80 years. Canadian inflation and wholesale trade data on Friday missed the market’s expectations. The data combined with dovish comments from the BOC Governor Poloz (over the Q4 growth outlook) to add to the negative sentiment. Local data over the holiday break includes the retail sales and GDP releases on Christmas Eve, and the RBC manufacturing PMI release early in the New Year. Energy market developments will continue to be the key driver however.