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FX Update - RBNZ in Focus this week

Written by Edited by Ian Dobbs on January 26th, 2016.      0 comments

Market Overview
The case for an interest rate cut in New Zealand in 2016 took a lift last week after data which showed annual inflation falling to just 0.1% in Q4 last year. This number was well below the 0.4% forecast by the RBNZ in December. The surprise for the Reserve Bank came in the form of the weak pricing seen for many tradeable goods, falling petrol prices were the main contributor but have been well flagged amidst the turmoil seen during 2015 in the oil and energy markets. Another decline in dairy pricing last week adds to the argument for a change in the Reserve Banks bias towards lower rates although it remains to be seen whether emerging evidence of a cooling in the Auckland housing market is well enough advanced to encourage a shift in verbal rhetoric as early as this week.

The AUD like the NZD has drifted lower in trade since Friday after rallying nearly 2.25c against the USD from last week’s lows. Focus for the week aside from the dominant prevailing global risk theme will be on the Australian Q4 inflation print tomorrow. Forecasts centre on a moderate 0.3% rise in the headline number for the quarter whilst the core number is likely to see annualized inflation running near the bottom of the RBA’s 2-3% target band. The export price index released the following day will be of some interest and is forecast to show a further deterioration in pricing over Q4 which will put pricing running at levels some 10% lower than a year ago. A stubborn AUD/USD exchange rate over the quarter (-0.7% from Q3 only) is likely to see the terms of trade post a further decline (~-12% from a year ago). Data released yesterday showing a decline from the month prior in NAB Business confidence failed to garner any market traction.

New Zealand
The NZD has drifted lower since our last report in quiet trade into the lead-up to this Thursday’s RBNZ interest rate decision. Some degree of underperformance against other ‘risk on’ currencies has been observed, perhaps in part due to reflection on last week’s soft local Q4 inflation print. Whilst there is almost no chance that the RBNZ will cut interest rates at Thursday’s meeting the data will no doubt contribute to the RBNZ’s thinking especially in light of the weak pricing observed for many tradable goods (other than petrol). This comes despite a lower exchange rate which the RBNZ has argued will push the price of tradable goods higher and see inflation push beyond 1% in 2016, well above last week’s 0.1% annualized print. Signs that the Auckland housing market is losing steam may also give the central bank additional confidence to acknowledge that the case for further cuts to the current 2.5% rate is now stronger. December trade data is also due for release on Thursday although is unlikely to trouble the markets once focus returns to the dominant global risk theme post the RBNZ meeting.

United States
Moves in the USD have been muted since our last report, data released on Friday included a strong rise in existing home sales which reversed November’s fall, new mortgage regulations delayed November closings however and bolstered December’s print giving the market little to go on in the way of a meaningful trend. Manufacturing PMI data which rose unexpectedly failed to induce any meaningful momentum in direction. Last week’s heavy data schedule was dominated by the latest inflation reading which showed a 2.1% core annual gain, other data included an easing in the latest housing starts and better than expected Philly Fed survey. Initial weekly jobless claims moved to their weakest level in six months although the primary focus for the markets was the inherent uncertainty in the financial and commodity markets which has many questioning the Fed’s ability to raise rates a further four times this year.

United Kingdom
The GBP has drifted lower in trade so far this week in line with the overall easing seen in the other more key risk currencies. December U.K. retail sales data released on Friday came in well below expectations and included a downward revision in the November data, the markets took the often volatile monthly data in its stride preferring instead to focus on the overall trend which saw Q4 post a 1.1% gain. CBI industrial trend data released overnight saw total orders slip further in January although the price series returned to a positive reading. Immediate focus will turn to another speech (on financial stability) by the BOE Governor Carney tonight, comments from him last week placed the GBP under pressure as he focussed on soft inflation and wages growth amidst an uncertain outlook looking forward. A speech by BOE member Forbes overnight also focussed on wage growth stagnation and reiterated the earlier Carney comments that the BOE will not be raising interest rates in the foreseeable future. Focus beyond tonight this week will turn to the U.K. Q4 GDP release on Thursday night.

The EUR has lifted in trade so far this week having finished last week trading on a soft tone in part not helped by manufacturing PMI data which eased more than expected in France, Germany and in the euro-zone on Friday. The manufacturing prints underperformed the services prints and reflect the theme seen in other countries as they deal with the China and emerging market slowdown. Euro-area new orders despite easing still posted their 14th consecutive month of expansion however, whilst much of the weakness seen in the manufacturing data was in oil-related industries. German IFO business sentiment data released overnight missed the market’s expectations driven largely by a fall in the expectations series. Trade last week was dominated by the ECB meeting at which the potential for a further easing at the next March meeting was raised. It is a relatively quiet week for the remainder of the week which will feature business and consumer confidence data along with German inflation and retail sales numbers amongst others.

There will be plenty of leads for the market this week in Japan with a heavy data calendar scheduled for release ahead of the key BOJ meeting on Friday. The BOJ is expected to remain on hold at the meeting, market expectations of an easing have intensified recently as the BOJ struggles with mundane inflation levels, although Governor Kuroda gave no hints of any further easing in an interview at the weekend in Davos. The BOJ will release an ‘Outlook for Economic Activity’ report after the meeting, one of only four this year under the new monetary policy meeting schedule which reduces the number of BOJ meetings going forward from 14 to 8 per year. Focus at the press conference will centre on the current state and outlook for exports, and the reasoning (excluding oil) should the inflation forecasts be lowered. The recent uncertainty in financial markets, capex trends, and the trend in wages are likely to be key items of influence. Data released on Friday showed a decline in the latest manufacturing PMI data, whilst trade data released yesterday showed y/y exports posting their largest decline since September 2012, imports fell more than expected in part likely due to waning internal demand.

The recovery in the CAD has paused in trade since our last report as pricing once again reflected the energy market dynamics in overnight trade after pricing fell on the back of news that Iraq’s oil output had reached record levels last month. The fall halted the two-day rally which saw prices post their largest percentage gains since 2008. Canadian data released on Friday saw inflation come in under expectations, the core number posted its second consecutive large decline in December and will likely cause concern for the BOC. The data comes on the back of optimistic comments last week from Governor Poloz at the BOC interest rate meeting. Retail sales data also released on Friday printed well above the market consensus forecasts. The Canadian data calendar is empty until Friday (Sat. morning NZ time) which will once again leave the CAD highly dependent on further oil market news.

Major Announcements last week: (Tuesday only)
  • NZ NZIER Business Confidence 15%, -14% prior
  • Chinese Q4 GDP 6.8% y/y on exp.
  • UK Core inflation 1.4% vs. 1.2% exp. (Dec. y/y)
  • German ZEW (Current situation, 59.7 vs. 54.0 exp.)
  • NZ GDT Dairy price index, -1.4%
  • NZ Inflation 0.1% vs. 0.4% exp. (Q4 y/y)
  • UK ILO Unemployment rate 5.1% vs 5.2% exp. (3M/Yr, Nov.)
  • UK Average Earnings 2.0% vs. 2.1% exp. (3M/Yr, Nov.)
  • US Inflation ex. Food+Energy 2.1% as exp. (Dec. y/y)
  • BOC Canadian Interest rate, 0.5% as exp.
  • US Philly Fed, -3.5 vs. -5.0 exp. (Jan.)
  • UK Retail Sales 2.6%, vs. 4.3% exp. (Dec. y/y)
  • US Preliminary Markit Manufacturing PMI 52.7 vs. 51.1 exp. (Jan.)