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FX Update - US employment underpins dollar gains

Written by Ian Dobbs on March 10th, 2015.      0 comments

2:30pm(NZT)
Market Overview:
The United States dollar made solid gains across the board in the wake of better than forecast employment data on Friday, reinforcing the broader trend toward a stronger dollar. The improving economic situation in the US helped boost Chinese exports to the country which jumped 48.3 percent from a year earlier. This was a key factor in China’s trade balance for February improving significantly to +$60.62 billion. Although the data was affected by timing of the Chinese New Year holiday some valid concerns remain. While exports surged, Chinese imports declined year on year by 20.5%, which may well be a telling signal of weakness in the domestic economy. The Chinese central bank has cut interest rates twice since November and further steps to stabilize economic growth may well be forthcoming. The health of the Chinese economy is hugely important to both New Zealand and Australia.
 

Australia
Data from Australia late last week didn’t have a big impact in the market. While GDP came in a touch below expectation at 0.5%, both retail sales and the trade balance we broadly in line with forecasts. Although the Reserve Bank of Australia (RBA) didn’t cut interest rates again last week, they maintain a firm easing bias and this is keeping a lid on any periods of Australian dollar strength. Data released yesterday on job advertisements for February showed continued gains, albeit at a slightly reduced pace. This would be consistent with a very moderate gain in employment. We get the employment change data on Thursday and this will be the key focus for the week. The market is expecting a gain in employment of 15.3k with the unemployment rate to remain steady at 6.4%. Ahead of that release we get consumer sentiment and inflation expectations data.
 

New Zealand
There has been no economic data of significance released from New Zealand since last week’s dairy auction. The markets attention is focused squarely on the Reserve Bank of New Zealand (RBNZ) who release their Monetary Policy Statement (MPS) on Thursday morning. It should prove to be a very interesting meeting. There are certainly some growing expectations in the market that the central bank could cut rates later this year, although that seems long shot at this stage. The biggest hurdle for any potential rate cut is the red hot Auckland housing market. The RBNZ are unlikely to throw fuel on that fire anytime soon. It could be a different story however, if property price gains moderated, and this exactly what the central bank are trying to achieve with the recently announced consultation process to reclassify investor lending. The eventual goal would be the implementation of macro-prudential tools to increase the cost of investor lending. Although this would no doubt help cool demand, it seems unlikely to be enough in the face of record positive migration figures. A massive increase in supply is needed in Auckland and that’s not something that can happen overnight.
 

United States
The United States produced some mixed data last week, but the key release of non-farm payrolls on Friday was much more encouraging. The data showed the economy added 295k jobs, which was significantly higher than the 240k expected. These job gains helped drive the unemployment rate down from 5.7% to 5.5%. It wasn’t unequivocally strong however, with negative revisions to prior numbers and soft wage gain figures. Average hourly earnings increased just 0.1% on the month and are up 2.0% year on year. That’s down from prior gains and below expectation. Wage price pressures could be the key determinant in the Fed’s decision on whether to start hiking interest rates, or not, around the middle of this year. The 2% annual wage gains are exactly in line with the average of the past four years and may not be strong enough, in an environment of very low inflation, to tip the Fed’s hand. One thing's for certain, the Fed will signal later this month they are moving closer to rate hikes when they remove the word ‘patient’ from there rate statement. They will then decide on a meeting by meeting basis whether the time is right to actually hike. It may well be the case that the Fed holds off pulling the trigger until wage gains improve. Still to come this week we have retail sales, producer prices, and consumer sentiment data.


United Kingdom
It certainly seems the United Kingdom economy has started 2015 on a very solid footing. Activity across the construction, manufacturing, and service sectors is increasing at a healthy pace and the improving outlook for Europe can only help. The Bank of England (BOE) left interest rates unchanged at 0.5% after their meeting late last week, although it looks very likely a rate hike will come either late this year or early in 2016. This week to draw focus we have a speech from Governor Carney, data on manufacturing and industrial production, the NIESR’s GDP estimate and the trade balance.
 

Europe
The past couple of weeks has seen a noticeable improvement in economic data from Europe. Better than expected readings from employment, retail sales, and German inflation have been the main highlights, although other indicators have also showed improvement. This somewhat brighter outlook was reflected by the European Central Bank’s upgraded growth outlook for 2015 released at last week’s rate meeting. In the past 24 hours the central bank has actively started purchasing bonds as part of their previously announced EUR 1.1 trillion quantitative easing programme. It is hoped this extra liquidity will further boost economic activity and help the Eurozone really turn the corner in terms of both growth and inflation. But there are still many hurdles to overcome, the least of which is not Greece. Never far from the headlines the Greek situation is again creating concern. This week’s Eurogroup meeting demonstrated the frustration the EU feels toward Greece with Eurozone finance ministers urging Greece to stop wasting time over reforms. The Dutch Finance Minister, who heads the group, went further saying proposed reforms were far from complete and little progress has been made. Greece is yet to receive the latest tranche of bailout funds and the country could well struggle to make payments on debt due over the coming weeks. With Greek concerns still at the forefront and the central bank now actively printing money, the Euro has remained under pressure largely ignoring the improvement in data. There are a number of speakers scheduled for this week along with data on French and Italian industrial production.
 

Japan
A couple of releases from Japan over the past week have suggested the Government and Bank of Japan (BOJ) still have a lot of work to do in reflating the economy. Japan’s leading index, which measures future economic activity, dropped unexpectedly in January, after rising the previous month. The index fell to 105.1 from 105.6 prior. The market was expecting an improvement to 105.8. Japanese GDP released yesterday also disappointed. Year on year GDP for the fourth quarter came in at just 1.5% which is well below the expectations for a reading of 2.2%. It seems Japan’s rebound from recession was weaker than first estimated with an unexpected decline in business investment and soft private capital expenditure largely to blame. Data like this will only add to calls for further stimulus from the BOJ. Still to come this week we have core machinery orders, tertiary industry activity, and consumer confidence data.
 

Canada
Last week saw a mixed bag of data from Canada. There were improved readings for GDP and Ivey PMI, while building permits and the trade balance both disappointed. The main focus however was on the Bank of Canada and their rate meeting. Somewhat surprisingly the bank struck a very neutral tone and held rates steady. This comes after January’s surprise rate cut that really caught the market off guard. Last night we saw housing starts data come in below expectation and down on last month, but the key release will be employment change set for release on Friday. The market is looking for a gain in employment of 21.3k with the unemployment rate dropping to 6.5%.
 

Major Announcements last week:
  • Australian GDP 0.5% vs 0.7% expected
  • UK services PMI 56.7 vs 57.6 expected
  • Bank of Canada leaves rates unchanged at 0.75%
  • US ISM Non-Manufacturing PMI 56.9 vs 56.5 expected
  • Australian Retail Sales 0.4% as expected
  • Bank of England leaves rates unchanged at 0.5%
  • European Central Bank leaves rates unchanged at 0.05%
  • Canadian Ivey PMI 49.7 vs 49.4 expected
  • Canadian Building Permits -12.9% vs -4.2% expected
  • US Non-Farm Payrolls 295k vs 240k expected
  • US Unemployment Rate 5.5% vs 5.6% expected
  • Chinese Trade Balance $60.62bn vs $7.8bn expected.
 

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