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FX Update - US Fed reduces their 2016 anticipated rate path

Written by Ian Dobbs on March 22nd, 2016.      0 comments

Market Overview: 
Trade in the USD last week was dominated by the US FOMC meeting aftermath on Thursday. This saw the Fed bow to the markets assessment of a more clouded outlook for the global economy by reducing their estimate for interest rate hikes in 2016 to two from four. Fed Chair Yellen signalled a greater willingness to tolerate an upside inflation surprise as opposed to see it continue to run under 2%. June now looks the most likely time for the next Fed move. In doing so the Fed have shown a willingness to yield to threats which as yet haven’t manifested in key US employment and inflation indicators. This illustrates that global economic concerns and financial market volatility will continue to bear significantly on the outlook for US monetary policy in 2016.

The AUD is continuing on a solid footing in trade this week after last week’s strong rally which saw it push to eight month highs against the USD. The latest surge came towards the end of the week after the US FOMC central bank meeting. This saw the Fed adopt a more dovish interest rate outlook which helped drive the USD lower and commodity prices higher to end the week. The ongoing global and financial market risks were seen as the key contributor for the Fed to remove two rate hikes this year from their suggested interest path. Key local data events were few last week which will again be the case this week in the run-up to Easter. The jobs report for February was the key event of note, this saw the unemployment rate fall to 5.8%, although reduced job participation drove the decline. Unemployment has now spent five months in the 5.8/6.0% range and conveys a message of a slowing in the strong pace of jobs growth seen last year. Of interest this week will be RBA Governor Stevens’ speech later today where market players will be watching closely for any comments on the recent AUD strength which has seen it rally 11% against the USD since January.

New Zealand
Expect a quieter week this week heading into Easter after last week’s busy US FOMC dominated event calendar. The US Fed’s move on Thursday to lower their anticipated 2016 rate path provided a fillip for the NZD as the USD fell sharply on the news. Markets had already priced in a much less aggressive tightening path for the Fed this year, although the extent of the move was a surprise to most. The uncertain global economy was seen as a key contributing factor in the Fed’s thinking. Thursdays shift to suggesting only two hikes this year from the four indicated in December comes despite an improvement in the key US employment and inflation indicators since.  Local events released last week included another soft GDT dairy auction and Q4 GDP upside surprise. ANZ Consumer confidence for March dipped slightly from February, although at 118.0 remained solid and in line with the historical average. Immigration data released yesterday showed a record 67,400 permanent and long-term migrants for the year to February. Expect US data flow and the commodities price environment to help set pricing this week, the only local data scheduled for release are trade numbers for February due on Thursday.

United States
The USD has received some reprieve so far this week after last week’s large FOMC inspired sell-off. The gains come after comments overnight from three non-voting Fed board members which spoke of a Fed that would meet their inflation objective thereby allowing them to resume rate hikes in the middle of the year. The FOMC interest rate meeting dominated the US news late week. This saw the Fed reduce the number of suggested hikes for 2016 from the four slated in December to two only. Data releases included a miss in the key retail sales control number and the latest industrial production figures. Michigan consumer sentiment also unexpectedly declined, although the long run inflation expectations survey recovered to the 2015 average. Better than expected releases included core producer price data and the latest annual core inflation print which rose to its highest level since May 2012. Existing homes sales numbers released overnight fell well short of consensus. Immediate events of interest this week start with further speeches from Fed members tonight, manufacturing PMI data and Richmond Fed manufacturing. Durable goods and GDP data are due later in the week.

United Kingdom
The volatility that was notable in the GBP last week has continued again in trade so far this week. Central bank meetings drove the shifts in the GBP last week. Meetings by the US Fed and then UK BoE both contributed positively to the GBP move up towards the end of the week. The bigger kick came after the Fed’s more dovish than expected meeting which saw the Fed remove two of their anticipated hikes for 2016. Further buying was noted after the BoE meeting which spoke of the likelihood of higher rates in time. Employment data released during the week was mildly positive also. Sentiment towards the GBP has taken a dent over the weekend however, on the back of resignations from members of the ruling Tory coalition. Brexit fears also continue to weigh after the resignations and after a report from the Confederation of British industry which suggested that an exit from the EU would cost the UK 100bn GBP in lost economic output and 950k jobs by 2020. Data to feature this week starts with UK inflation and producer price numbers tonight, retail sales is set for release on Thursday.

The EUR has eased in recent trade this week, a move which comes after last week’s strong showing which was born about from the U.S Fed’s move to lower their anticipated interest rate path at the FOMC meeting on Thursday. Data out of Europe last week was lacking, but included a slight rise in euro-zone employment and euro-zone inflation which printed above expectations. Comments from Fed officials overnight have helped the USD rally after they signalled they were comfortable with the US inflation outlook. All three commenting members signalled the potential for imminent rate hikes. These comments contrast with those of the ECB Chief Economist Praet on Friday which countered the market’s view that the ECB was at the “physical lower bound” for interest rates, a view which had gained popularity after ECB president Draghi’s recent comments at the ECB monetary policy meeting press conference. Data to look forward to this week starts with the release of preliminary PMI’s and the German IFO survey tonight.

The JPY is easing in trade so far this week against the USD, although still sits sharply higher than those levels observed at this time last week. The gains have come on the back of losses experienced by the USD post the US FOMC interest rate meeting which saw the Fed lower their anticipated path for interest rates in 2016. Events of interest in Japan last week included the BOJ monetary policy meeting on Tuesday, this passed without much fanfare however after the BOJ kept their policy unchanged as expected. The BOJ minutes for the January meeting were released on Friday. The minutes showed that four of the nine board members had dissented on the surprise decision to deploy a negative interest rate policy. This decision has drawn criticism from lawmakers for failing to bolster stock prices and arrest an unwelcome rise in the yen.  Data releases during the week included better than expected core machinery and tertiary industry activity numbers and industrial production data which matched forecasts. Amongst the releases this week is the Reuters Tankan (tomorrow) and inflation data on Friday.

The CAD continues to benefit from buoyant oil market sentiment in trade this week. Recent CFTC data has shown an increased number of bets on a stronger price in the months ahead. This comes as net long (bought) positions moved to their highest levels since last June. The CAD received an additional boost last week from a USD which lurched lower after the more dovish than expected US FOMC interest rate meeting. The reduced 2016 suggested Fed rate path helped push commodities higher again on the prospect of continued weakness in the USD. Canadian data highlights last week included a softer than expected inflation print and much better than expected retail sales release. The inflation numbers included cheaper imports which have benefitted from the recent CAD strength. The Canadian data calendar is empty heading into Easter this week.

Major Announcements last week: (Tuesday only)
  • EU Industrial Production s.a. 2.1% m/m vs 1.5% exp. (Jan.)
  • BoJ Cash Rate, -0.1% as exp.
  • US Retail  Sales, -0.1% m/m vs. -0.2% exp. (Feb.)
  • NZ GDT Dairy price index, -2.9%
  • UK ILO Unemployment rate, 5.1% as exp.
  • US Inflation ex. Food+Energy, 0.3% m/m vs. 0.2% exp. (Feb.)
  • US FOMC interest rate, 0.5% as exp.
  • NZ Q4 GDP, 0.9% vs. 0.6% exp.
  • Australian Employment, 0.3k vs. 10.0k exp. (Feb.)
  • UK BoE Cash Rate, 0.5% as exp.
  • US Philly Fed Manufacturing Index, 12.4 vs. -1.7 exp. (Mar.)
  • Canadian Core Inflation, 0.2% m/m vs. 0.4% exp. (Feb.)