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FX Update - US holiday sees a quiet start to the week

Written by Howard Wilcox on February 21st, 2017.      0 comments

Very quiet start to the week with US markets closed on Monday for the Presidents Day holiday, currency markets have traded on reduce volumes and are mostly unchanged from Friday's levels. European equity markets were mixed to lower, as the withdrawal of the Kraft takeover bid for Unilever saw Unilever shares drop, offsetting gains across industrial stocks. With the US out, investors’ attention has centred on European developments. Political risk remains in focus, outweighing economic developments, with anti EU candidate Maine Le Pen gaining ground on her rivals as she benefits from increasing concerns over security, in the race for the French presidential elections. Across in Germany a new poll showed a drop in support for Chancellor Angela Merkel’s governing party which fell behind the opposition Social Democrats for the first time under hear leadership. In the UK some members of the House of Lords, parliament’s upper house, will seek changes to the draft “Brexit” law allowing the triggering of Article 50 the departure from the EU when it comes before the Lords. Later this week the US  Federal Reserve minutes from its last meeting will be released Thursday, possibly providing some incite as to how members view the new US administration's policies. Also later tonight/tomorrow there will be several speeches by Fed members which will be watched closely for any pointers to the probability of an interest rate hike at the March meeting.

The Australian dollar has traded sideways since Friday and continues around the 0.7670/95 range vs the USD. Later today will see the release of the February RBA meeting minutes which are expected to reflect the more upbeat RBA commentary of late. Also of a positive note was a report released by Deutsche Bank suggesting that the increase in commodity prices would continue to reduce the current account deficit as an export led recovery got underway. The surging demand and higher price for iron ore and coal is estimated to see an increase in exports as a share of GDP from 21.2%  to 22% in the first quarter of this year and this would be reflected in an increase in the Australian dollar against the USD to the 0.80 level and above.  The Australian dollar has already enjoyed an increase of over 6.5% against the US unit since the beginning of the year. Certainly this positive view is also partly shared by the RBA in some of its comments last week and although we are positive on a rise for the Australian dollar, the 0.80 level is a way off and it has had considerable trouble staying above the 0.77 mark. We look for gradual appreciation over the next 3 months or so as economic data continues to improve. RBA policy meeting minutes released later today, will be inspected for any change in monetary policy stance.

New Zealand
The New Zealand dollar is largely unchanged from the end of last week, sitting in the 0.7175/95 zone vs the USD, remains underpinned by continuing solid local data. There is another Dairy auction on Wednesday morning which should continue with the trend of firm prices thus providing New Zealand dollar support. However if the US economy continues to improve, the Trump tax policy (cut) is positive and the Fed is more bullish on rate rises, this will apply pressure on the New Zealand dollar, especially with the RBNZ indicating at its last MPS that it saw no need for rate increases. Potential exists for a move back to the 0.7000 region over the next few weeks.

United States
US markets continue to be positive, with US equities making new highs and the US holding gains against most of its trading partners. Data continues to show an economy improving and if the Trump tax policy is as expected, should add further fuel to the recovery. A rate rise for March is still very much on the cards as indicated by the Yellen testimony before Congress last week and any further confirmation of this in speeches from Fed board members this week would rise the rate hike possibility to a 50/50 call and would push the USD higher. Although the first month of the new administration has been rocky, the political situation in the US is more settled than that of the Eurozone, as recent polls show a narrowing of the lead on incumbent governing parties in both France, Germany in the upcoming elections. This is not expected to change in the short term and we look for continuing USD strength.  
United Kingdom
The “Brexit” debate continues to grind its way through the system with it now passing through the House of Lords. Once this is passed the timetable is most likely a triggering of Article 50 by the end of next month and a two year process of exit negotiations with the EU from that date. The GBP has been holding firm after rallying last week to a high of 1.2481 on the USD. The BoE Governor Mark Carney has warned of his concerns around consumer spending and these were somewhat justified by last week's drop of 0.2% for January (December figures were revised down to -2.2%) retail sales. There may be further indications of the BoE Governors views on rates as he testifies before the UK Treasury Select Committee on the February inflation report later tonight.  The GBP continues to strengthen against the EUR climbing from a low last week of 1.1641 to around 1.1763 currently. Next resistance is at the 1.1828/30 level seen early last week.

The EUR has improved against the USD since last week but at currently 1.0609 is lower than the 1.0678 seen late last week as European political news continues to be negative for the EUR. The Greek problem continues to rumble on, with Eurozone finance ministers at a meeting on Monday declined to disburse further Greek aid payments quickly, with Athens and its creditors agreeing to more discussions over the coming week. As part of the deal the Greek government will legislate measures which are fiscally neutral, but will not institute any additional austerity measures. Bailout funds will not be released until a set of prior conditions are met. German PPI data released yesterday was better than expected at up 0.7% (expected 0.2%) and later this week will see Eurozone February consumer confidence and PMI data.

The JPY is holding steady against the USD , now around 113.40 and with little in the way of economic data looks set in a 111.50-115.62 range. A breakout on either side would give new direction but any such move is unlikely to come before the release of the FOMC minutes on Thursday. The JPY remains the currency of choice for safe-haven hunters but this awaits a further bout of volatility in Europe or US for these flows to reignite.

Little news from Canada over the last few days after the ratifying of the Canada/EU trade agreement. The Canadian dollar has weakened against the USD from 1.3080 last week to currently trading around the 1.3136 level. Value for the CAD will largely be determined by USD movements this week given the release of FOMC meeting minutes and potential for the new Trump tax policy.

Major Announcements last week
•    US Producer PPI 0.6% vs 0.3% expected
•    UK Average Earnings Index 2.6% vs 2.8% expected
•    UK Claimant Count Change -42.4k vs +1.1k expected
•    Canadian Manufacturing Sales 2.3% vs 1.4% expected
•    US CPI 0.6% vs 0.3% expected
•    US Core Retails Sales 0.8% vs 0.4% expected
•    Australian Employment Change 13.5k vs 9.7k expected
•    Australian Unemployment Rate 5.7% vs 5.8% expected
•    NZ Retail Sales 0.8% vs 1.1% expected
•    UK Retail Sales -0.3% vs 1.0% expected
•    NZD PPI 1.0% vs 0.9% expected