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FX Update - US, NZ and Japanese central banks set to meet this week

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

It will again be a busy week for central bank meetings this week.  Events start with the US FOMC meeting on Wednesday (US time) where Fed Chair Yellen is widely expected to stand pat on rates as the risks posed by weak global growth on consumption and investment are likely to be prioritised over those posed by strong employment. The RBNZ decision, which follows shortly after, will be a closer run affair. Albeit the current majority also expects no move from the current NZ 2.25% cash rate. The statement should point to further easing however, and comments around the recent NZD strength would appear likely. Focus will then turn to the BOJ later in the session where the market expects a move to add further stimulus, most likely in the form of ETF equities purchases. Bond buying and a further move into negative rates are possible, but rated less likely by analysts given that the current policy is already extended on these fronts. Expect a busy day especially after Friday’s JPY plunge on the back of news that the BOJ was also considering loans to banks at negative interest rates in order to bolster bank lending.

The AUD has had a quiet start after the ANZAC holiday weekend which has seen it drift lower since Friday’s report. Lower commodity prices including oil and iron ore overnight which have fallen 2.5% and 3% respectively continued last week’s closing theme of reduced appeal for the commodity currencies. Weak global PMI data reads on Friday has also dampened market sentiment and led to a mild reduction in risk exposures. Offshore events have had a large impact on the AUD in recent times given the small amount of key local data flow. This should change a little this week with the release of the Q1 inflation numbers tomorrow. Monthly inflation gauges suggest that inflation should remain well contained during the quarter helped in part by a 13% fall in the price of petrol over the period. The “underlying” measure (ex. petrol) is forecast to grow 0.5% in the quarter and around 2% over the year, numbers which should ensure the RBA sticks to its current easing bias. Other items of interest during the week include export and import data for Q1 which is set for release on Thursday and Private Sector Credit numbers on Friday. A speech by the RBA assistant Governor Guy Debelle later in the day will also be watched for notes on the currency strength and views on the inflation result from earlier in the week.

New Zealand
The NZD has drifted lower since our report on Friday and starts the shortened week trading near its recent lows against the USD. Levels above .7000 which had not been seen since June last year proved short lived as the NZD spent the remainder of the week on the back foot as the appeal for the commodity currencies eased. The data wrap last week was dominated by the Q1 inflation release which came in slightly stronger than expectations. A small lift was also seen in the latest GDT dairy auction. This week’s focus centre’s squarely on the RBNZ OCR announcement on Thursday and the US FOMC announcement a few hours earlier. Expectations locally are for rates to be held at 2.25%, although one of the major four Australian banks is calling for another move lower. Areas of concern for the RBNZ which should prevent a cut will be the strong property market particularly in Auckland, which has now seen the average price of a home in the city become more expensive than Sydney. Emerging signs of inflation in the areas of the economy which are performing strongly such as accommodation and construction also favour a delay until June at least.

United States
The USD (DXY index) is drifting lower in trade so far this week. The move is eroding the gains which occurred on Friday which were driven in a large part by the strong sell-off seen in the JPY during the session. Data of interest last week included a notable fall in the latest housing starts numbers, gains in home prices and decline in manufacturing conditions in the Philadelphia region. Another fall was seen in the jobless claims numbers before the week concluded with an under-shoot in the April Manufacturing PMI data on Friday. Data released overnight which showed a decline in New Home Sales from the month prior, missed expectations although focus for the market was on other key events this week. Expectations for the FOMC meeting are strongly in favour of no move in rates although the real interest will centre on the Fed’s dot plot and management of the market’s rate hike expectations given the current difference between the markets and Fed’s rate trajectory. Economic releases of interest for the remainder of the week include tonight’s Consumer Confidence, Richmond Fed Manufacturing and Durable Goods releases. Pending Home Sales numbers will feature prior to the FOMC release on Wednesday and will be followed by the “advance” Q1 GDP numbers later in the day. Data on personal income, spending and employment costs will feature amongst other releases on Friday.

United Kingdom
The GBP has continued to gain against the USD since our report on Friday in a move which has further extended the rally that started from near 1.4000 nearly three weeks ago. Gains which have topped 3.6% come on the back of a reduction in the markets expectations on the risk of the likelihood of a British exit from the European Union (EU) as polling shifts in favour of the UK remaining in the EU. Comments from US President Obama on the issue have included one which warned of the potential for it to take up to a decade to negotiate a trade deal with the US should Britain depart the EU. Data released last week did little to dampen the GBP rally despite disappointing on both the key jobs and retail sales releases. Data set for release this week includes Mortgage Approvals numbers later today and key Q1 GDP data tomorrow. Further mortgage data will become available on Friday (approvals/lending) and will combine with the release of M4 Money Supply data and BoE Consumer Credit numbers. CBI industrial trend data released overnight whilst still weak showed an improvement from March.

The EUR is drifting higher in trade against the USD this week. The move comes after the losses which were seen late last week after the ECB meeting and mainly weaker than expected euro-area PMI data released in Europe on Friday. Events last week were dominated by the central bank meeting which saw the ECB hold its key interest rates steady. Comments from President Draghi included ones which warned over the potential for euro-zone inflation to again turn negative in coming months and over the risks to the economic outlook. The ECB announced that they had started to expand monthly purchases to 80bn Euros and were focussing on the implementation of the non-standard measures decided upon at the last March 10 meeting. German IFO data released overnight showed the business climate index coming in lower than expectations. Other indicators of interest this week include German employment, retail sales and inflation indicators.

The JPY has fallen sharply against the USD in trade since our report on Friday. The move came on Friday after reports on Bloomberg which said that the BOJ was considering helping banks lend by offering a negative rate on some loans. The move would likely come via the central banks Stimulated Bank Lending Facility which currently offers loans at 0%. Discussions on the move would likely occur in conjunction with a decision to further cut the current negative rate offered on certain reserves. The reports have added to the already heightened interest surrounding this Thursday’s BOJ meeting where currently the majority of analysts surveyed by Bloomberg expect the bank to expand the policy stimulus, mostly via the purchase of equities via exchange traded funds. A move further into negative rates whilst possible, is less favoured presently. Thursday is a busy day on the Japanese event calendar with household spending, industrial production, retail sales, and employment indicators (amongst others) all set for release.

The CAD continues to trade with a firm tone in trade against the USD this week. This comes despite the general weakness noted since our report on Friday in key commodities and the commodity currencies. This in part has come on the back of a 2.5% reduction in the price of oil overnight. Bearish reports from a number of key investment houses placed pressure on oil pricing as they continued to point to bearish fundamentals and elevated inventory levels. The CAD has fared better than its NZD and AUD counterparts however. This comes on the back of strong local data on Friday as the simultaneous reports of a strong Canadian retail sales report and much higher than expected core inflation release hit the market. Scheduled data flow from Canada this week is light until Friday (Canadian time) when the February GDP and March Raw Materials Price data is released. A speech scheduled overnight by current BoC Governor Poloz will also be of interest.

Major Announcements last week: (Tuesday only)
  • NZ Q1 Inflation, 0.2% vs. 0.1% exp.
  • US Housing Starts, 1.086M m/m vs. 1.2M exp. (Mar.)
  • NZ GDT Dairy Index, +3.8%
  • UK Claimant Count Change, 6.7k vs. -10k exp. (Mar.)
  • UK 3M Unemployment rate, 5.1% as exp. (Feb.)
  • UK Retail Sales, -1.3% m/m vs. -0.1% exp. (Mar.)
  • ECB Deposit Rate, -0.4% (no change)
  • US Philly Fed Manufacturing, -1.6 vs. 8.9 exp. (Apr.)
  • German Markit PMI Composite, 53.8 vs. 54.0 prior (Apr.)
  • US Markit Manufacturing PMI, 50.8 vs. 52.0 exp. (Apr.)
  • Canadian Core Inflation, 0.7% m/m vs 0.3% exp. (Mar.)