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FX Update : Brexit polling and BOJ/FOMC/BoE meetings the focus this week

Written by Ian Dobbs on June 14th, 2016.      0 comments

Elevated volatility in the markets looks about the only sure bet this week ahead of key central bank meetings from the US the UK and Japan. Adding to the uncertainty are the frequent polls coming out of the UK many of which have recently pointed to solid leads for those in favour of the UK leaving the EU. The polling has turned the focus on the fragility of the global economic story and the prospect of a wider fall-out should the UK choose to go it alone. The risk of a UK exit ushers in the prospect of other European countries choosing to give their voters the chance to join Britain in leaving down the track, raising the prospect of an EU break-up and dismantling of the single currency project. Scheduled central bank meetings add to the interest during the week although current expectations are for no moves from either of the US Fed, BOJ and BoE.

The AUD closed trade on a weaker note against the USD on Friday. Gains from earlier in the week moderated on the back of ‘risk’ selling which took place in offshore trade as the market grappled with the increased political uncertainty which was headed by another poll in the UK which showed a decent lead in the ‘leave’ vote in the EU membership referendum. Geopolitical tensions remain in the markets focus as the IMF warned of the potential for contagion and a severe market reaction should the UK choose to leave whilst in the US shootings in Florida yesterday added fuel to the ISIS debate in the race for the US presidential election. Concerns over the corporate debt pile in China have raised comments from the IMF this week and came as data on fixed asset investment yesterday missed analyst estimates. Domestic events in Australia last week were headed by the RBA rate decision which like their NZ counterparts later in the week saw the central bank leave rates on hold. Local data was sparse but included a rise in ANZ jobs ads and housing finance, whilst finance approvals fell from the month prior. Data this week starts with numbers on business confidence today although most of the attention will be on Thursday’s US FOMC statement and Australian employment data.

New Zealand
The large NZD gains against the USD seen earlier in the week were trimmed by the close of trade on Friday. Market volatility and ‘risk-off’ positioning dominated trade offshore on Friday as investors sought the relative safety of currencies like the CHF, JPY and USD. Sharply weaker global equity bourses and mounting geopolitical concern drove investor sentiment into the end of the week. Uncertainty took a boost on the back of an opinion poll in the UK which showed a sizeable lead for the ‘leave’ camp in the upcoming UK EU referendum. The EU has expressed concern that an exit may lead to referenda in other EU countries on the issue as EU membership debates and low EU favourability polling blight the European political landscape. Local news last week was dominated by the decision of the RBNZ which chose to hold rates at 2.25%. Pressure from the housing market was seen as a key reason for the more hawkish than expected commentary that was issued by the central bank. Data of interest was minimal and included a lower Q1 survey of manufacturing and electronic card retail sales which eased from the month prior. Events this week look likely to be heavily influenced by offshore sentiment once again. The Q1 current account is due tomorrow and will be followed by the Q1 GDP release and US FOMC meeting on Thursday. The next in the GDT dairy auction series is also due for release.

United States
Last week was a very quiet one in the US which saw sentiment being dictated by the previous Friday’s poor employment release that saw investors significantly downgrade their estimates for US rate hikes in 2016. Key data releases which were sparse included a rise in JOLTs jobs openings and unexpected fall in jobless claims for the week to June 3rd. Friday saw the release of the latest Michigan consumer sentiment survey the highlight of which was a drop in the 5-10 years inflation expectations which fell to an all-time low. Trade in the USD on Friday was dominated by inflow on the back of concern over rising political uncertainty across the Atlantic as new polls showed an increasing possibility of the UK leaving the EU. The news and potential for wider contagion saw global equities retrace on the day and again during trade overnight. This week will be a busy one in the US. Retail sales will feature today and comes ahead of tomorrow’s FOMC meeting statement. Expectations for a move in rates are minimal although the new dot plot and press conference could be informative. Other releases which are numerous include numbers on May inflation on Thursday.

United Kingdom
Polling on the issue of the UK membership in the EU has dominated flow in the GBP since our report on Friday. The theme which has been a familiar one will continue to dominate news in the lead-up to the 23rd June referendum. Latest polls included one from the Independent which showed the Brexit camp having a 55% tally and a later one from the Guardian/ICM which also showed a lead (although smaller) by the ‘leave’ camp. The polling has seen the GBP plump lows not seen since mid April and has helped push the UK FTSE stock index 4.4% lower from its recent highs. Concern is also high over the possibility of other countries in the EU having their own referenda on the issue and comes at a time of elevated political uncertainty across the US and Europe. Data last week in the UK which was largely positive failed to make any impact on investor sentiment. Manufacturing and industrial production both beat their estimates whilst the latest Halifax house price numbers managed to maintain a higher than expected rate of annual growth. April trade saw a marginal gain on the month prior whilst the latest NIESR GDP estimate also managed a modest improvement. Focus for this week starts with May inflation today which will be followed by numbers on employment tomorrow. Thursday will see the BoE MPC meeting outcome and give us the latest read on UK retail sales.

A lack of incoming data has seen the Euro take its leads from external influences in recent trade. Uncertainty provided by the debate on the UK membership in the EU continues to plague sentiment in Europe as the market looks to the wider implications for other countries who may also consider their EU stance. The political uncertainty comes during a time of increased political tension in the US presidential race and as concerns over the Asian economies increase. These issues have seen the EUR ease recently as the investors chase the relative safety of the USD and JPY. Data out of Europe last week was sparse. The Q1 GDP euro-area final estimate lifted moderately whilst the latest German and Spanish industrial production numbers beat their consensus estimates. Interest this week will come in the form of euro-zone industrial production today and inflation numbers on Thursday. Euro-zone current account and wages numbers will hit the wires on Friday although most of the focus will be on events in the US (and the UK) which include the FOMC meeting outcome on Wednesday.

Market volatility which saw the VIX index trade to 3 month highs this week has provided fertile ground for JPY strength in recent trade. Falls in global equity bourses since our report on Friday has seen demand for the ‘safe haven’ JPY lift and come as the market grapples with increased concern over the potential for the UK to leave the EU. Polls which in recent days have indicated a lead for the ‘leave’ camp come as the market fears wider referenda on the issue across the EU. Data out of Japan last week included Q1 GDP numbers which rose in line with the consensus and bank lending that met last month’s gain. The latest current account numbers disappointed whilst machinery orders numbers for April were seen falling heavily from the month prior. Data this week starts with the capacity utilization and industrial production numbers this afternoon although local focus for the week will be on the BOJ monetary policy meeting outcome on Thursday.

An easing in the price of oil in recent sessions has placed pressure on the CAD gains which were seen initially last week. Economic concerns over the fallout from a Brexit and concerns over Asia’s economy have helped lift demand for the USD. These factors and a lift in the latest US oil rig count helped cap oil’s recent strong rally. Economic data out of Canada last week was largely disappointing although finished the week on a positive note after the latest employment data beat expectations. Jobs added in May beat the consensus by 10k whilst the unemployment rate fell 0.2% to 6.9%. Earlier releases were mainly disappointing however. They included the Ivey PMI which joined the latest housing starts and building permits numbers in underperforming expectations, although new house prices rose slightly more than expected. Inflation numbers on Friday are the main local event of note this week, other key focus will be the US FOMC meeting on Wednesday.

Economic Events (Tuesdays only)
  • Australian cash rate, on hold at 1.75% as exp.
  • EU Q1 GDP, 0.6% q/q vs. 0.5% exp.
  • Canadian Ivey PMI, 49.4 vs. 51.5 prior (May).
  • Japan Q1 GDP, 0.5% q/q as exp.
  • UK Manufacturing Production, 2.3% m/m vs. 0.0% exp (Apr.)
  • NZ cash rate, on hold at 2.25% as exp.
  • US Initial Jobless Claims, 264k vs. 270k exp. (Week to 3 June).
  • Canadian Employment, 13.8k vs. 3.8 k exp. (May).
  • Canadian Unemployment rate, 6.9% vs. 7.1% exp. (May).
  • US Reuters/Michigan Consumer Sentiment, 94.3 vs. 94.0 exp. (June).