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FX Update : Central bank easings remain in focus

Written by Ian Dobbs on October 27th, 2015.      0 comments

Market Overview:
The People’s Bank of China surprised the markets late on Friday with another interest rate cut, it’s sixth since last November. This action by the PBOC would suggest the downward pressure on China’s economy is not abating even though recent GDP data for the third quarter came in a little stronger than forecast. The cut is just another ominous sign about the near term outlook for global growth. Recent reports from the likes of Caterpillar and Whirlpool, both large manufacturers whose sales figures provide a good proxy for world growth, have suggested downside risks for the global economy driven by weakness in emerging markets. The European Central Bank (ECB) last week gave a strong signal that further easing measures will come in December and this week we have meetings from the Bank of Japan (BOJ), the US Fed, and the Reserve Bank of New Zealand (RBNZ) to digest. The BOJ meeting is a close call with many forecasters expecting further easing at some stage over the coming months, although perhaps not as soon as this week. The US Fed are almost certain to remain on hold. Despite assurances from some Fed officials that all meetings remain ‘live’ it seems extremely unlikely they will hike rates this week. The RBNZ will probably keep its powder dry for now, with stronger potential for a cut in December. This too however, might be a close call with the bank less than impressed about the elevated level of the NZD over recent weeks.

Last week saw the rest of Australia’s main banks follow Westpac’s lead and increase interest rates on mortgages. The banks have blamed the out of cycle increases on new regulations that require them to hold more capital to cover their mortgage loan books. The Australian dollar reacted negatively to the announcements as the market believes it raises the chance of an offsetting interest rate cut from the Reserve Bank of Australia (RBA) when they meet next week. However, opinion is divided with the likes of Westpac and NAB both releasing notes recently suggesting the RBA will remain on hold next week. Currently the market is pricing in around a 30% chance of a cut at next Tuesday’s meeting. This week we have key inflation data to digest which is set for release tomorrow afternoon. Expectations are for an unchanged outcome of 0.7% for the quarter. A softer than forecast result will no doubt see the market price in a greater chance of a cut next week, and therefore pressure the Australian dollar further. Data set for release later this week in the form of import prices, producer prices and private sector credit shouldn’t have much of an impact.

New Zealand
The only release of note last week was the GDT dairy auction, and while the 3.1% decline was disappointing, it has to be taken in context of the four previous strong price gains. A public holiday yesterday has meant a quiet start to this week with attention now firmly on the RBNZ rate statement set for release on Thursday. Earlier this morning we did get the latest trade balance data and it came in softer than forecast. The trade deficit widened to 1222m from 1035m prior driven by a fall in exports and a larger than expected increase in imports. The RBNZ meeting this week could prove to be an interesting one. While Governor Wheeler recently said “some further easing seems likely”, he qualified it by adding housing market concerns do influence their thinking. Recent domestic data hasn’t been weak enough to suggest any real urgency to cut rates, and as such many in the market are looking at December as a more likely time for another interest rate reduction. The central bank may also want to keep its powder dry so it can react later to what might be a significant drought on the back of this summer's El-Nino.

United States
After what had been a run of relatively strong housing market data from the US last week, last night’s new home sales figures were very disappointing. New home sales missed expectation by a large margin coming in at 468k. The market was expecting 546k. Broadly speaking the US housing market has been a solid performer, driven by the improving employment situation and low interest rates. But this latest data will raise some eyebrows and it won’t do the Fed any favours in trying to decide whether to hike interest rates later this year. The Fed have a meeting this week with the outcome released early on Thursday morning, but there is little expectation for any change in policy. The market will be very keen to get a better picture of the likelihood for a potential December rate hike. It’s fair to say the Fed seem to be struggling to give any clear indication to the market of just when they can expect an eventual lift of in rates. Fed Chair Yellen continues to suggest a hike is likely this year, but a number of other FOMC (Federal Open Market Committee) members have been openly suggesting that delaying lift off until sometime in 2016 would be prudent. Other data to watch out for this week includes durable goods orders, CB consumer confidence, GDP, and the employment cost index.

United Kingdom
Last week saw a much better than expected outcome for retail sales in the UK with a 1.9% gain. Enthusiasm was tempered by the admission that one-off factors seem to have influenced the result, the largest of which is the rugby world cup. That being said the UK consumer is in a good place at the moment, supported by a solid employment market and positive real wage growth. Last night we saw a couple of disappointing readings from the second tier indicators of mortgage approvals and CBI industrial orders, but the main focus this week is on GDP data which hits the wires tonight. The market is looking for third quarter growth of 0.6%, which would be down a touch from the second quarters 0.7% outcome. Bank of England (BOE) Governor Carney was in the UK papers on the weekend making it clear that the central bank will give everybody plenty of warning about interest rate raises, and that when they do start to rise it will be a very gradual path higher. He was quoted as saying “If we think there is a prospect, a possibility - that’s a possibility not a certainty -  of rate rises, then that it’s far, far better to let the British people know so they can prepare”.

The Euro has been under pressure ever since the ECB last week laid the groundwork for further easing measures in December. We have seen little in the way of a bounce from the currency even though data since that ECB announcement has been encouraging. PMI data from both the manufacturing and service sectors released on Friday showed improvement in October and last night’s German IFO business climate index also beat expectations. We’ve also seen data that showed the French jobless total fell by 23.8k in September, which is the biggest decline since November 2007. It wasn’t all good news however, as part of the decline in joblessness was driven by people losing the right to register for unemployment. Still to come this week we have German inflation, employment change and retail sales, French consumer spending and Spanish GDP. We also get the first estimate of Eurozone inflation along with the Eurozone unemployment rate.

Last week was a light one in terms of economic data from Japan. The trade balance missed expectation and this has only added to calls for further action from the Bank of Japan. However, Friday’s release of manufacturing PMI was better than forecast with the index improving to 52.5 from 51.0 prior. This week should prove a lot more interesting with retail sales, household spending, inflation and unemployment data all set for release ahead of Friday’s BOJ meeting. Although we have seen a number of Japanese officials suggest there is no need for further easing at this stage, the market isn’t so convinced. The BOJ is expected to cut its growth and inflation outlook and many forecasters say it’s a very close call whether we get further easing at this meeting or sometime over the coming months. The Yen could therefore be very volatile toward the end of the week.

Last week provided plenty of focus for Canadian dollar watchers with a general election, a Bank of Canada rate meeting, big declines in oil prices and some soft economic data. The end result was a significant decline in the value of the Canadian dollar which has remained under pressure in the early stages of this week. Canadian inflation data hit the wires on Friday evening and the weaker than forecast result only added to downward pressure on the CAD in the wake of the central bank's ‘dovish’ comments. There is little scheduled for release this week to turn the market around with only GDP on Friday of any note.

Major Announcements last week:
  • US Building Permits 1.10m vs 1.16m expected
  • Global Dairy Trade Price Index -3.1%
  • Bank of Canada left rates unchanged at 0.5%
  • UK Retail sales 1.9% vs 0.3% expected
  • European Central Bank leaves rates unchanged at 0.05%
  • Canadian Core Retail Sales 0.0% vs 0.2% expected
  • Canadian CPI 0.2% vs 0.3% expected
  • NZ Trade Balance -1222m vs -822m expected