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FX Update : Central banks again in the spotlight

Written by Ian Dobbs on November 3rd, 2015.      0 comments

5:30pm(NZT)
Market Overview:
This week shapes up as another important week for the markets starting with today’s RBA cash rate announcement and statement on monetary policy on Friday. Current pricing only marginally favours the RBA remaining on hold at 2.0% today. Expectations of a rate cut have increased after the recent Q3 inflation report and lift in mortgage rates. In the U.S. it will be all about the October employment report on Friday where market consensus forecasts centre on a 182k gain in jobs. Last Friday’s BOJ meeting failed to ignite the market after the BOJ failed to add any extra stimulus to its current program. However, the market remains convinced of further easing in months ahead as inflation struggles to reach the 2.0% BOJ inflation target. A lack of inflation also remains at the front of the ECB’s mind. ECB president Draghi said at the weekend that he expected inflation to remain near zero into 2016 and that the ECB was ready to do what it takes to keep medium-term inflation on course. Tonight’s GDT dairy trade auction and NZ unemployment report tomorrow will be important drivers for the NZD this week.
 

Australia
The RBA interest rate decision later today is the major event on the Australian calendar this week. Market pricing puts the chance of a cut from the present 2.0% at marginally less than 50%. The recent lift in mortgage rates and low-side inflation reading last week (+0.5% vs.+0.7% exp. q/q) have added fuel to the rate cut debate. Whilst the decision is a close call we see the RBA remaining on hold as the underlying inflation measure printed within the 2-3% RBA target (headline 1.5% p.a.). Data released late last week was mixed, HIA new home sales for September fell 4.0% whilst September private sector credit at 0.8%, exceeded the 0.5% expectations. Chinese manufacturing PMI data released over the weekend remained below the 50.0 expansionary level for the third straight month (49.8), the Caixin measure released yesterday was also soft although improved to 48.3 from 47.2. Chinese non-manufacturing PMI data slowed to 53.1 as small firms continue to feel the strain. Australian building approvals data for September rose 2.2% slightly exceeding the 2% expectations. Trade and retail sales data tomorrow are of note before the more important RBA statement on monetary policy on Friday.
 

New Zealand
Unemployment data due for release tomorrow for Q3 and the latest GDT dairy auction (tonight, futures currently imply a ~ 5% decline) will dominate sentiment towards the NZD this week. The unemployment rate is forecast to rise above 6 % as record migration numbers boost the working age population. The economy is forecast to have created an additional 10k jobs in the 3 months to September 30. Trade last week was heavily influenced by the cash rate announcement where the RBNZ was seen leaving the cash rate on hold at 2.75%. Comments from the RBNZ may limit the NZD’s upside in the near term after the Governor expressed concern over the recent currency strength and the impact it may have on inflation and economic activity. The ANZ business confidence survey released on Friday showed a widespread boost in confidence after the large improvement seen in dairy prices since their August trough. Seasonally adjusted the bounce was the largest 1-month lift seen in 20 years.
 

United States
The U.S. FOMC meeting dominated dollar sentiment last week. This saw demand for the dollar increase as the market raised the prospects for a December rate lift off after the Fed’s more bullish than expected assessment of the U.S. economy. GDP data showed a slowing in growth in Q3 as expected. The U.S. PCE deflator (the Fed’s preferred inflation measure) rose 0.1% (0.2% exp.) and year-ended growth was unchanged at 1.3%. Employment cost data met expectations in Q3 (0.6% q/q) after a soft Q2 result, although both the pending home sales (-2.3% m/m) and CB consumer confidence failed to meet expectations. The ISM manufacturing survey released overnight whilst broadly in line with market expectations (50.1, vs. 50.0 mkt.) shows that manufacturing activity continues to slow throughout the course of 2015. Data flow this week will help drive Fed rate hike expectations, with Friday’s October Nonfarm Payroll report being of critical importance. Expectations centre on a 182k gain in jobs and no change in the unemployment rate at 5.1%. ISM Non-Manufacturing PMI data and a testimony from the Fed chair Janet Yellen (both on Thursday morning NZ time) will also be of interest.
 

United Kingdom
The BoE meeting (Friday morning NZ time) hogs the focus in the U.K. this week in what is otherwise a quiet week data wise. No change in monetary policy is expected, although the market will closely watch the bank’s comments for thinking on future BoE action. Currently the market is not looking for a first rate hike until 2017. Data released last week mainly disappointed. GDP for Q3 showed a moderation in growth to 0.5% q/q from 0.7% in Q2, the mortgage approval and CBI industrial order indicators also failed to meet expectations. On a positive note U.K. manufacturing PMI data for October rose to its highest level since June 2014 in data released overnight (55.5 vs. 51.3 exp.). The data was helped by strong export orders, the employment component remained in expansionary territory for the 30th consecutive month. Construction PMI data due for release tonight and Services PMI data (tomorrow night) will also be of interest.
 

Europe
The Euro suffered last week on the back of a surge in the dollar post the U.S. FOMC meeting. Increasing expectations of ECB easing before the end of the year have also weighed. German data was largely solid. The unemployment rate at 6.4% remains at post-reunification lows, German inflation at 0.2% y/y exceeded expectations, although flat September retail sales failed to meet the 0.4% rise expected. Flat y/y euro zone inflation data released on Friday was an improvement on the -0.1% y/y decline recorded in September, although still remains well below the ECB’s near 2% target. ECB President Draghi said in comments at the weekend that he expected inflation in the Eurozone to remain close to zero, if not negative, into 2016. He also added that the ECB is ready to do what it takes to keep its medium-term inflation target on course. Yesterday saw the final euro zone area manufacturing PMI data upgraded modestly to 52.3 (from 52.0). It was driven by improved revisions in the German PMI data, the French and Spanish numbers were revised lower however. The remainder of the week will be punctuated by more PMI data. German factory data on Thursday night and industrial production on Friday will be of some interest.
 

Japan
The BOJ interest rate meeting was the key event in Japan last week. The central bank left its policy settings unchanged on Friday and pushed back the timing for its expectations of achieving its 2% y/y inflation target to H2 2016. The market will continue to price the potential for further easing in the months ahead whilst the BOJ continues to struggle to achieve this target. Despite September core inflation data marginally topping expectations on Friday (-0.1% y/y vs -0.2% exp.), it did little to change the markets thinking. Other data released last week was mixed. Industrial production data improved sharply (+1% m/m) in September, although retail sales fell 0.2% y/y. September household spending and start data both failed to meet expectations. October manufacturing PMI data released yesterday showed growth in production increasing to its fastest rate since February (52.4) and new orders increasing at their sharpest rate in a year.
 

Canada
Losses for the CAD for most of last week reversed late in the week to leave it moderately higher today on levels a week ago. Canadian August GDP data released on Friday met expectations rising 0.1% m/m. Whilst posting a third straight month of growth the levels were less than those posted a month prior. RBC October manufacturing PMI data released overnight fell to 48.0 against the 48.5 expectations. The CAD has eased somewhat in recent trade on the back of sliding oil prices although sits well above levels seen after last week’s more hawkish than expected U.S. FOMC statement. The IVY PMI release on Friday morning (NZ time) and Canadian October employment data on Saturday morning are the key events to watch this week.
 

Major Announcements last week: (Tuesday only)
*German IFO Business climate 108.2 vs 107.8 exp.
*NZ September Trade balance -1222M m/m vs -800M exp.
*UK Preliminary Q3 GDP 0.5% q/q vs 0.6% exp.
*US Durable Goods Orders -1.2% m/m on exp.
*US CB Consumer Confidence 97.6 vs 103.0 exp.
*Aus Q3 CPI 0.5% q/q vs. 0.6% exp.
*NZ RBNZ cash rate 2.75% as exp.
*US Preliminary Q3 GDP 1.5% q/q vs 1.6% exp.
*NZ ANZ Business Confidence 10.5%
*Japan Unemployment 3.4% as exp.
*Eurozone Preliminary CPI 0.0% y/y vs. 0.1% exp.
*Canadian GDP 0.1% m/m as exp.
*US Employment cost index 0.6% q/q as exp.
 
 

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