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FX Update : Central banks once again in focus

Written by Ian Dobbs on September 20th, 2016.      0 comments

This week will again be a busy one on the central bank policy calendar. The action will start tomorrow when the BoJ announces it decision on how (or whether) to amend its stimulus programme. This comes after it has just extensively reviewed the effectiveness on whether it is achieving its goals (inflation remains well adrift of target). The week’s biggest event will be the US FOMC decision on Wednesday (US time) which looks likely to see the Fed remain on hold (20% odds priced in of a hike) despite inflation and employment being at levels which could justify a move. Following shortly after will be the Reserve Bank of NZ’s official cash rate review which also looks likely to remain on hold in light of their signalling that they prefer to wait for a full Monetary Policy Statement to move- with the next one being in November.

Interest in Australia last week was centred on Thursday’s August employment report. This saw the level of employment growth underperform expectations, although full-time roles which rose by 11.5k helped balance the release. The data saw employment rise 1.5% in the latest year to August, or 180k roles, of which the vast majority (149k) have been concentrated in part time positions. Other indicators included the NAB business confidence index which rose from the month prior and consumer confidence data which edged higher in its latest read, remaining around its average. Comments the RBA assistant Governor Kent included ones which noted “the abatement of two substantial headwinds” being the decline in the terms of trade and mining investment which should ease towards 2018 (and coincide with a down-turn in the construction cycle) and allow reasonable growth to continue. Key focus for this week will be on this afternoon’s RBA minutes (watching for commentary around inflation, housing and the labour market) and house price numbers.

New Zealand
Focus for the Kiwi centred on the local Q2 GDP report and offshore financial markets for most of last week. The GDP report was slightly weaker than expectations for the quarter, although revisions to prior data ensured that NZ’s annual growth rate at 3.6% remains the envy of most. Key positives in the data was the more broad based nature of the growth which was led by the construction sector as it expanded 5% over the quarter, and 10% so far this year (compared to 1.8% overall for the economy). Other data included the Q2 current account which underperformed expectations and food prices which rose 1.3% in August, although neither release created much interest. August REINZ house price data showed house prices easing (-2.2%); the decline comes as the market begins to feel the soon to be formally implemented next round of LVR restrictions, although prices over the year were still up almost 12% on a year ago. Looking to events this week we have the next in the GDT dairy auction tonight where the 4th consecutive rise in prices is expected. Thursday will be the key day of the week with the RBNZ OCR review. This sees the market placing a very low probability on a cut (~14%) given the preference (to wait for a full MPS) and signalling of the RBNZ in August.

United States
Trade in the greenback was relatively lacklustre for much of last week, although picked up on Friday after the release of the better than expected August inflation report which saw core inflation rise to 2.3% y/y. The data continues the firming trend which has seen the average monthly headline move since April amount to 2.4% annualised, above the Fed’s 2% target, although the Fed’s preferred measure (PCE inflation) sits at only 1.6%. Other data released during the week included misses in retail sales, producer prices and industrial production. Manufacturing data included the Philly Fed and NY Empire indices which both showed improvement on the month, although the latter remained in contraction territory. Michigan consumer sentiment was seen holding steady on the month, although missed the improvement expected. Focus for this week centres squarely on Wednesday’s FOMC meeting which has the market firmly favouring a Fed on hold (20% odds on a hike) as the Fed ‘doves’ continue to focus on the ability of US equity and global financial markets to absorb an increase in rates.

United Kingdom
Last week was a poor one for the pound sterling which saw its close on its lows against the greenback on Friday. Friday’s sharp fall came in the environment of a stronger USD, although the main driver was reports on Bloomberg that the UK Chancellor of the Exchequer Philip Hammond was ready to accept that Britain would have to relinquish membership to the EU’s single market in order to achieve the immigration restrictions that voters demand. The news came on the back of a BoE decision a day earlier, which despite leaving rates on hold indicated a bias to lower rates further. Inflation data released earlier in the week was disappointing although positives were seen from the latest numbers on the retail sector and labour market. This week looks set to be quieter with just the CBI Industrial Trends Orders numbers on Thursday of any real note. Other events to watch include a speech from BoE member Cunliffe on Thursday and any further headlines on the Brexit issue.

Last week was a relatively quiet one in Europe which saw the main volatility arrive on the back of Friday’s firmer than expected US inflation data. Data releases included soft inflation numbers out of Germany and across the euro area which matched their prior estimate and remained unchanged from the month prior. The German ZEW highlighted static investor confidence and business confidence which dropped by the most since 2012. German current conditions eased on the month, although euro area economic sentiment rose on the month prior. Industrial production across the Euro-zone fell in July. The result was down 0.5% on July last year and below the consensus for the month, although revisions to the prior data ensured a better year-on-year read. The week so far has started with EU current account data which failed to meet expectations in July. Later in the week we look forward to the ECB economic bulletin, a speech from current ECB president Draghi (Thursday) and various PMI reads on Friday.

Trade in the Yen has been understandably quiet in recent days ahead of tomorrow’s BoJ monetary policy decision. Interest is high and divided over what the central bank will do in response to their recent detailed review of their extreme monetary policy actions. The consensus at this stage appears to be for the bank to announce further additions/tweaks to its easing programme. The form remains highly uncertain and will be interesting given that headline inflation at -0.4% y/y (and 0.5% using the central bank’s core measure) remains well adrift of the 2% target. Data released last week included core machinery numbers which exceeded expectations and a higher quarterly BSI manufacturing index. Industrial production was disappointing in July and contributed to annual output which has dropped 4.2%. Other items of interest this week includes August trade tomorrow and manufacturing PMI data on Friday.

Last week was particularly quiet for incoming data in Canada. This meant that the CAD was again tethered to the changing fortunes in the price of oil. This saw it close towards it lows of the week (against the greenback) on Friday. This was in response to the weak price of oil which fell on the back of the stronger USD (Friday) and on oil surplus concerns which again remained elevated over the week. The only data point of any note was the July manufacturing shipments release on Friday which fell well short of expectations, although the numbers were overwhelmed by the simultaneous release of the US inflation data. Events of interest this week include another speech from the BoC Governor later today, and wholesale sales on Wednesday, although key data comes on Friday in the form of numbers on inflation and retail sales. Wednesday’s US FOMC meeting will also be watched closely for it implications on the USD, and USD linked commodity pricing.

Economic Events.
  • Japanese Machinery Orders, 4.9% m/m vs. -3.5% exp. (Jul.)
  • Australian NAB Business Confidence, 6 vs 4 prior (Aug.)
  • UK Inflation, 0.3% m/m vs. 0.4% exp. (Aug)
  • German ZEW- Current Situation, 55.1 vs. 56.0 exp. (Sep)
  • NZ Q2 Current Account, -0.945B vs. -0.411B exp.
  • Japanese Industrial Production, -0.4% m/m vs. 0.0% exp. (Jul.)
  • UK Claimant Count Change, 2.4k vs. 1.8 k exp. (Aug.)
  • EU Industrial Production s.a., -1.1% m/m vs. -0.9% exp. (Jul.)
  • NZ Q2 GDP, 0.9% vs. 1.1% exp.
  • Australian Employment Change s.a., -3.9k vs. 15.0k exp. (Aug.)
  • UK Interest Rate Decision, no change at 0.25% as exp.
  • US Retail Sales, -0.3% m/m vs. -0.1% exp. (Aug.)
  • US Inflation, 0.2% m/m vs. 0.1% exp. (Aug.)