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FX Update : ECB in focus this week, key UK data also eyed

Written by Ian Dobbs on October 18th, 2016.      0 comments

In focus this week will be Thursday’s ECB meeting which will see investor attention focus on signs that the central bank will be looking to trim its current EUR80Bn month bond-buying stimulus. Recent comments from President Draghi have inferred a belief that monetary policy may have reached the limit of its efficacy which has invited market perception of a tapering in the programme. Attention will once again be on the UK with key indicators due on inflation, the labour market and from the retail sector. It remains to be seen whether any of the data will stem the sterling’s sharp decline which has seen it loose ~19% against the both the greenback and Euro since the 23rd June EU referendum.

Last week was quiet for domestic data. Business and consumer confidence numbers were sound and are at levels which are above their long term average and consistent with moderate ongoing growth. Housing finance data was soft in August as approvals to owner occupiers fell 3% on the back of July’s 4.5% decline. The RBA’s Financial Stability Review pointed to a reduction in concern over household debt on the back of tighter lending standards and slowing credit growth, although concern was raised over the large increase in the supply of apartments. Interest this week starts with today’s RBA minutes and Thursday’s employment data for September where the market is looking for the addition of 15k jobs and a slight up-tick in the unemployment rate to 5.7%.

New Zealand
Dominating interest for this week locally was this morning’s September quarter inflation report which came in stronger than market expectations at 0.2% for both the quarter and year ended 30 September. The number was in line with the RBNZ’s expectations and has seen the NZD rally around 0.5% against the greenback on the news. Data last week was uninspiring and for most of the week the local unit fell on the back of a stronger USD. Electronic card retail sales rose by more than expected and the manufacturing PMI rose to its highest level since January. Comments from assistant RBNZ Governor pointed to a high likelihood of a rate cut when the central bank next meets in November. In focus for the remainder of the week will be tonight’s GDT auction (little move expected) and data from the US (inflation today) and Australia (employment Thursday).

United States
The USD has continued to propel higher in opening trade this week. This has seen it reach highs which last traded in March. The strength on Friday came after US bond yields rose on the back of comments from Fed Chair Janet Yellen. Yellen’s remarks included ones over letting the US economy run hot in an effort to reverse some of the “supply side” damage that has been evident since the GFC. The move up in rates likely reflected the market’s view that the Fed can lift inflation, in time. Market pricing for a December move remained unchanged at around 66% after the speech and was also little changed after last week’s FOMC minutes. Key data included Friday’s retail sales numbers which rose by 0.6% m/m. The number rebounded from the month prior’s revised 0.2% drop as 10 out of the 13 categories showed gains. Producer prices came in slightly above expectations in September, although the University of Michigan consumer confidence numbers were disappointing and long-term inflation expectations eased. JOLTs job openings fell sharply, although the latest weekly jobless claims remained flat. In focus this week is today’s inflation numbers, data on building/housing, the Philly Fed (manufacturing) and talk from various Fed speakers.

United Kingdom
Sterling sentiment was again driven by the negative influence of discussions on the format of the Brexit negotiations last week. Some relief came after UK PM May accepted that the Parliament should have to vote on the EU exit plan (which could provide a block to the exit), although the rally proved only temporary. BoE Governor Carney spoke on Friday and indicated a tolerance for some overshoot in inflation in order to support growth. Carney noted that the BoE is not “indifferent to the level of the sterling” although the tone of the speech was one of flexibility in its mandate, this as the BoE’s Broadbent (in comments overnight) said he saw inflation as being above goal in the next couple of years. Data last week was scarce. Indicators included a better than expected BRC retail sales monitor and the RICS house price balance indicator which showed properties coming to market falling for the seventh month in a row. This week looks far more interesting as we get key leads on inflation (today), employment (tomorrow) and retail (Thursday).    

Last week was a relatively quiet one for the Euro which saw it fall mainly on the back of solid demand for the greenback. Data releases had little influence on trade. Numbers from Europe’s largest economy Germany included trade data which outstripped expectations on the back of a boost from exports, a better than expected ZEW indicator of economic sentiment and harmonised inflation, which highlighted the ECB inflation quandary after it rose just 0.5% year-on-year. Data from across the euro-zone included a strong ZEW, industrial production that easily beat forecasts in August and trade data for the same month which showed a surplus well above expectations. This week has started with numbers on inflation which showed prices rising by just 0.4% year-on-year across the euro-zone (data as expected). In focus this week is Thursday’s ECB rate decision. Attention will likely focus on signs that the ECB will trim its EUR80Bn a month bond-buying stimulus which is currently due to end in March.

Last week was a quiet one in Japan for fresh economic leads. Data releases included the current account for August which rose modestly from the month prior and machinery orders which experienced a smaller than expected decline in their latest month, although rose 11.6% year-on-year. Bank lending rose at the fastest pace since May, whilst the Tertiary Industry Index remained flat on the month prior. Data this week started with numbers on Industrial Production and Capacity Utilization yesterday. The former release maintained its pace of growth from the month prior, although the result was slightly less than that expected. Capacity Utilization lifted in August, although none of the mentioned data had any currency impact. Comments yesterday from the BoJ Governor Kuroda noted an economy on a moderate expansion path and core consumer prices which were slightly negative to flat. Kuroda added that the central bank would take further action to boost growth if it was required. With no data of interest coming out of Japan look for events in the US to influence, starting with numbers on inflation later today.

Last week was a quiet one in Canada that saw only data from the housing market come to market. News from the housing sector started with housing starts which easily beat forecasts for September. New house prices lifted moderately on the back of gains in the Toronto market, although the rise was marginally less than expected. Existing home sales increased in September after having fallen in each of the previous five months. Sales were up 4.2% year-on-year, although forecasts from TD Economics indicate that new housing regulations may lower sales by up to 10% next year. News from the energy market last week was dominated by the announcement from Russia that it was looking at joining OPEC in limiting production at the next OPEC meeting on November 30th. In focus this week is the BoC interest rate decision on Wednesday where the market expects rates to remain on hold at 0.5%. Inflation data and numbers from the retail sector on Friday are the other key indicators of interest.

Economic Events.
  • Australian NAB Business Confidence, 6 vs. 6 prior (Sep.)
  • German ZEW - Current Situation, 59.5 vs. 55.5 exp. (Oct.)
  • Canadian Housing Starts s.a., 220.6k vs. y/y 190k exp. (Sep.)
  • Australian Westpac Consumer Confidence, 1.1% vs. 0.3% (Oct.)
  • Japanese Machinery Orders, 11.6% y/y vs. 6.5% exp. (Aug.)
  • EU Industrial Production s.a., 1.6% m/m vs. 1.1% exp. (Aug.)
  • US JOLTs Job Openings, 5.443M vs. 5.724M exp. (Aug.)
  • German Harmonised Inflation, 0.5% y/y as exp. (Sep.)
  • US Retail Sales, 0.6% m/m as exp. (Sep.)
  • US Michigan Consumer Sentiment, 87.9 vs. 91.9 exp. (Oct.)