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FX Update : ECB in focus this week, US payrolls confirm that a Fed hike is on course for next week

Written by Ian Dobbs on December 6th, 2016.      0 comments

Focus for this week is on Thursday’s ECB meeting which looks set to see an extension of the current quantitative easing (QE) beyond March 2017, especially in light of the recent increased political uncertainty on the continent. Last week was one of consolidation for the greenback which concluded with the release of the November Nonfarm payrolls report on Friday. The data was mildly disappointing given the downwards revision to October’s headline number, although it was the 0.1% m/m decline in average hourly earnings that was perhaps most underwhelming. Despite the data there was sufficient strength in the numbers to see the market place a 100% probability on a Fed rate hike next week.
Last week was relatively uneventful for key news coming out of Australia. Focus which was on the weak business investment data for the third quarter and the sharp fall in building approvals ensured that any bounce-back rally against the greenback was muted. New home sales which disappointed after they fell to two years lows were accompanied by a ~25% drop in apartment approvals. The fall comes as a huge excess supply of apartments looms in the three key largest Australian cities. Positives came from the retail sector which posted its third monthly consecutive gain (beating expectations) and the rebound in the manufacturing conditions PMI. Gains in commodity prices also point to the likelihood of an end in the Australian income recession. In focus this week is today’s RBA cash rate announcement (expect no change) and tomorrow’s third quarter GDP data. Trade data on Thursday and housing finance numbers on Friday will also be of some interest.

New Zealand
The left field announcement of a resignation from National Party leader and current NZ PM John Key sent the NZ dollar lower in trade against the greenback yesterday. Sentiment for the week had already started on a soft tone on the back of news out of Europe on the Italian referendum which saw voters opt against the proposed constitutional reforms and PM Matteo Renzi resign during an address to the nation. Last week contained little local fresh news of any note. ANZ business confidence eased in November from the month prior. Declining export prices pushed the terms of trade into a further deterioration during the third quarter. The NZ Financial Stability review raised the prospect of debt to income ratios being introduced into housing market lending should it be required, although further macro prudential measures aimed at cooling the housing market could be a political hot potato heading into an election year, especially after yesterday’s Government leadership news. Expect a heavy Australian influence this week with the RBA today and Australian GDP tomorrow. Local leads include the overnight GDT dairy auction and a speech from RBNZ Governor Wheeler tomorrow.

United States
Comments from Fed officials overnight which were supportive of less accommodative Fed monetary policy and better than expected US ISM non-manufacturing data could not prevent the dollar from declining in trade overnight. Data last week was also positive and points to a Fed that will hike rates later this month. Dominating the week was Friday’s Nonfarm payrolls employment number which printed largely in line with expectations for November, although a downwards revision to last month’s read and a decline in average hourly earnings meant the data was mildly disappointing. The unemployment rate fell to 4.6% on the back of a decline in the participation rate. Other key data included an upwards revision to the Q3 GDP, strong consumer confidence numbers and a better than expected manufacturing ISM. Further positives came from the Dallas Fed and the Chicago PMI (both are manufacturing indicators) although pending home sales disappointed slightly. This week is set to be a quieter one with Michigan consumer sentiment on Friday. Trade and factory orders data are due later today.

United Kingdom
Demand for the sterling remains solid in trade ahead of this week’s UK Supreme Court case which will consider the appeal made by UK PM May regarding last month’s High Court decision that only parliament had the right to trigger Article 50 of the Lisbon treaty. The results of the decision may not be known until next month. The market’s view on the lack of authority of PM May to trigger the Article has been taken as an indication that a ‘hard’ Brexit may be in the end be watered down. Recent data has also provided support for the GBP. Positive releases last week came via stronger than expected Mortgage Approvals and consumer credit numbers, the latter being the best since 2005. Better than expected reads also came from yesterday’s November services PMI and Thursday’s construction PMI, although the earlier manufacturing PMI eased against expectations of a small rise. Focus for this week includes trade and construction data on Friday, although manufacturing and industrial production numbers tomorrow should pack the most punch.
News that confirmed Italian voters had chosen to vote against the proposed constitutional reforms in the Italian referendum sent the Euro crashing to 20 month lows in early trade yesterday. The size of the ‘no’ vote surprised, although markets quickly moved on from the vote and sent the Euro sharply higher in trade overnight. The Austrian Presidential election at the weekend was won by the Green Party candidate who won 53.3% of the vote compared to 46.7% for the far rights (and anti immigration) Hofer. Data last week had little influence on trade in the Euro. German November harmonised inflation was flat which undershot expectations and further disappointments came via the business climate index, the euro zone services sentiment indicator and the business and consumer survey. November manufacturing PMIs upside surprises came from Spain, Italy and France, although the German read marginally undershot the consensus. Euro zone reads included yesterday’s services and composite PMIs which marginally disappointed and last week’s manufacturing PMI which met expectations. Euro zone Q3 GDP and German factory orders are in focus today, although most attention will be on Thursday’s ECB meeting which looks set to see the ECB extend QE beyond the present March expiry.

Trade in the JPY has been mixed this week after initial gains on ‘flight to safety’ demand. These gains after the Italian referendum results yesterday, were unwound on the back of better than expected US data overnight. Data last week was second tier and had very little impact on trade. Included in the releases were household spending numbers which disappointed on the October monthly read. Unemployment at 3% was in line with expectations and unchanged from September although the latest job-applicant ratio did manage a minor improvement. Further positives came from retail sales which fell only marginally in October against the over 1% decline expected, housing starts which rose 13.7% year-on-year and industrial production which edged higher in its latest monthly print. Data this week started with soft household confidence numbers released yesterday, although Thursdays Q3 GDP numbers look set to get the most attention.

The Canadian dollar reached highs not seen in six weeks against the greenback overnight. Sentiment remains strong after last week’s OPEC output cut decision which sent oil soaring above the $50 mark. Data on Friday added to the gains as the economy added jobs for the fourth straight month in November. The 10.7k job addition was well above the 20k loss of roles expected. The unemployment rate which fell to 6.8% was a five month low. Other data last week included better than expected Q3 GDP numbers and stronger than expected industrial and raw material product prices for October. Attention this week will be on Wednesdays Bank of Canada (BoC) monetary policy meeting. Last week’s data has reinforced expectations that the BoC will keep interest rates on hold this week after they said in October that they had actively considered cutting for the third time in two years. Other data includes October trade numbers and the Ivey PMI today.
Economic Events.
  • Japanese Household Spending, -1% m/m vs. 0.1% exp. (Oct.)
  • Australian HIA New Home Sales, -8.5% m/m vs. 3.8% prior (Nov.)
  • UK Mortgage Approvals, 67.52k vs. 65k exp. (Oct.)
  • US Q3 GDP, 3.2% vs. 3.0% exp.
  • Japanese Industrial Production, -0.1% m/m vs. 0.1% exp. (Oct.)
  • Australian Private Sector Credit, 0.5% m/m vs. 0.4% exp. (Oct.)
  • EU Core Inflation, 0.8% y/y as exp. (Nov.)
  • Canadian GDP, 0.3% m/m vs. 0.1% exp. (Sep.)
  • US ISM Manufacturing PMI, 53.2 vs. 52.2 exp. (Nov.)
  • Australian Retail Sales, 0.5% vs. 0.3% exp. (Oct.)
  • Canadian Employment Change, 10.7k vs. -20k exp. (Nov.)
  • US Nonfarm Payrolls Employment, 178k vs. 175k exp. (Nov.)