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FX Update : Expectations of Fed and ‘Brexit” referendum lead markets.

Written by Ian Dobbs on May 31st, 2016.      0 comments

2:30pm(NZT)
Overview
Over the last week the dual influences of aligned messages from Federal Reserve Board members, and the apparent swing toward a no vote at the “Brexit” have provided the lead for markets. Not seen in recent times, the orchestrated and aligned message from the Fed has seen the June monetary policy meeting come very much back on the table as a prospect for a lift in rates. US employment numbers this Friday will likely be the most pivotal release heading into the coming June FOMC meeting. USD volatility is therefore likely to remain high this week. In the UK the polls show that divergent views on EU membership remain, although there has been a material swing recently in favour of a status quo outcome in the UK referendum on the issue. Unsurprisingly this has led to a materially stronger GBP , albeit it sitting off its highs in current trade.
 

Australia
The AUD is trading with a soft tone in current trade in what is set to be a busy week on the event calendar. Recent trade has felt the pressure from a stronger USD which continued its advance on Friday after comments from US Fed chair Yellen which alluded to the appropriateness of rate rises in the coming months. Last week was quiet in Australia, events of note included a speech by RBA Governor Stevens which defended the inflation targeted approach to monetary policy and quashed calls to move the target (2-3%) in light of the low inflation environment. Q1 Private CAPEX numbers missed the forecast estimates on the back of the pull in mining investment, a theme which was also reflected in the spending intentions in the year ahead. The ABS Capex intentions survey indicated a further 35% slump in mining investment. Positives included a rise in dwelling construction in Q1 and improving non-mining capex plans from levels seen a year ago. Data released yesterday showed a fall in Q1 company profits and drop in HIA new home sales. Other releases this week include building approvals and private sector credit data today. Q1 GDP tomorrow will be followed by trade and retail data on Thursday.
 

New Zealand
A continued advance in the USD has seen the NZD remain on the back foot in trade this week. The latest pressure comes after comments from Fed Chair Janet Yellen on Friday which bolstered USD demand after she said that it’s appropriate for the Fed to gradually and cautiously increase its interest rate over time and that “probably in the coming months such a move would be appropriate”. Last week was a relatively quiet one in NZ that saw sellers take the upper hand after the 2016/17 Fonterra dairy payout forecast disappointed. The $4.25/KG payout was based on expectations of a minimal rebound in dairy prices, little change in production and reflected a stubbornly firm local currency. Trade data released earlier in the week surprised to the upside, whilst the NZ budget presented rosy forecasts for unemployment and GDP growth. Buildings consents numbers for April released this morning showed a large jump from the month prior. On the radar in NZ this week is the ANZ Business Confidence survey  today, the next in the GDT dairy auction series, and the Q1 terms of trade numbers. Expect the key US employment data on Friday to dominate USD sentiment overall and set direction for the NZD into the end of the week.


United States
The USD rally extended after our report on Friday and followed comments from Fed chair Yellen which asserted that is likely to be appropriate to raise rates in coming months. This was a theme which was echoed by the Fed’s Bullard overnight. Data released last week was somewhat mixed. Data on the manufacturing industry showed a sector under pressure as the Markit PMI, Richmond and Kansas Fed indicators all posted sizeable declines on the month prior. A decline in the core durable goods numbers suggest that business fixed investment is also under pressure. The second read of the Q1 GDP was revised marginally lower on Friday, although the Atlanta Fed’s forecast for Q2 GDP was revised higher to 2.9% from 2.5% (annualized). Housing indicators continued to show solid activity in the housing market after both the new and pending home sales numbers jumped from the month prior. The housing price index also showed a decent lift in March beating the consensus expectations. This week is set to be a busy one on the US economic calendar which starts with consumer confidence and the Chicago PMI today. ISM manufacturing data is due later in the week and comes prior to the pivotal May employment numbers on Friday.


United Kingdom
The May bank holiday has meant a quiet start in the UK this week. Trade last week was once again dominated by fluctuating sentiment on the likelihood of a Brexit at the looming June 23rd referendum. Comments from the BoE Governor Carney on the issue dominated headlines once again during the week as he  spoke of the looming vote as posing the biggest risk to UK growth. Carney noted that the economy appearing to be slowing in the lead-up and that it was probably related to issues around the vote. Data last week confirmed that economic growth had slowed markedly in Q1 to 0.4% from the 0.6% rate registered in the final quarter of 2015. Other economic indicators of lesser interest included soft BBA home lending numbers for April and a pick-up in CBI reported sales for the month of May. PMI data will dominate the newsreel this week, although house price and mortgage data should also provide passing interest.
 

Europe
Holiday trade has ensured a quiet start for the EUR this week ahead of the key ECB meeting on Thursday. Hawkish comments on US rates from Fed chair Yellen on Friday ensured that the EUR closed at its lows for the week. Data releases were dominated by the German ZEW and IFO releases and the early week PMI prints. The latter disappointed for the euro wide manufacturing print as it fell from the month prior, whilst the services and composite numbers also under-delivered on the consensus. Strong gains were noted across all three PMI indicators in Germany. The German IFO rose to its highest this year and was led mainly by a rise in the expectations series which suggests an improving German business outlook. The earlier ZEW survey of economic sentiment showed a decline in economic expectations however, although the current situation read posted a notable rise from the month prior. Data released overnight saw German inflation and EU confidence come in marginally above expectations. Political events were in the limelight also last week after the Eurogroup agreed to extend further funding to Greece, although the IMF has stated in recent hours that it is unwilling to participate in further support for Greece until it sees a concrete plan from the European’s to substantially cut the country’s debt burden.
 

Japan
The JPY has continued to remain under pressure in trade this week as it extends its losses which began on Friday after the hawkish comments over US rates from Fed Chair Yellen. Local inflation data released earlier in the day set the tone for the weak sentiment falling 0.3% y/y (headline) in April, an outcome which extended the decline from March as lower commodity prices and the stronger yen deepened the BOJ’s deflationary quandary. Data released earlier in the week included manufacturing PMI numbers which weakened at the fastest rate in three years and trade numbers that whilst showing a larger than expected surplus in April included a large 23% plunge in imports. A senior ruling party official said yesterday that Japanese PM Abe had announced plans to delay next April’s planned sales tax by 2 ½ years, in a decision which is aimed at avoiding a blow to the fragile economic recovery. Opposition against the move came from the Finance Minister Taro Aso. Local data releases this week started with retail sales yesterday which fell less than expectations. Household spending and Industrial production numbers released this morning easily outstripped their respective estimates, whilst the April unemployment rate remained unchanged on the month prior at 3.2% (and was on expectations). Other data of interest this week includes numbers on capital spending, construction orders and housing starts.
 

Canada
Trade in the CAD remains in a lull since our last report as both the US and the UK celebrated holidays overnight. Oil prices remain near their 2016 highs in current trade, although the CAD weakness of recent weeks indicates a greater focus on recent economic data and rate spreads vs the US, which point to a softening Q2 in Canada. Last week was dominated by the BoC rate meeting which saw the central bank leave rates unchanged at 0.5% and trim their estimates for the Q2 GDP growth due to the Alberta wildfires. Data released overnight had little impact after the Q1 current account printed in line with the consensus whilst producer price data for April missed the target on the back of reduced prices for vehicles and parts. Canadian data to watch out for later in the week includes March GDP numbers later today. Trade and labour productivity data due for release on Friday will take a back seat to the busy US data schedule (dominated by employment and earnings) slated for release at the same time.
 

Major Announcements last week: (Tuesday only)
  • Japanese Merchandise Trade Balance, 823.5 B Yen vs. 492.8 B Yen exp. (April)
  • Eurozone Preliminary Composite PMI 52.9 vs 53.2 exp. (May)
  • US Preliminary Composite PMI 50.8 vs 52.4 prior (May)
  • Eurozone ZEW Economic Sentiment Survey 16.8 vs 23.4 exp. (May)
  • US New Home Sales .619m m/m vs .523m exp. (April)
  • NZ Trade balance $292M m/m vs $60M exp. (April)
  • Bank of Canada leave monetary policy unchanged as exp. (0.5%)
  • US Durable Good Orders 3.4% vs .5% exp. (April)
  • UK Preliminary Q1 GDP, 0.4% q/q as exp.
  • Australian Q1 Private Capex, -5.2% vs. -3.0% exp.
  • US Preliminary Q1 GDP, 0.6% vs. 0.7% exp.
 

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