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FX Update : Fed rate hike on the table

Written by Sam Coxhead on October 11th, 2016.      0 comments

1:45 (NZT)
Market Overview:
Largely stronger than expected key US data last week has helped the USD (DXY) index reach highs not seen in 10 weeks in overnight trade. Friday’s September US Nonfarm payrolls came in moderately under expectations for the month. An upwards revision to August’s data ensured a result that has done little to alter the market’s pricing (currently 67%) on the prospect for a Fed move in December. A blip higher in the unemployment rate to 5.0% reflects higher labour force participation as more workers look to return to the improving labour market, although the average hourly earnings of 2.6% y/y remains below the Fed’s preferred 3-4% range. The other major talking point last week was Friday’s spectacular GBP/USD meltdown seen in Asian trade. The  circa 6-10% plunge in minutes (depending on what pricing source is used) once again puts the focus on the reduced risk bearing capacity of financial institutions and the influence of automated trading in the market, factors that sometimes do little to instil confidence in those who are brave enough to speculate in the FX marketplace.
Last week was a relatively quiet one in Australia for key local events which saw the AUD come under moderate selling pressure on the back of a firmer USD and waning ‘risk’ currency appetite. Focus was on the RBA meeting on Tuesday, this saw incoming Governor Lowe keep rates on hold in a move which was widely anticipated by the market, even more so after his recent speech on ‘flexible’ inflation targeting. Dwelling approvals outstripped expectations in August with only a moderate dip. The reading was the fourth highest on record as approvals gained 10.1% y/y. Retail sales posted their best result since October last year by lifting 0.4% in August, although the sector remains weak overall with annual growth running at just 2.8%. The trade balance showed another improvement, although again remained in deficit, a position it has been in since April 2014. Gains in metal ores, fuels and services helped drive the result. Focus for this week starts with numbers on housing finance and business confidence today and consumer sentiment tomorrow. Look for overall direction therefore to come from offshore.
New Zealand
Strength in the greenback has continued to be the driver of flow in the NZD in recent days. Last week was a very dull one for local news which saw the latest in the GDT dairy price series decline modestly in what was the first overall fall since early July. NZIER business confidence for the third quarter was strong with 26% of firms expecting improved economic conditions over coming months. The prospect of reducing key central bank stimulus undermined the ‘risk’ currencies. This combined with better than expected US data and a stronger USD to see the NZD fall against its US counterpart over the week. Data this week has started with electronic card retail sales this morning which rose 1.9% in September. Business PMI and the latest food prices will feature on Thursday, so again look to direction to be set from offshore.
United States
Last week was a good one for the US dollar which saw it extend it gains in trade overnight to reach 10-week highs. The gains were helped by mainly stronger than expected key data throughout the week. However, Friday’s September Nonfarm payrolls, which created 156k jobs, were lower than the 172k consensus (although August’s revision mitigated most of this miss). Unemployment edged up to 5%, although the rise was due to a large inflow to labour market. This added weight to Fed Chair Yellen’s recent comments that formerly discouraged workers may be returning to the improving labour market. Other data included the ISM Manufacturing and Non-Manufacturing indicators which both easily exceeded their consensus (particularly the latter), and jobless claims which fell to their second lowest level since 1973. The trade deficit was seen widening in August and better than expected releases came from the factory orders and Services/Markit Composite PMI indicators. In focus this week are various Fed speakers and the FOMC minutes (Wednesday). Fed Chair Yellen will speak on Friday after the earlier releases of Retail Sales and Michigan consumer sentiment.
United Kingdom
Dominating headlines on the sterling last week was Friday’s Asian session flash crash which saw the GBP/USD exchange rate plunge more than 8% in just a few minutes. Automated computer driven trades were seen to be the most likely reason behind the aberration. The move showed the degree of anxiety around the prospect for the GBP moving forward as the market looks to the difficult Brexit negotiations. The tough talk from senior European leaders added to sentiment (including French PM Hollande who said Britain would have to suffer for the vote in order to ensure EU unity, around the time of Friday’s plunge). Data last week was largely positive until Friday after all the PMI reads outperformed expectations, although the market ignored their message. Friday’s data was poor however, and included sizeable misses in the latest industrial and manufacturing production numbers and August goods trade balance. This week is relatively quiet from a scheduled event perspective, although expect further volatility in the pound, this as bearish IMM bets (a vehicle for speculation) rose again last week to reach multi-year highs.
Last week was a relatively quiet one for the Euro which saw it swing within moderate ranges but end marginally lower against the greenback after a slew of mainly better than expected US data released over the week. Data during the week was second tier. Manufacturing PMI numbers were stagnant in Germany and across the euro area, although remained expansionary. The corresponding composite and services numbers marginally outperformed in Germany and across the EU, although the French read underwhelmed. German factory orders improved by 1% and their seasonally adjusted industrial production rose a very strong 2.5% in August, well above expectations. Data this week has started with further numbers from Germany which saw their trade balance improve by over 30% from the same month a year earlier as exports rose by 5.4 m/m. Investor confidence numbers across the euro area lifted from the month prior and outperformed expectations. Looking forward to the remainder of the week we have the ZEW economic sentiment indicators today, EU industrial production/trade numbers and the latest regional inflation reads.
Last week was a quiet one domestically which saw the Yen lose ground against the greenback. This was largely thanks to key US data which supported the USD and kept market odds high (67%) for a Fed rate move in December. The Tankan survey of manufacturers was the most important release of the week. It showed confidence amongst large manufacturers remaining stagnant and Capex intentions edging higher, although failing to post the size of gain expected. Consumer confidence edged higher in September and there was a slight improvement in the latest manufacturing conditions PMI indicator, although the services PMI worsened from the month prior. Data this week starts with current account numbers today and machinery orders tomorrow. Banking lending and the Tertiary Industry Activity index feature on Thursday and will be followed by data on producer prices on Friday. Expect none of these releases to have much impact so look to the US data for influence over the week.

News from Russian President Vladimir Putin that Russia was ready to join the OPEC deal to limit oil output has sent the price of oil and the Canadian dollar sharply higher in trade this week. The news helped the price of Brent Crude reach over one year highs and came on the back of further positive energy market developments after the Saudi Energy Minister expressed optimism yesterday that OPEC would agree the details of an accord in Vienna next month. Data last week was concentrated on Friday. Employment numbers for September beat expectations after 67,200 jobs were added for the month. The data was the first time in two years that employment had managed to string together two consecutive monthly gains and came on the back of the biggest increase in self-employment in seven years. The seasonally adjusted Ivey PMI beat expectations and registered it strongest expansion since January, strong employment was also a feature in this report. Other data included trade numbers and building permits which both exceeded expectations, although the low weight RBC Manufacturing PMI underperformed. This week looks quiet from a scheduled event perspective with just numbers from the housing sector due.