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FX Update : FOMC, BOJ and Australian inflation in focus

Written by Sam Coxhead on July 26th, 2016.      0 comments

Market Overview:
Trade this week looks set to get interesting from tomorrow as the market gears up for key central bank meetings from the US Fed and BOJ. Wednesday’s second quarter Australian inflation data also has policy implications for the RBA ahead of their meeting next Tuesday. This as the market looks to the prospect of a further cut to the cash rate as inflation languishes well below the 2-3% RBA policy target band. Wednesday’s US FOMC meeting will also be interesting. Look mainly for the tone of the statement as the Fed looks most likely to exercise caution against ramping up rate hike expectations later in the year. The week rounds out with the BOJ central bank meeting on Friday which looks likely to be the most interesting event this week. They are set to reveal the form and extent of the extra stimulus, expectations of which have gained traction since Japanese PM Abe’s win in the upper house of parliament earlier in the month.
Minutes from the last RBA board meeting dominated focus in Australia last week. The minutes confirmed that the door is wide open for a cut at the August 2nd meeting, although the central bank indicated that it was waiting on further information on inflation, labour and housing. A recent assessment from the RBA described the labour and housing market as “mixed” and the current data suggests that the updated RBA economic forecasts which come ahead of the August policy meeting will do little to change the high likelihood that a 25bps (to 1.5%) rate reduction will be delivered. The minutes bring this Wednesday’s June quarter inflation numbers into close attention with an on consensus expectation of 0.4% q/q likely being enough to see the RBA cut. Other focus for the week will be the US FOMC meeting on Thursday (Australian time) and local producer price and private sector credit numbers due on Friday.
New Zealand
It has been a quiet open for the kiwi in trade this week after last week’s hard correction which saw the local unit fall significantly against most of its peers after the Reserve Bank (RBNZ) took steps to stem its recent strength. The week started with the RBNZ tabling a discussion paper which would introduce further macro-prudential measures aimed at restricted lending to the residential property market and tackling the sharp price rises currently being experienced in the sector. The move’s by-product is a greater central bank ability to cut interest rates. The market was left in little doubt over the RBNZ’s intention when later in the week it directly pointed at the need to reduce rates in order to tackle the over-valued NZD and low tradable inflation. Look for a cut at the policy meeting on August 11th as the bank attempts to move inflation closer to its 1-3% policy target. Data released on Monday last week showed inflation running well adrift of the mid-point of this bank target at just 0.4% y/y currently. This week has started with trade numbers this morning which printed near expectations for June. Expect a much quieter week this week which is dominated by offshore events which include the US FOMC meeting. Building consents and the ANZ business confidence survey on Friday are the only local points of interest.
United States
The greenback has started this week in consolidation mode after finishing last week on its highs on Friday. Gains were noted over the course of the week as strong data came from the housing sector which saw the housing starts and forward looking building permits lift markedly from the month prior. Existing home sales are also in sound shape, a point enforced by sales which rose to their highest level since 2007. Jobless claims failed to deteriorate as expected in the latest weekly read. Data from the manufacturing sector included a disappointing read from the Philly Fed index, although we did see a positive upside surprise from the manufacturing PMI indicator. Focus for this week is on the FOMC on Wednesday. We are likely to see the Fed remain in a wait-and-see mode as it assesses the threats to the global outlook and local employment growth slowdown. Fed fund futures are currently pricing less than one 25 bps hike over the next 12 months and expect the inherently dovish Fed to refrain from any ramping of those expectations at the meeting this week.
United Kingdom
The pound finished the week on a soft footing last week after the release of some of the first key indicators that captured the post-‘Brexit’ sentiment. These came in the form of the manufacturing and services PMI numbers which both registered sharp falls from the month prior and added to the case for a rate cut early next month. Key indicators for the week started with numbers on inflation which exceeded expectations and data from the labour market which showed unemployment falling to post GFC lows on the back of a large increase in self employment. Data issued from the retail sector was disappointing after it fell markedly at both the headline and core level. CBI industrial trends orders for July released overnight beat expectations, although registered a notable decline from the month prior whilst the optimism index plunged to -47. Focus will now turn to tomorrow’s first read on Q2 GDP and Thursday’s numbers on nationwide house prices. Expect a quieter week as the market gears up for next Thursday’s BoE monetary policy meeting.
The event calendar in Europe last week was dominated by Thursday’s ECB meeting which created minimal fuss after the ECB left policy unchanged. This result was expected given the minimal time period that has elapsed since the UK’s EU exit vote. The Euro ended the week on its lows on Friday despite the release of Eurozone PMI indicators which remained in expansion territory. All of the French and German regional reads provided positive upside surprises and only a marginal miss in the manufacturing series marred the Eurozone indicators. Other data released earlier in the week included a fall in Eurozone consumer confidence and data from the ECB that showed an easing in credit conditions. The ZEW indicators of economic sentiment disappointed both in Germany and across the Eurozone. This week has started with the German IFO business climate index which eased only slightly from the month prior and points to a relatively muted reaction to the Brexit vote so far. Other items of interest this week include business climate and consumer confidence indicators. Data on employment, inflation and GDP from across the Eurozone all also set to feature.
There was little to report in Japan last week in what was a particularly quiet week for incoming economic data. The main indicator of note came from the manufacturing sector which saw the preliminary July PMI beat expectations. The data revealed international demand falling at the fastest rate in over 3 1/2 years, in part on the back of the recent appreciation of the Yen. Volatility was seen after historical comments from the BOJ’s Kuroda over the issue of helicopter money which is in focus ahead of this Friday’s BOJ monetary policy meeting. Expectations are that the BOJ will take easing action at the meeting which will come in conjunction with increased government spending. The Governor’s comments that ‘helicopter money’ is “forbidden in developed nations” means that helicopter money is off the agenda. Reports yesterday indicate that the stimulus budget may include a government overseas lending fund for projects involving Japanese companies and come as rumours circulate that the stimulus budget may be as large as 30 trillion Yen. Data releases this week include the trade numbers released yesterday which beat expectations as exports fell by less than expected. The data reel on Friday dominates the economic indicator calendar as numbers on inflation, retail sales, household spending and industrial production (amongst others) all come to market.
A firm greenback and lower overnight oil prices have seen the Canadian dollar trade under pressure this week. Supply concerns and a resurgent USD has helped the price of WTI crude oil fall to 3-month lows in trade overnight. The move comes as investors respond to further signs of a supply glut, especially among refined products which point to reduced demand for oil from refineries over coming weeks. Data released last week was concentrated on Friday. This saw inflation for June marginally exceed expectations (although the core monthly number matched expectations) and retail sales exceed analyst forecasts, although the data only provided temporary relief for the CAD. Wholesale sales released earlier in the week were seen expanding at its fastest rate in over a year on the back of rising demand for food and automobiles. Look for the greenback and oil to dictate local currency sentiment this week prior to Friday’s May GDP report.

Economic Events.
*NZ Q2 Inflation, 0.4% y/y vs. 0.5% exp.
*UK Inflation, 0.5% y/y vs. 0.4% exp. (Jun.)
*German ZEW Current Conditions, 49.8 vs. 51.8 exp. (Jul.)
*US Building Permits, 1.5% m/m vs. 0.6% exp. (Jun.)
*NZ GDT Dairy Prices, 0% vs. -0.4% prior.
*UK Unemployment Rate, 4.9% vs. 5.0% exp. (May)
*Australia NAB Quarterly Business Confidence, 2 vs. 4 prior.
*UK Retail Sales, -0.9% m/m vs. -0.6% (Jun.)
*US Philly Fed Manufacturing, -2.9 vs. 5.0 exp. (Jul.)
*EU Manufacturing PMI, 51.9 vs. 52.0 exp. (Jul.)
*Canadian Inflation, 1.5% y/y vs. 1.4% exp. (Jun.)
*US Manufacturing PMI, 52.9 vs. 51.6 exp. (Jul.)