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FX Update : Get ready for a December US interest rate hike

Written by Edited by Ian Dobbs on November 10th, 2015.      0 comments

Market Overview:
The US dollar and U.S. Fed rate hike expectations surged on Friday after the release of a block-buster October non-farm payrolls report which saw a gain of 271,000 jobs, well above the 182,000 market expectations. This was the largest monthly employment gain this year; the unemployment rate at 5.0% is now the lowest since 2008. Fed rate hike expectations for a December lift-off have moved from ~55% before the number to around 70% now and should make the decision to move an easier one for Fed chair Janet Yellen. In Europe expectations of a rate cut by the ECB in December continue to mount, whilst across the English Channel dovish rhetoric from the BOE have the market continuing to delay expectations of a move in the near-term from the BOE.
Last week saw the RBA leave interest rates on hold at the historic low of 2.0%, a level it has been at since May this year. However, the RBA board said that the soft inflation outlook could open the door for a further rate cut if required. The RBA lowered their underlying inflation outlook on Friday to 2.00% from 2.50% for this calendar year and forecast a 2.00% rate for the year to June 2016 also. Data released over the weekend saw Chinese exports fall 6.9% in October, worse than the 3.0% decline expected. The trade balance marginally missed expectations after China posted a $61.4 Bn surplus for the month ($62.0 Bn exp.). Australian ANZ Job Ads for October released yesterday rose 0.4%, well down from the 3.8% print registered last month. This week we look forward to the NAB Business Confidence survey and RBA housing credit data later today before the more important October employment data on Thursday.

New Zealand
Sentiment towards the local currency soured last week after another fall in the GDT dairy auction which saw the GDT-TWI register a 7.4% decline. The NZ Q3 employment report released the same day showed a loss of 11,000 jobs during the quarter (+10,000 exp.) as the NZ economy struggles to generate the degree of new jobs required to accommodate the surging migration numbers. The currency faced further headwinds at the end of the week after the release in contrast of an exceptionally strong U.S. October employment report on Friday. This saw U.S. non-farm payrolls swell by 271,000 jobs, well above the 182,000 expectations. The report also showed falling U.S. underemployment and a lift in the annual pace of growth in average hourly earnings to 2.5%. Expectations for a Fed-lift in rates in December spiked as a result of the release and contrast sharply with NZ’s bias towards lower rates in the months ahead. A speech by the RBNZ Governor Wheeler tomorrow dominates an otherwise quiet local calendar this week.

United States
Expectations of a Fed rate hike in December surged on Friday after the release of a very strong U.S. October non-farm payrolls report (+271k, vs. +182k exp.). The figures showed the largest monthly employment gain this year and the lowest unemployment rate since 2008 (5.0%, from 5.1%). Average earnings growth posted its largest rise since 2009 (+0.4% m/m vs. 0.2% exp) whilst the underemployment rate also fell further to 9.8%, some 1.7% lower than levels seen a year ago. The fact that U.S. equities were largely unperturbed by the data and with market expectations for a December lift-off now at 70% should help make the transition to rate hikes more easy for the U.S. Fed Chair Janet Yellen. ISM manufacturing data released earlier in the week met expectations, whilst the non-manufacturing survey was stronger than expected after it increased to 59.1 in October from 56.9 the month prior. U.S. data releases this week concentrate on Friday and will be dominated by the October retail sales report and producer price data.

United Kingdom
The BoE meeting dominated trade in the GBP last week. The local currency fell sharply after the BoE was seen lowering its near-term inflation forecasts on the back of continued weak oil prices, an elevated currency and concern over global growth. A strong U.S. non-farm employment report release on Friday only added to the GBP’s woes. U.K. industrial production also released on Friday showed a 0.2% decline m/m in September and a decline in the annual pace of growth to 1.1% from 1.8%. The simultaneous release of better than expected U.K. trade data was largely overlooked by the market. Construction and Services PMI data released earlier in the week was generally solid and showed that activity remained well into expansionary territory. This week will be dominated by U.K. employment data to be released on Wednesday night.

ECB monetary policy discussion and a strong U.S. labour report dominated sentiment towards the Euro over the last week. Media reports released overnight suggested that the ECB are preparing for rate cuts in December and that some Governing council members were pushing for a ‘big cut’. Last week ECB President Draghi noted concerns over price stability in the medium term and the effectiveness of the current Asset Purchase Programme (APP) in achieving this goal. Weak German factory order (-1.7% m/m) and industrial production data (1.1% y/y vs. 1.3% exp, 1.8% prior)  released towards the end of the week also placed the EUR under pressure. Tonight sees the release of relatively low impact French and Italian Industrial Production data before German and French inflation data on Thursday and Euro-wide GDP data on Friday.

It was a slow week for data-flow in Japan last week. Sentiment towards the JPY has been dominated by the end of week release of a strong U.S. October employment report. This has the market lifting its expectations for a Fed rate lift-off in December. Locally the BOJ released the minutes to its monetary policy meeting which noted concern over the impact of low oil prices on the bank’s 2.0% medium-term inflation target. The market expects the BOJ Governor Kuroda to be proactive in easing monetary policy further should offshore risks pose a threat to the moderate Japanese recovery. Later today will see the release of Japanese current account data which is expected to expand from last month’s reading (2.235Tn JPY exp.). Thursday will see the release of Japanese Machinery orders data before the week is rounded off with Industrial production and Capacity Utilization data of Friday. These second tier data releases should be dominated by USD sentiment.

Friday’s better than expected Canadian employment release took a back seat to the strong U.S. employment data report. Canadian employment rose by 44,000 in October, well above the 10k market consensus, although the number was dominated by a large rise in part-time employment (35.4k). Much of the increase being official roles related to the recent Canadian election. The unemployment rate fell to 7.0%. RBC Manufacturing PMI data and the Ivey purchasing managers index releases both fell short of their expectations. Canadian Housing Starts data for October released overnight marginally missed the 200k expectations at 198.1k, well down from last month’s 231.3k print. Oil market developments and U.S. data flow should drive the CAD given this week’s empty Canadian data calendar.

Major Announcements last week:
*German Manufacturing PMI (Oct. 52.3, vs. 52.0 exp.)
*UK Manufacturing PMI (Oct. 55.5, vs. 51.3 exp.)
*Australian cash rate, 2.0% as exp.
*UK Construction PMI (Oct. 58.8 as exp.)
*NZ GDT Dairy index -7.4%.
*NZ Q3 Employment (-11k, +10k exp.)
*Australian Retail Sales (Sep. 0.4% as exp.)
*US ISM Non-manufacturing PMI (Oct. 59.1 vs 56.5 exp.)
*UK cash rate, 0.5% as exp.
*Canadian Ivey PMI (Oct. 53.1 vs. 54.0 exp.)
*US Non-farm Payrolls (Oct 271k vs. 182k exp.)
*US Average Hourly Earnings (Oct. 0.4% vs. 0.2% exp.)