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FX Update : Investors desert the commodity currencies

Written by Ian Dobbs on May 10th, 2016.      0 comments

The golden run for the commodity currencies has come to end in trade over the last week. Pricing for the hard commodity sensitive CAD and AUD has seen the pairs lose nearly 4.5 and 5.5 percent against the USD since their respective highs last week. This comes amidst a reversal in the large gains which have been seen recently for many commodities. This includes oil which had seen its WTI price climb by close to 80% since its February lows to its highs. Whilst the pessimism over the global growth outlook reached monumental proportions at its height in February, the recent blow off in pricing for many commodities suggests, as many had suspected, that much of the gains since have been based on speculative re-positioning, rather than a fundamental rebalance in the supply/demand equation of the many commodities that have rallied. Moves such as those seen in steel, oil and iron ore last night look set to bring further heightened volatility in the commodity currencies this week.

The AUD has continued to fall against the USD since our report on Friday. The move represents a continuation of the theme which started on Tuesday last week after the RBA cut rates for the first time in a year. The move to 1.75% represents fresh historical lows and comes as the RBA noted the suppressed labour costs and low global cost pressures which point to a weaker outlook for inflation. Concern over inflation was again in the limelight during Friday’s RBA statement on monetary policy as it downgraded its forecast to the end of 2016 from its 2-3% target to a range of 1-2%. Pressure on wages growth, when combined with increased retail competition and easing housing costs were seen as the key reasons for the downgrade. Pressure on key commodities has come as the price of oil, gold and iron ore fell away sharply in trade overnight. Other events of less interest last week included an upside surprise in the latest trade data and large jump in HIA New Homes Sales numbers. The latest retail sales numbers indicated continued subdued conditions in the retail sector, whilst the better than expected building approvals data on Tuesday was soon overshadowed by the later RBA cash rate reduction. Expect a quieter week in Australia this week with just Westpac Consumer Sentiment and Home lending data tomorrow of any note.

New Zealand
The NZD has eased since our report on Friday in quiet trade that has seen the USD shift moderately higher after the release of the key non-farm payrolls report on Friday. Despite a miss in the headline monthly (April) US jobs number the market has bought the USD since Friday on the back of the gain in average earnings and falling measure of underemployment. The move lower in the NZD occurs amidst a correction in the commodity currencies after their recent strong run of past weeks. The NZD’s high correlation with the AUD has seen it continue to ease in recent days in line with the weaker AUD. The fall in the AUD comes after the RBA cut rates for the first time in a year last week and revised its outlook for inflation lower by a full percent for Dec 2016 on Friday in its latest statement on monetary policy. Local NZ data provided little impetus during the week after the latest dairy auction slipped only moderately. The Q1 employment numbers provided a mix of better than expected jobs growth that was offset by a rising unemployment rate as more job seekers entered the labour market. Key events to watch for the week include the RBNZ Financial Stability Report tomorrow (watch for measures on housing policy and discussion on monetary policy) and retail sales data on Friday.

United States
The USD has continued to firm in recent trade in a continuation of the strong recovery that was seen last week after it traded to lows not seen since early 2015. Weakness in risk sentiment and strong downwards pressure on the commodity currencies helped support the USD. This came amidst mixed US data during a week that culminated with the release of the Nonfarm payrolls employment numbers on Friday. Whilst disappointing on the headline number for April (160k vs. 202k exp.), it was the dip in the underemployment rate (unemployment was unchanged at 5.0%) when combined with a rise in the length of the workweek and average earnings which rose 2.5% y/y which captured the market’s attention. These factors point to continued absorption of slack in the labour market, although pricing on the probability of a Fed rate move at the upcoming June meeting has fallen under 10% since the data. Other data released earlier in the week included ISM manufacturing and construction spending numbers which underwhelmed although both the Services PMI and ISM Non-Manufacturing numbers printed above expectations. Data of interest this week includes amongst others retail sales and Michigan Consumer Sentiment numbers on Friday.

United Kingdom
The trend of a weakening GBP against the USD which was seen over the second half of last week has continued in trade this week. The move comes after the market latched onto the positive surprises in the US employment data on Friday which included a fall in the underemployment rate and rise in annual average earnings. The resultant demand for the USD has cemented weakness in the GBP which came after a raft of poor UK data last week, which underwhelmed in all three PMI releases. Halifax house price data released overnight eased by a wider margin than that expected as the annual price of growth eased to 9.2% in the year to April. Focus for this week will centre largely on Thursday as the BoE announces it latest monetary policy decision, minutes and inflation report. Manufacturing and industrial production numbers feature on Wednesday. Other focus will continue to remain on the debate around UK membership in the EU and comes as PM Cameron recently warned over the risks of a Brexit on EU peace.

Trade in the EUR has been relatively subdued since our report on Friday. A mild easing against the USD which has been noted comes amidst a lift in demand for the USD after the US Nonfarm payrolls numbers on Friday. Purchasing Manager Index (PMI) data dominated the European event calendar last week. The releases included a slight upside surprise in the euro-zone manufacturing numbers, a small miss in the German Composite and further slight misses in the German and euro-zone services numbers. The week concluded with a lift in Spanish industrial output in the year to March. Releases so far this week have included stronger than expected German factory orders data. Other interest centres on the Greek austerity measures which have included the passing of a EUR 5.4 billion package to reform pensions and income tax. The move increases the likelihood of further bailout funds being released and opens the door for potential debt relief later this month. Focus for the EUR today will turn to German trade and industrial production data tonight, other EU member nations will also report their production numbers although expect the data to provide a passing interest at best.

The retracement in the JPY which was seen last week accelerated in trade overnight. Holiday trade ensured a quiet week last week, although was not enough to prevent the JPY from reaching 18 month highs against the USD. Data points in recent days have been understandably sparse, although included a marginal upside surprise in the latest manufacturing PMI numbers last week. Numbers released yesterday saw average cash earnings rise by more than twice that expected, although focus for the day centred on the release of the monetary policy meeting minutes from the March BOJ meeting. These revealed a board which was sharply divided on the path for future interest rate settings following the earlier move weeks prior to lower interest rates into negative territory for the first time in history. With only minor data scheduled this week look for US data to help set the tone of trade this week. Japanese current account numbers are slated for release on Thursday, whilst the Tertiary Industry Activity index will feature on Friday.

The CAD has continued its plunge against the USD in trade this week. The move comes after a fall of over 3.5% in the price of oil during overnight trade amid an increase in short futures positions reported for the week to May 3 and as fears over the impact (on supply) of the Alberta wildfires reduces. Large declines were also seen in other commodities overnight including pricing in iron ore, gold and steel futures. Data of interest last week included trade numbers which expanded to their worst ever in March, a decline in building permits and employment change numbers, which marginally missed the consensus. Positive surprises came from manufacturing PMI data and the Ivey PMI. Housing starts data released overnight met expectations by rising 191.5k in April. Expect a quiet week on the data front in Canada for the remainder of the week with the New Housing Price index scheduled for release on Thursday. Commodity price movements and the waning appeal of the commodity currencies look set to dictate trade again over coming days.

Major Announcements last week: (Tuesday only)
  • EU Manufacturing PMI, 51.7 vs. 51.5 exp. (Apr.)
  • Canada RBC Manufacturing PMI, 52.2 vs. 51.5 prior (Apr.)
  • US ISM Manufacturing PMI, 50.8 vs. 51.4 exp. (Apr.)
  • Australian Cash Rate, 1.75%, -25 bps.
  • Australian Building Approvals, 3.7% m/m vs. -3.0% exp. (Mar.)
  • UK Manufacturing PMI, 49.2 vs. 51.2 exp. (Apr.)
  • NZ GDT Dairy Index, -1.4%.
  • NZ Q1 Employment Change, 1.2% q/q. Vs. 0.7% exp.
  • NZ Q1 Unemployment Rate, 5.7% vs. 5.5% exp.
  • US ISM Non-Manufacturing PMI, 55.7 vs. 54/7 exp. (Apr.)
  • Australian Q1 Retail Sales, 0.5% q/q vs. 0.7% exp.
  • UK Services PMI, 52.3 vs. 53.5 exp. (Apr.)
  • US Nonfarm Payrolls, 160k vs 202k exp. (Apr.)
  • Canadian Employment Change, -2.1k vs. 1k exp. (Apr.)