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FX Update : RBA in focus today. BOJ hogs the limelight last week.

Written by Ian Dobbs on May 3rd, 2016.      0 comments

The Australian dollar will be at the centre of trader’s attention later today over the RBA cash rate decision. Interest in the decision is greater than normal given the even nature of expectations on whether the RBA will cut rates from the current record 2.0% low. It has been almost a year now since the RBA last moved, although the chances today are higher than they have been at any time this year after last week’s soft Australian Q1 inflation release. Expect interest in the JPY to also remain high this week after last week’s surprise decision by the BOJ to not add any further stimulus to the Japanese economy. This has seen the JPY surge 4.7% against the USD since to highs not seen October 2014. The combination of the central bank actions should once again mean hair-raising volatility for pairs such as the AUD/JPY cross which sits over 5.6% lower than last week’s highs in present trade.

The AUD sits marginally higher against the USD since our report on Friday. Trade last week was dominated by the large fall. This came on the back of a very weak local Q1 inflation print which saw the headline number miss expectations by ½ a percent. Across the board weakness was noted in the data, although the key take out was the weakness in retail prices which was a key driver in what was the first deflationary headline inflation print in seven years. The annual pace of core inflation fell to its lowest rate in the history of the series. The data has elevated the interest in today’s RBA cash rate announcement. Key to whether the RBA will act is the effect that a lack of change in policy will have on the RBA’s inflation and growth targets over the medium term. The other key data point of interest last week was the latest Private Sector Credit numbers released on Friday which displayed a moderation in growth from February. Both the NAB Business Confidence and the AIG Manufacturing index indicators released yesterday eased moderately from the month prior. Looking out to later this week we look forward to Retail Sales and Trade numbers on Thursday. The RBA statement on monetary policy is set for release on Friday.

New Zealand
The NZD has taken advantage of a weakening USD and continued positive sentiment after last week’s OCR review to trade moderately higher since our report on Friday. A raft of weaker than expected US data and a firmer CRB commodity index allowed the local unit to finish last week on a firm footing and came on the back of the positive sentiment enjoyed after rates were left on hold by the RBNZ last week. Housing market risks based around the current migratory pressures were seen as a key factor behind the RBNZ remaining on hold. Strong construction and tourism sectors and rising headline inflation on the back of higher oil prices were also noted. Events over the next 24 hours look set to have a key bearing on the NZD this week starting with the latest in the GDT dairy auction price series overnight. Current expectations point to another modest uptick in overall pricing. This will be followed by the Q1 Household Labour Force Survey which is expected to show solid employment growth for the second consecutive quarter. Unemployment is expected to tick higher after the previous quarters shock plunge as the participation rate rebounds from the last quarters notable decline.

United States
The USD has continued to fall since our report on Friday in a continuance of the theme that has been evident for much of this year. This comes as the US data fails on the whole to live up to the market’s high expectations and the US Fed pare their signalling on 2016 US rate hikes. Last week was a busy one in the US which was dominated by the latest FOMC meeting. This saw the Fed remain on hold and evade any indication on the likely timing of future rate hikes. The strength of the jobs market was noted, although as expected for now the Fed is happy to gather further data before moving further on rates. Key to this further assessment will be the April non-farm payrolls employment release due this Friday. Other data of interest for the market this week are the various ISM manufacturing and non-manufacturing prints and scheduled speeches by numerous Fed members. Data released last week included a decline in New Home Sales and weak Durable Goods Orders numbers. A soft preliminary Q1 GDP report was accompanied by a miss in the latest Chicago PMI and consumer sentiment, which fell to seven month lows. Data released overnight included ISM manufacturing and construction spending numbers which also missed expectations.

United Kingdom
The GBP has drifted higher against the USD since Friday in lacklustre trade which has largely been influenced by investor sentiment shown towards the USD. Amongst the highlights on the economic calendar last week was the release of the advance Q1 GDP which failed to excite as it rose in line with expectations. Mortgage data released during the week included approvals numbers which failed to reach the consensus. However, mortgage lending for March which jumped from the month prior easily surpassed expectations. BoE Consumer Credit and Net Lending to Individuals numbers released on Friday also provided positive surprises, although as expected failed to garner any real interest. Looking out to later this week we have various PMI releases which begins with the manufacturing read tonight and will be followed by the construction and services reads later in the week. The latest Halifax house price data will become available on Thursday.

The EUR has risen against the USD this week to trade above 1.1500 for the first time since August last year. The move comes on the back of overall weakness in the USD and continued momentum from an upside surprise in the euro-zone Q1 GDP print on Friday. Labour market data released at the same time showed a continued recovery albeit a moderate one as the rate fell 0.2% to 10.2% across the euro-zone. Inflation data which was also released in unison was disappointing as the services inflation read pulled on the core inflation levels, although the weaker than expected headline number was in line with the ECB’s expectation. The data came on the back of the soft German inflation numbers released earlier in the week which foreshadowed a potentially weak outcome. Employment data out of Germany also mimicked the gradual improvement which was seen in the euro-zone data. Data released overnight included a slight positive surprise in the euro-zone manufacturing PMI data, on a regional basis positive reads from Germany, Italy and Spain offset weakness in the French number to set up the small euro-zone improvement overall. Further PMI data from across the euro-zone will dominate the data event calendar In Europe this week.

The JPY continues to trade on a robust footing this week against the USD. The strong tone of trade comes on the back of last week’s surge which took place after the decision by the BOJ which failed to satiate the market’s expectation of the addition of further monetary stimulus. The move surprised many especially given the nature of recent reports which suggested the possibility of negative interest rate loans to banks in order to spur lending. Inflation data released just prior to the decision was weaker than expected and only added to the markets surprise. The large rally in the JPY (+4.7% against the USD) since the announcement has helped push the Nikkei 225 over 6% lower as investors react to pressure that the higher currency will place on Japanese exporters. Thursday was a busy day for economic releases although they largely took a back seat to the monetary policy meeting outcome. Positive surprises were seen in the latest unemployment rate, retail trade, industrial production and housing starts releases.

The CAD remains in solid demand against the USD since our report on Friday. The firm tone of trade has been helped by some better than expected local data which has contrasted with the underwhelming US data which has been released since. Canadian GDP data released on Friday displayed a more modest than expected pullback after January’s strong 0.6% m/m growth. Manufacturing data released overnight by RBC beat expectations and was the strongest since December 2014. Oil prices which set six month highs towards the end of last week have retreated overnight as traders continued to react to a report released on Friday. This report showed OPEC production levels reaching near record highs as they increased production by 170k barrels per day in April to 32.64 million daily. Oil prices have remained strong lately however, as US production continues to slide and on the back of analyst expectations of 1.2 million bpd demand growth this year. This growth is expected to overwhelm the current oversupply and begin to erode the large record US crude oil stock inventory. Looking out to later in the week we look forward to economic events which include the trade balance on Wednesday, building permits on Thursday and employment/Ivey PMI on Friday (all Canadian time).

Major Announcements last week: (Tuesday only)
  • German IFO Business Climate Index, 106.6 vs. 107.0 exp. (Apr.)
  • US Durable Goods Orders, 0.8% vs. 1.8% exp. (Mar.)
  • US Markit Services PMI, 52.1 vs. 52.3 exp. (Apr.)
  • Australian Q1 Inflation, -0.2% q/q vs 0.3% exp.
  • UK Q1 GDP, 0.4% q/q as exp.
  • US FOMC interest rate decision, on hold as exp.
  • NZ RBNZ interest rate decision, on hold as exp.
  • Japanese Core Inflation, -0.3% y/y vs. -0.2% exp. (Mar.)
  • Japanese Industrial Production, 3.6% m/m vs. 2.9% exp. (Mar.)
  • US Q1 GDP, 0.5% vs. 0.7% exp.
  • Australian Private Sector Credit, 0.4% m/m vs. 0.6% exp. (Mar.)
  • Eurozone Q1 GDP s.a, 0.6% q/q vs. 0.4% exp.