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FX Update : RBNZ rate cut expectations grow

Written by Edited by Ian Dobbs on December 8th, 2015.      0 comments

Market Overview:
Expectations of a rate cut this Thursday by the RBNZ heightened yesterday after the market took an increasingly pessimistic view on the global commodity price outlook. The market also remains concerned over the relatively elevated level of the currency in relation to RBNZ forecasts. The currency level remains a key consideration for the RBNZ and recent trading has the NZ-TWI well above those RBNZ forecasts. In the U.S. a move in the opposite direction looks a done deal later this month after the release of another solid U.S. non-farm payrolls employment report on Friday. Odds of a hike now sit at ~74% with a recent Bloomberg survey showing 68 of 73 economists polled expecting a rate hike in what will be the first monetary policy tightening in the U.S. since the 2004-2008 tightening cycle. These factors point towards continued volatility in the coming weeks through the end of year period.

The AUD has eased in trade overnight and sits well off its highs seen on Saturday morning which were set after the release of the U.S. non-farm payrolls employment report. Renewed commodity price weakness in trade this week has been behind the souring in sentiment seen towards the AUD. A decision by OPEC on Friday to maintain current oil production levels has helped the price of oil plumb fresh six and a half year lows in trade overnight. Australian data was largely positive last week and was led by a firm Q3 GDP data release on Wednesday. October retail sales was seen matching market expectations on Friday and hence failed to excite. Data released yesterday showed ANZ job ads rising 1.3% m/m in November. The outlook for the AUD this week will depend on Thursday’s November employment data release and movements in the key underlying commodities. Westpac consumer confidence and home lending data on Wednesday also feature. NAB business confidence data will be released later today.

New Zealand
The NZD has eased off highs ahead of .6790 (set on Saturday morning) at the start of the week. Extended positioning saw the USD sell-off at the week’s end after the solid U.S. non-farm payrolls employment report, a report which has cemented markets expectations of a Fed rate hike on December 17. A combination of factors including firm ANZ business confidence and an uptick in dairy prices helped the NZD firm during the week, although the story was more one of weaker U.S. data and a surging Euro post the delivery of an underwhelming ECB package. Commodity prices have been under intense pressure this week (NZD negative) and were not helped by OPEC’s decision on Friday to maintain current oil production levels. This has helped the Bloomberg commodity index crash to new 16 year lows overnight, some 22% below its 2009 lows. Other critical focus for the week is Thursday’s RBNZ interest rate decision where expectations have now moved to 65% in favour of a rate cut after yesterday’s fresh commodity price meltdown.
United States
Data out of the U.S. on Friday continued to raise the spectre of a lift in rates by the U.S. Fed on December 17. The key November non-farm payrolls employment report printed broadly in-line with market expectations, after the gain of 211k jobs were posted in the month. The unemployment rate was unchanged at 5%, although the underemployment rate ticked marginally higher and re-enforces the message of a gradual tightening path. The result and revisions to the prior month puts the 3-month average gain in payrolls at 215k. Comments from Fed officials Harker and Bullard backed those of Janet Yellen’s in maintaining expectations of an imminent U.S. rate lift off. It is a relatively quiet week on the data front in the U.S. until Friday where the raft of data releases includes retail sales, Michigan consumer sentiment and producer price data.

United Kingdom
It has been a quiet start to the week for the GBP as the market focus chooses to concentrate on the BOE interest rate meeting on Thursday. Monetary policy settings are not expected to change at the meeting, although the market will closely monitor for any signs that the minutes may show of risks to the BOE normalising sooner than expectations. Mixed U.K. data last week meant the GBP was unable to enjoy any further gains on the back of the USD repositioning post the U.S. non-farm payrolls employment report on Friday. U.K. industrial and manufacturing production data is set for release tonight, although should have a relatively low impact ahead of Thursday’s BOE meeting.

The Euro continues to sit at levels well above those seen pre the ECB meeting in trade today. The gains have moderated somewhat from those seen when the market rushed to cover Euro shorts last week following the delivery of a stimulus package that largely failed to meet the high expectations. Comments from unnamed ECB sources have criticised ECB president Draghi for trying to pressure the governing council into taking bigger action beyond those measures announced, and for raising market expectations of expanded stimulus too high. Data released overnight had little impact after German industrial production was seen rising less than expectations. Last week saw the German unemployment rate reach fresh lows of 6.3%, whilst German inflation data met market expectations. Data this week includes the second read of the euro-zone Q3 GDP tonight, German trade data tomorrow and inflation data on Friday will be of limited interest.

Trade in the JPY has been relatively well contained in recent days as the market has focussed on the more pressing issues of U.S. employment, ECB stimulus, and energy market developments. Recent comments from the BOJ Governor Kuroda included one which said that there was no need for Japan to adopt negative deposit rates. This comment indicates that pressure is mounting on the BOJ to provide additional stimulus, although indications point to the BOJ having little enthusiasm for extending its huge asset purchase programme at this stage. The deflationary effects of the weakness seen in the oil and energy markets will continue to place pressure on the Japanese central bank to achieve the targeted 2% inflation rate. It is a relatively light data calendar out of Japan this week with just the Q3 GDP data of any real note.

The story for the CAD continues to deteriorate this week as oil prices were seen plumbing fresh six and a half year lows overnight (WTI $37.80 last). The fresh weakness in oil prices (and the CAD) comes after Friday’s decision by the OPEC oil cartel to maintain oil production at current levels and leave the current production ceiling at 30 million barrels per day. Difficulty in enforcing quotas has seen current production levels run at more like 32 million barrels a day however, and the outlook is even more clouded with the expectation that Iran will soon join the exporting production ranks. Canadian employment data released on Friday did the CAD little favour after the data revealed the loss of 35.7 k jobs, much higher than expectations. The unemployment rate at 7.1% was also worse than expectations.  The October trade data also disappointed as exports declined for the third straight month, the Ivey purchasing manager’s report was strong however, although provided little reprieve as CAD investors continue to focus on the dour energy market outlook.

Major Announcements last week: (Tuesday only)
  • NZ Q3 terms of trade -3.7%
  • NZ GDT dairy price index +3.6%
  • Australian building permits (Oct. +3.9% m/m, vs. -2.3% exp.)
  • Australian cash rate, unchanged at 2.0%
  • German unemployment rate (Nov. 6.3%, vs. 6.4% exp.)
  • U.K. Markit manufacturing PMI (Nov. 52.7, vs. 53.6 exp.)
  • US ISM manufacturing PMI (Nov. 48.6, vs. 50.3 exp.)
  • Australian Q3 GDP (0.9%, vs. 0.8% exp.)
  • Eurozone core inflation (0.9% y/y, vs. 1.0% exp.)
  • US ISM non-manufacturing PMI (Nov. 55.9, vs. 58.0 exp.)
  • Australian retail sales (Oct 0.5% m/m, on exp.)
  • US Non-farm payrolls (Nov. 211k, vs. 200k exp.)
  • Canadian employment (Nov. -35.7k, vs. -10k exp.)