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FX Update : UK set to get key indicators on how the Brexit vote is shaping the economy

Written by Ian Dobbs on August 16th, 2016.      0 comments

The GBP will be in focus this week as we receive some of the first major economic indicators since the 23rd June UK vote to exit the EU. Data so far has included surveys and various estimates which point to a downturn, although data from the office of National Statistics this week should provide more tangible clues. Look for signs of upward price momentum in the inflation and producer price data when released later today, this as the pound’s near 12% trade weighted decline since the vote looks to drive up consumer prices and companies costs. Clues for any negative impact on the labour market come tomorrow via the jobless claims figures. Thursday’s retail sales numbers for July will give us evidence of the impact on domestic spending; an area which has so far proved quite resilient. Expect an interesting week with the GBP/USD sitting poised just above the Brexit 1.2796 lows.
The Australian dollar has opened this week in quiet fashion against the greenback after fading into last week’s end on the back of weaker than expected Chinese data that was released on Friday. The data dump included weaker than expected growth in Chinese retail sales, a decline in industrial production and falling investment and new lending. Local data last week was second tier in nature and failed to make any dent on trade. Releases included a decline in ANZ job ads and NAB business confidence which eased as it remained broadly in line with the long-run average. Consumer sentiment increased by 2% in August as optimists outweighed pessimists. Numbers on June housing finance approvals to owner occupiers showed a 1.2% rise, a pace which was half that expected, although annual growth was shown to be holding around 6.7%. Events on the economic calendar start today with the RBA minutes which are expected to reiterate the RBA’s views on expectations and risks to the economy. The highlight will be on Thursday as the July employment report is received which is expected to show a 10k gain in jobs for the month.

New Zealand
The NZD has started this week higher against the greenback on the back of support that has been seen for the commodity currencies overnight (on higher oil). Trade last  week was dominated by the fallout from the RBNZ’ OCR review on Thursday which saw the central bank cut interest rates as expected to 2.0% and the NZD rally in the hours following the statement. More easing was indicated as the RBNZ forecast subdued inflation at levels that won’t reach the 2% target until September 2018, some nine months later than that forecast in June. The RBNZ targeted the high NZD and its impact on tradable inflation (which has been negative for four years) as the key reason for the current low levels of inflation. Data released over the week included a small decline in the July food price index and business PMI indicator and much better than expected Q2 retail sales which surged 2.3% in real terms. REINZ house price data for July showed prices sitting 2.4% higher for the month and 16.3% higher than a year ago as low interest rates boosted house prices across all major regions. Of interest this week is the next in the GDT dairy auction series tonight (expected to show strong gains (+~10% for whole milk powder) and tomorrow’s household labour force employment survey.

United States
Last week was a relatively quiet one in the US which peaked with key data from the retail sector on Friday which showed spending stalling in July. The number was well below expectations, although revisions to prior numbers helped reduce its impact. Producer prices, which fell a seasonally adjusted 0.4% from a month earlier also disappointed as they registered their largest one-month fall since September 2015. The Michigan consumer sentiment and current conditions series also both failed to meet expectations. The data helped push expectations for a Fed hike at the next meeting down to near 15%. Data released earlier in the week highlighted the continuing trend of declining productivity and was joined by data on labour costs which were also worse than expected. Numbers released this week started with the NY Empire manufacturing index which disappointed, although expect a far greater impact from today’s inflation and building permits numbers (less so). Others items of interest include the FOMC minutes on Wednesday and Philly Fed manufacturing  index(Thursday). Various Fed members are also scheduled to speak.
United Kingdom
Pressure on the pound remains high this week ahead of key data which will give a more solid idea on the impact of the UK’s June 23rd decision to quit the EU. The numbers start with those on inflation tonight which are forecast to remain unchanged (at 0.5%) in July, this despite the GBP’s 12% decline since the vote (on a trade weighted basis). Producer prices (released at the same time) will be watched for pressure on companies costs as import prices look to reflect the impact of the currency’s move. Other data includes tomorrow’s July jobless claims and Thursday’s data on retail sales. Events last week included numbers from the NIESR which showed the UK economy contracting 0.2% in July. Manufacturing production data was marginally worse than expected in June, although revisions to earlier data saw the annualized figure fall well short of expectations. Industrial production was seen rising by a small margin, whilst the RICS house price indicator which fell to its lowest level since April 2013 displayed some of the impact of the waning post-Brexit buyer confidence.

Last week was a quiet one in Europe which saw the single currency etch out slim gains on the back of the lower greenback. Data released over the week was largely underwhelming and lightweight in nature. Releases included trade numbers from Germany which came in under expectations and industrial production data from France which also failed to meet the consensus. Inflation data from the key countries on the continent highlighted a continued weak inflationary environment. Euro area GDP data released on Friday remained unrevised from the first estimate at 1.6% y/y, whilst industrial production for the month of June at 0.6% was 1/10th of a percent above expectations. Look for a more interesting week this week which begins with ZEW economic sentiment indicators today. Euro area inflation reads on Thursday will precede the ECB policy meeting minutes which come shortly after, although expect the earlier US FOMC minutes to have had a greater impact.

Data out of Japan for this week was dominated by yesterday’s second quarter GDP release which came out much lower than expected at +0.2% q/q annualized, well short of the 0.7% expected. The numbers continued the jumpy, going nowhere trend that has been seen under Abenomics. These showed business spending once again dropped in the quarter in a move which followed the previous quarter’s 0.7% decline. Recent reports from Bloomberg indicate that the BOJ will become the top shareholder of 55 firms in the Nikkei 225 by the end of 2017. The report is based on the current rate of exchange traded fund (ETF) buying, which has come as the central bank doubled its annual ETF buying target last month in a move aimed at revitalizing Japan’s stagnant economy. The buying has drawn criticism from its opponents who say the buying is artificially inflating equity valuations and reducing incentives to make public companies more efficient. Data last week included core machinery orders that rose by more than expected in June and the latest current account which showed the smallest trade surplus since January. Look for further trade data on Thursday during what should be a quiet week overall this week.

Rallying crude oil prices continue to lend a hand to the Canadian dollar in trade this week. US crude futures rose to 3-week highs in trade overnight after the Russian energy minister Alexander Novak hinted that Russia could be open to having discussions with major producers from the Middle East in an attempt to coordinate joint oil market stability. The comments join those of the OPEC president last week which indicated a similar interest from OPEC major producing nations when they meet in Algeria next month. Canadian data last week lacked authority and failed to make any impact on trade. Indicators included a sharp drop in building permits and housing starts which maintained a positive trend, although fell from the month prior. Of interest this week is data on manufacturing sales later today although the main leads will come on Friday when we get numbers on inflation and from the retail sector.

Economic Events.
  • German Industrial Production, 0.8% m/m vs. 0.7% exp. (Jun.)
  • Canadian Building Permits, -5.5% m/m vs. 2.1% exp. (Jun.)
  • Australian NAB Business Confidence, 4 vs. 5 prior (Jul.)
  • UK Manufacturing Production, -0.3% m/m vs. -0.2% exp. (Jun.)
  • UK Total Trade Balance, -5.08 Bn GBP, vs -2.26 Bn GBP prior (Jun.)
  • US Nonfarm Productivity (Q2), -0.5% vs. 0.4% exp.
  • Japanese Machinery Orders, 8.3% m/m vs. 3.1% exp. (Jun.)
  • NZ RBNZ Interest Rate Decision, 2.0% as exp.
  • Canadian New Housing Price Index, 0.1% m/m vs. 0.3% exp. (Jun.)
  • NZ Retail Sales (Q2), 2.3% q/q vs. 1.0% exp.
  • EU Industrial Production s.a., 0.6% m/m vs. 0.5% exp. (Jun.)
  • US Retail Sales, 0.0% m/m vs. 0.4% exp. (Jul.)
  • US Producer Price Index. , -0.4% m/m vs. 0.1% exp. (Jul.)