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FX Update : US dollar sentiment and positioning to provide an interesting start to 2017

Written by Ian Dobbs on December 20th, 2016.      0 comments

Gains by the US dollar index, which reached almost 8% last week (on its highs) from the lows reached on US Presidential Election day, came as the Fed upped the ante on rate hikes for next year. The 0.25% hike last week came with the projection of three further hikes of the same size next year and included an admission by Fed Chair Yellen that pending changes in US fiscal policy had played a part in the changed expectations. Expect positioning and sentiment to play a large role over the holiday period and in early 2017 given the recent large moves. Focus for this week starts with today’s BoJ meeting which is expected to see no change in the current monetary policy settings. US data includes existing home sales tomorrow and various releases on Thursday which will be headed by the third quarter’s economic growth numbers.

A more hawkish than expected US Fed which highlighted a higher projected interest rate path for 2017 put the Australian dollar under heavy pressure in trade last week. Heavy falls in iron ore yesterday (-7%) have also weighed as losses extended to four sessions in a row for the key Australian commodity. Concerns over a downgrade to Australia’ key AAA sovereign debt rating also weighed ahead of yesterday’s mid-year budget update, although two of the three key agencies confirmed that there would be no immediate loss after the budget revealed a $10.3Bn blowout in the deficit over four years yesterday. Data last week was led by the stronger than expected November jobs report. Leading indicators on employment such as job ads and vacancies signal reasonable jobs growth ahead. Consumer confidence and business conditions fell and house prices grew at a more modest 3.5% annualised rate. Focus this week is on today’s RBA minutes which look unlikely to surprise. Expect the RBA to remain optimistic about the medium term economic prospects, especially after the recent lift in commodity prices.

New Zealand
A lack of important local data saw the local currency garner its direction from offshore last week. Falls from its highs against the US dollar of around 3c were seen at one point after the US Fed signalled an intention of a 0.75 percent hike in rates throughout next year, higher than previous market expectations. Local data included house prices which rose 14.9% y/y and Q3 manufacturing which maintained a steady rate of growth. The terms of trade eased (in a large part thanks to falling export prices) and the November business PMI posted a minor fall. Completed building work rose strongly in the third quarter (+22%) and October building consents released yesterday posted its first gains since June. Homes consented in Auckland rose above 30k in the latest year which is the first time the figure has passed 30k in over 11 years. ANZ business confidence posted a minor rise for December when released yesterday. Look to GDP data on Thursday for key local influence this week. Current expectations are for growth to set a brisk 3.7% y/y rate.

United States
Focus last week was naturally on Wednesday’s FOMC meeting which saw the Fed lift interest rates for the first time in a year. Accompanying the move was the forecast for three further moves in 2017, one higher than previously signalled (although the Fed signalled four hikes for 2016 at the same time last year and we got only one). The move sent the greenback higher in following trade and was accompanied by Fed speakers on Friday who also talked up the prospect of further rate hikes next year. Local economic data included solid gains the New York and Philadelphia regional manufacturing indices and continued strength in the Markit manufacturing conditions PMI. Small business optimism registered a solid rise in November and home builder conditions rose to their highest level since 2005. Housing starts disappointed (-18.7% m/m) although came on the back of a 27% gain the previous month. Industrial production and retail sales were weaker than expected although the latter followed two prior strong months. Focus for this week includes existing home sales on Wednesday and Q3 GDP and durable goods on Thursday.

United Kingdom
There was plenty to absorb in the UK last week given the key data and BoE monetary policy meeting. The decision by the BoE to leave rates on hold at present levels was expected. The decision was unanimous amongst the MPC members and was accompanied by an apparent softening on the inflation outlook from Governor Carney which could be interpreted as a mildly dovish signal despite their neutral policy bias. Key data included inflation which marginally exceeded expectations on an annual basis and employment data which was largely on consensus. Retail sales continued to maintain an impressive rate of growth when measured against those levels seen at the same time last year. Look for GDP and business investment data near the end of the week to dominate the news from the UK this week.

Last week was a quiet one for key news of interest out of Europe. The German ZEW (current situation) rose to its highest level in over a year although expectations remained unchanged on the month prior. Industrial production across the euro area missed expectations by easing although the business conditions PMI remained unchanged in December at a solid level which points to some acceleration in growth. German harmonised inflation was flat in November and rose 0.7% year-on-year, levels that matched those seen in France. Across the euro area inflation declined 0.1% during the month although the fall was twice the size at the core level. The 0.6% and 0.8% (core) year-on-year numbers matched expectations. German IFO data released yesterday broadly met expectations and created little stir. Look for a quiet run into Xmas that will see greenback sentiment be the driver of trade over the week.

Last week was again driven by events offshore which saw the US dollar extend its gains against the Yen to over 17% (on its highs) since the Trump Election Day lows. The Fed confirmed last week that the prospect of higher spending under the incoming Trump government had influenced their rate expectations for 2017. This saw them signal an additional further 0.25% rate hike for 2017 (now 0.75% expected for 2017). Much of the recent rally in the USD/JPY has come of the back of such expectations. Data in Japan last week included the Tankan survey which pointed to a rise in confidence amongst large manufacturers. The December PMI also showed improved conditions for manufacturers and core machinery orders lifted by more than expected in October. Yesterday’s trade data revealed a smaller than expected November surplus on the back of a less than expected decline in imports. Dominating focus for this week is today’s BoJ monetary policy announcement. Expect monetary policy settings to remain unchanged as the sharp fall in the yen against the US dollar looks to drive a move towards higher inflation and economic activity.

Last week was a very quiet one in Canada with the only release of any interest being manufacturing sales which slipped 0.8% in October from September. The widespread weakness in the numbers was a clear negative for this Friday’s October GDP release. Direction last week for the CAD like most currencies came via the stronger US dollar which sprinted further ahead on the prospect of additional Fed hiking in 2017. Oil prices closed only marginally higher on the week despite digesting the news of the detail on the coordinated cut in production between the OPEC and non-OPEC producers, the first deal of this type since 2001. The last full week of the year will be a busy one with inflation and retail numbers on Thursday to be followed by Friday’s GDP data.

Economic Events.
  • Japanese Machinery Orders, +4.1% m/m vs. +1.0% exp. (Oct)
  • NZ Q3 Manufacturing Sales, +2.1% vs. +2.2% prior.
  • UK Inflation, +1.2% y/y vs. +1.1% exp. (Nov.)
  • German ZEW - Current Situation, 63.5 vs. 59.1 exp. (Dec.)
  • Japanese Q3 Tankan Large Manufacturing Index, 10 vs. 6 prior.
  • UK BoE Interest Rate Decision, on hold at 0.25% as exp.
  • US Retail Sales, 0.1% m/m vs. 0.3% exp. (Nov.)
  • US Fed Interest Rate Decision, 0.75% + 25 bps as exp.
  • NZ Business PMI, 54.4 vs. 55.1 prior (Dec.)
  • Australian Employment Change s.a., 39.1k vs. 20k exp. (Nov.)
  • EU Markit Manufacturing PMI, 54.9 vs. 53.7 exp. (Dec.)
  • US Inflation, 0.2% m/m as exp. (Nov.)
  • Canadian Manufacturing Shipments, -0.8% m/m vs. +0.4% exp. (Oct.)
  • US Philly Fed Manufacturing Survey, 21.5 vs. 9 exp. (Dec.)