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FX Update : US dollar sentiment to be the focus again this week

Written by Edited by Ian Dobbs on November 22nd, 2016.      0 comments

Interest this week will again be on the impressive performance of the greenback which has posted fresh highs this week that have not been seen in over 13 ½ years. The gains in the USD index have reached over 5.8% from the lows reached on US Election Day and reflect a growing consensus that the incoming Trump led government will usher in a period of notably higher interest rates on the back of fresh fiscal policy initiatives. This has helped expectations lift for a December rate hike from around 80% prior to the election to near 100% presently. Directives for the US dollar this week include the FOMC minutes on Wednesday and economic indicators which includes durable goods, existing home sales, PMI manufacturing and consumer sentiment.
Strength in the US dollar, which reached highs not seen in over 13.5 years, helped pressure the Australian dollar to falls of around 2.8% in trade last week. Weakness in iron ore and gold were also contributors although the market was also unimpressed with labour market and wages data which failed to show any hard evidence of a reduction in slack in the labour market. Wages growth of 1.9% year-on-year in Q3 was a record low and despite a rebound in full-time job positions in October, the trend remains one of weakness and very high underemployment. Risks from this trend are a lower inflation out-turn than that expected by the RBA especially when viewed with a slowing in the housing sector (as rising bank funding costs pressure mortgage rates higher) and strong AUD. Minutes from the RBA and a speech from Governor Lowe indicated that the RBA is happy to remain on hold for now, although the labour market will continue to be keenly monitored. Looking ahead to later this week where we have CAPEX data on Thursday and RBA talk will be on the radar today.
New Zealand
Focus last week was again on the US dollar which reached highs not seen in over 13.5 years. This comes as the market continues to buy the story of higher US inflation under the incoming Trump government. Local interest included the assessment of the economic cost of the Kaikoura earthquakes, which experts now expect to top $NZ5 billion. GDT dairy prices rose again last week (+4.5%) and have now gained over 40% since August. The gains saw Fonterra lift its 2016/17 payout forecast to $6.00/Kg. The delayed retail sales release received yesterday saw seasonally adjusted retail sales lift 0.9% in the third quarter, down from the June quarters 2.2% rise. Motor vehicle and parts retailing posted the largest rise. Focus this week will again be largely on international developments including the FOMC minutes on Thursday morning (NZ time). Local trade data on Friday should garner little more than a passing interest.

United States
The US dollar continues to be in heavy demand in trade this week. Trade last week was heavily influenced by the prospect of higher inflation under the incoming Trump government. Further support has come from Fed official comments which are indicative of a rate hike next month and a Fed which is keenly awaiting the details of the Trump fiscal package. Data last week was largely solid. It included retail sales which were stronger than expected in October and revisions to September which were also positive. Housing starts were exceptionally strong, although industrial production and producer prices both disappointed. Headline inflation continued to lift as the impact of falling energy prices drops out of the calculation, although core inflation was weaker than expected. Fed Chair Yellen indicated that rates will rise “relatively soon” although continued to highlight that the process would be gradual. Focus this week will be on Wednesday’s FOMC minutes. Indicators of interest start with existing home sales (today) and a host of data tomorrow which includes durable goods, new home sales, and Michigan consumer sentiment (amongst others).
United Kingdom
This week has started well for the sterling after it jumped in trade yesterday on the back of comments from PM Theresa May which spoke of a desire for a UK business friendly arrangement with the EU in the coming Brexit negotiations. Last week was a busy one for local data which included key indicators on employment, inflation and retail, although it was the strength in the US dollar which was the main driver of GBP trade. Numbers started with inflation data which disappointed, albeit were viewed as largely temporary. Unemployment fell to 11 year lows in the three months to September, although unemployment claims disappointed. Retail sales were strong and reached their highest levels since April 2002. This week is a relatively quiet one in the UK which starts with industrial trend orders numbers today. BBA mortgage approvals feature on Thursday, although most of the interest will lie with the third quarter GDP numbers on Friday.

Sellers which dominated trade in the Euro last week continue to hold sway in trade this week. Demand for the US dollar, which was the driver last week, comes as investors eye the loose ECB monetary policy and increasing expectations of US rate hikes. Geopolitical focus is also high as the market eyes the upcoming Senate referendum in Italy and Austrian presidential election, both of which have been adding to the anxiety around their respective EU membership (especially the former). Data last week included a smaller than expected fall in industrial production and GDP numbers which were in line with expectations (1.6% year-on-year). Both the Eurozone and German ZEW index of economic sentiment improved. These when combined with the improving business conditions PMI’s should support a lift in growth down the track. Focus for this week will be on various PMI indicators tomorrow and the German IFO business climate index on Thursday.
The weakness that was seen in the Yen against the greenback has continued in trade this week. Losses from the beginning of last week have reached around 4% in trade overnight. Data last week included Q3 GDP growth that surprised on the upside which was helped by strength in exports, housing investment and public spending. Better than expected industrial production numbers did little to curb the losses against the US dollar. Trade data released yesterday which was disappointing was driven by a larger than expected decline in exports which fell 10.3% year-on-year. The decline was the 13th consecutive monthly drop, although the recent sharp falls in the Yen should help to reverse this trend. Other focus last week was on the Bank of Japan’s yield curve management operations which are aimed at capping JGB yields at zero, a directive which has amplified the recent downwards pressure on the Yen. Expect most of the direction this week to come from offshore. Local data of interest includes the manufacturing PMI indicator on Thursday and inflation data on Friday.

Demand for the Canadian dollar remained robust in trade last week , despite the considerable strength which was seen in the greenback. The rebound in the price of oil that was seen early in the week helped has continued in trade so far this week. The gains of over 14% since last week’s lows come as OPEC experts make progress in preliminary meetings ahead of the Vienna Nov 30th official meeting. Comments from Russian President Putin added to the air of confidence that an agreement could be reached. Putin added that Russia was ready to freeze output at the current level. Local influence on trade was lacking last week. Inflation numbers for October were largely in line with expectations although the decline in September manufacturing sales from August was less than expected. Wholesale sales which disappointed in trade overnight had no impact on trade. Focus for today is on data from the retail sector although look to oil and Wednesday’s FOMC minutes for direction.
Economic Events.
  • Japanese Q3 Annualised GDP, 2.2% vs. 0.9% exp.
  • Japanese Industrial Production, 1.5% y/y vs. 0.9% prior (Sep.)
  • EU Industrial Production s.a., -0.8% m/m vs -1% exp. (Sep.)
  • UK Inflation, 0.9% y/y vs. 1.1% exp. (Oct.)
  • German ZEW survey - Economic Sentiment, 13.8 vs 8.1 exp. (Nov.)
  • NZ GDT Dairy Index, +4.5% vs. +11.4% prior.
  • UK Claimant Count Change, 9.8k vs. 2k exp. (Oct.)
  • UK ILO Unemployment Rate (3M), 4.8% vs. 4.9% exp. (Sep.)
  • Australian Employment Change s.a., 9.8k vs. 20k exp. (Oct.)
  • EU Inflation, 0.2% vs. m/m 0.3% exp. (Oct.)
  • US Inflation, 0.4% m/m vs. 0.3% exp. (Oct.)
  • Canadian Inflation, 1.7% y/y vs. 1.8% exp. (Oct.)