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FX Update : US Fed and the BoE in focus this week

Written by Ian Dobbs on December 13th, 2016.      0 comments

Central bank meetings from the US Fed and the Bank of England (BoE) form the main focus for the FX markets this week. The former meeting will interest most given the degree of anticipation in recent months as to when the Fed will resume interest rate hikes. The Fed launched its hiking cycle in December last year and promised four hikes this year; although the reality is that we will get only one presuming the Fed conforms to the market’s expectation of a hike on Wednesday. With recent US economic data being in line with Fed expectations and given the strong market response to the Presidential election a hike should be a given. Expect no move from the BoE on Thursday given the recent string of better than expected UK data and recent relative stability in the pound. We also expect the BOE’s MPC to indicate no bias on the direction of the next move in rates.

Last week saw the RBA leave rates on hold at the current level of 1.5% which was fully expected. Governor Lowe noted the low levels of inflation in many countries which posed risks to global growth. Weak third quarter company profit numbers saw the market anticipate a weak print for the GDP data for the same period later in the week. The 0.5% result was even worse than expected, although was promptly discounted given factors such as the better than expected growth up to the June quarter, the boom in export volumes as projects come to completion (and prices rise) and one-offs such as the Brexit and the respective Australian and US elections. Other data included the October trade deficit which was worse than expected and housing finance which declined but continued to bounce back for investors. ANZ job ads remained solid and the AIG services PMI rose. Strong rises in key commodities such as coking coal and iron ore also helped shore up sentiment for the local currency. Thursday’s employment data (and earlier US FOMC decision) should provide the most interest this week.

New Zealand
It was a fascinating week in NZ last week that saw politics dominate the landscape as then PM John Key stepped aside and new PM Bill English take over leadership of the country yesterday. English had earlier issued an upbeat assessment of the NZ economy in the fiscal update last week. He spoke of strong employment and growth, lifting wages and an ongoing surplus despite budget stress from the latest earthquakes. RBNZ Governor Wheeler also noted the positive growth outlook and noted that the inflation lows had probably passed. Dairy prices posted another gain, albeit a moderate one which contributed to the 56% overall gain in prices that has been since July. This week started with REINZ house price sales data yesterday which showed at 14.9% y/y rise in prices, although indicated that investor lead sales are slowing particularly in Wellington and Auckland. Data today showed Q3 manufacturing sales lifting 2.1% q/q and the actual volume of manufacturing sales rise 4.8% on the same period last year. Current account data for Q3 is due tomorrow, although Thursday looms as the most interesting as we receive local Q3 GDP numbers and the earlier US FOMC decision.
United States
This week looks set to be a huge one for the US dollar as we head into tomorrow’s much anticipated FOMC meeting. A positive market response to the recent election and economic data that has conformed to the Fed’s expectations has seen market pricing move to 100% for a shift in the target range for the federal funds rate to 0.50-0.75% (+0.25%). Data last week was largely positive. The non-manufacturing ISM rose to its highest level in over a year which was driven by strong employment and business activity. Factory orders exceeded expectations and a widening in the latest trade deficit points to strong consumer demand amid a firm labour market and rising consumer confidence. Job openings and hiring data remained strong and jobless claims continued to remain low. The week finished with preliminary Michigan consumer confidence numbers which reached 23 month highs and easily beat expectations. Data this week includes key numbers from the retail and manufacturing sector, industrial production, and inflation. November building permits and housing starts also feature.
United Kingdom
Trade this week has started positively for the sterling (on the back of an easing in the greenback in overnight trade) ahead of what will be a busy week for local data which starts with numbers on inflation today. Last week’s data wrap included a better than expected services PMI, which reached 10 month highs, and weak manufacturing output which fell 0.9% m/m. Industrial production was also disappointing and was heavily affected by the shutdown of a critical oilfield. Trade data for October showed the deficit in goods and services narrowing to 2Bn GBP, although the decline in export volumes was disappointing in light of the recent sharp falls in the value of the sterling. Halifax house prices lifted by 0.2% m/m in November, although the gain was well down on previous month’s revised 1.5% lift. Looking out to the rest of this week we have employment numbers tomorrow, although Thursday’s BoE meeting should provide the most interest. Expect rates to remain on hold and given the recent better than expected data and relative stability of the GBP expect no bias to be given on the direction of the next move.
Dominating focus for last week was the ECB meeting which saw the ECB extend quantitative easing (QE) until December 2017. President Draghi’s dovish statement included comments on the lack of a sign of a convincing upward trend in underlying inflation. QE will be reduced to EUR60bn from the current EUR80bn per month after March next year. European politics were also in focus. Austrians voted against their anti-Euro far right presidential candidate with numbers that were larger than pre-Brexit. The Italians voted against the proposed constitutional reforms, although the vote was perceived mainly as a vote against PM Renzi and an increased concentration of power in government. Data released over the week included minor disappointments in the euro zone services and composite PMI. German factory orders beat expectations and the euro zone’s Q3 GDP annual numbers was revised up marginally. In focus this week is the ZEW economic sentiment indicators today, euro zone industrial production tomorrow and manufacturing PMI and inflation data later in the week.

It was a quiet week for fresh news in Japan last week which has given investors little reason to buy the yen which reached lows below 116 against the greenback in trade overnight. Data included a disappointment in household confidence and wages growth which remained weak, although economic sentiment rose to levels last seen before the sales tax hike. The third quarter’s GDP was revised lower against expectations of a small lift as estimates of capital spend and inventories were lowered. Recent positives have come from yesterday’s October core machinery orders numbers which lifted 4.1% m/m and last week’s stronger than expected current account surplus for the same month. Little interest was shown in yesterday’s mildly better than expected producer price index and weaker than expected Tertiary Industry Activity Index. The Tankan survey is in focus tomorrow, although most interest will be reserved for the later US Fed interest rate decision and statement.

A further surge in the price of oil has once again bolstered demand for the CAD in opening trade this week. The move came after the weekend’s announcement by Saudi Arabia that it would cut oil production by more than what was agreed with OPEC last month. Eleven non-OPEC countries agreed to cut 558k barrels per day, short of the targeted 600k, although it was still the first time since 2001 that OPEC and other producers had agreed a deal to jointly reduce output. Economic news from Canada last week included a dovish BoC statement which accompanied the decision to leave rates on hold. The October trade deficit narrowed as prices for energy products improved and further positive surprises came from the latest building permits data and the new house price index. Expect oil focus to take centre stage again this week given the developments at the weekend, although Wednesday’s US Fed statement will also be watched with interest.
Economic Events.
  • UK Markit Services PMI, 55.2 vs. 54.2 exp. (Nov.)
  • US ISM Non-Manufacturing PMI, 57.2 vs. 55.3 exp. (Nov.)
  • Australian RBA Cash Rate, held at 1.5% as exp.
  • EU Q3 GDP s.a., 1.7% y/y vs. 1.6% exp.
  • NZ GDT Dairy Prices, +3.5% vs. +4.5% prior.
  • Australian Q3 GDP, -0.5% q/q vs. 0.3% exp.
  • UK Manufacturing Production, -0.9% m/m vs. 0.5% exp. (Oct.)
  • Canadian BoC Cash Rate, 0.5% no change as exp.
  • Japanese Q3 GDP Annualised , 1.3% vs. 2.4% exp.
  • EU ECB Deposit Rate, -0.4% no change as exp.
  • US Michigan Consumer Sentiment, 98.0 vs. 94.5 exp. (Dec.)