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FX Update : US Nonfarm payrolls employment in focus after Jackson Hole

Written by Ian Dobbs on August 30th, 2016.      0 comments

Commentary emanating out the Jackson Hole Symposium from senior US Fed officials has seen the market move to re-price the odds on a Fed rate hike this year. Current odds of over 40% for a move in September are nearly double that seen prior to the commentary. This comes as Fed Chair Janet Yellen spoke of a continued solid performance in the US labour market and an outlook for economic activity and inflation which strengthened the case for an increase in the federal-funds rate. The comments when combined with those of the Fed’s Fischer have seen support for the greenback rise in the wake of the meeting and puts additional emphasis on this Friday’s Nonfarm payrolls employment release. Current expectations are for a gain of around 164k jobs in August. Look for stronger than expected jobs growth and higher wages to tip the odds firmly in favour of a move as early as next month.
Last week was a quiet one in Australia that saw investors holding out for direction from the weekend’s Jackson Hole meeting of economic leaders. This saw US Fed leaders note the strengthening case for an increase in the Fed funds rate, perhaps up to twice in 2016 based on the remarks from the Fed Vice Chair Fischer as he noted Janet Yellen’s earlier hawkish speech. Events in Australia last week included data on construction activity which fell by more than expected in the June quarter. This came as the sharp slump in mining related engineering activity once again weighed. The data shows engineering construction work has now fallen back to near its long term trend which indicates that the winding down in the mining investment boom is nearing completion and should be less of a drag on growth in 2017. Data on skilled vacancies showed a slowing again in July which points to slowing jobs growth, whilst numbers on consumer confidence which hit three year highs indicates robust consumer spending currently. Look for data on building approvals today which should spark more interest than yesterday’s volatile HIA new home sales indicator which slumped 9.7% in July.

New Zealand
Headlines out of the Jackson Hole Economic Symposium over the weekend have dominated trade in the currency markets since our last commentary. Comments from Fed Chair Janet Yellen included one that noted the continued solid performance of the US labour market and the Fed outlook for economic activity and inflation which had strengthened the case for a rate rise in recent months. It wasn’t until further comments from Fed Vice Chair Fischer however, who noted that Yellen’s comments were consistent with two rate increases this year, which finally saw the greenback rally strongly as the market re-priced the odds of 2016 rate hikes. Last week in NZ was a very quiet one for local leads which included a lift in the latest forecast dairy payout from Fonterra and trade numbers for July which revealed a moderately largely than expected trade deficit. Building consents data for July released this morning fell 10.5% m/m from June, although the volatile series had no impact on trade.

United States
Trade in the US last week was dominated by the sharp rally that was seen in the greenback after the comments that came out the Jackson Hole Economic Symposium. These included remarks from Fed Chair Yellen which pointed to the strengthening case for rates hikes given the recent months indicators, including those of the labour market. Initial reaction to the comments was muted given the lack of indication on timing and the range of rate forecast possibilities (to 2018) which were presented to the market. Later comments from the Fed Vice Chair Fischer bolstered rate hike expectations for 2016 after he spoke of Yellen’s comments being consistent with two rate increases this year. Key data last week from the US was mixed, although positive on balance.  Data included new home sales which grew at the fastest rate since 2007 and existing home sales which fell 3.2% in July, far greater than the 0.4% decline expected. Data on manufacturing included a weak Richmond and Kansas Fed and fall in the Markit PMI. Durable goods orders were seen beating expectations, whilst US Q2 GDP was revised down a tenth to 1.1% (annualized)- although contained detail which was more upbeat. Data released already this week has included numbers on personal income and spending for July which showed signs of positive momentum for Q3. Focus for this week is on Friday’s Nonfarm payrolls employment data which will take on additional importance in light of Yellen’s comments at the weekend.

United Kingdom
The holiday shortened week has started quietly in the UK which has seen the focus come from the more bullish USD sentiment which had spiked following the comments from US Fed officials (which lifted pricing for US rate hikes this year) at Jackson Hole over the weekend. UK data last week provided little direction for the GBP given its low impact nature, particularly so after the second estimate of Q2 GDP remained unchanged on Friday which was as expected. Other indicators released during the week included numbers on the second quarter’s business investment which beat expectations by rising 0.5% (q/q), and CBI Industrial Trends Orders which highlighted export orders that have reached two year highs. Data on BBA mortgage approvals showed a small decline on the month prior, although remained healthy. The CBI Distributive Trades Survey noted an expansion in retail sales volume in the year to August. Items of interest this week starts with data on consumer credit and mortgage lending/approvals today which will be followed by Nationwide House Prices and GfK Consumer Confidence tomorrow. Key releases for the week will be Thursday’s Manufacturing PMI indicator and Friday’s Construction PMI.

Commentary coming out of the weekend’s meeting of key economic and central bank leaders at Jackson Hole has dominated trade since Friday. Those of the US Fed were watched keenly for any sign of thinking on the US economy and US rates moving forward. Investors weren’t disappointed after both the Fed Chair Yellen and Vice Chair Fischer talked about the strengthening case for US rate hikes. This saw the USD move higher especially after those of Fischer, who unlike Yellen prior, had noted an element of timing in his interview (he noted that Ms. Yellen’s comments were consistent with two hikes this year). Comments from ECB Executive Board member Coeure which reinforced the current ECB easing bias highlights the diverging policy themes which are emanating from the Fed and ECB. Data last week included various PMI indicators from across Europe. The Services reads were seen remaining firm, although the manufacturing PMIs displayed some weakness in the euro-zone and the economic heavyweights, France and Germany. Other data included numbers out of Germany included the second quarter’s final GDP data which showed growth of 1.8% y/y (work-day adjusted) and the IFO business confidence series which posted its largest decline in four years. Data of interest this week includes regional inflation prints and updates on last week’s manufacturing PMI reads.

Trade in the Yen like the other major currencies covered was heavily influenced by the headlines coming out over the weekend at Jackson Hole. These included ones from Fed Chair Yellen which spoke of the strengthening case over recent months for Fed rate hikes and those of the Fed’s Fischer which noted Yellen’s comments as being consistent with a case for two hikes this year. The latter comments have bolstered recent support for the greenback. Comments from BoJ Governor Kuroda, who also attended the Jackson Hole meeting, spoke of the willingness to boost monetary stimulus if needed and the space for further easing via asset buying, monetary base guidance and negative interest rates. Kuroda’s comments underline his commitment to current stimulus efforts despite the growing doubts over its effectiveness. This comes as the BoJ is presently engaged in a review of its monetary policy settings which is due to be completed next month. Data from Japan last week included a rise manufacturing sector output and numbers on inflation which highlighted the current poor inflationary environment being targeted by the central bank. Data released this morning showed both unemployment and household spending beating expectations, whilst other local focus will be on industrial production numbers tomorrow.

The Canadian dollar has eased in recent trade against the greenback after the USD bullish comments out of Jackson Hole’s meeting of economic leaders and oil prices fell nearly 2% on Monday. The oil price decline was on the back of numbers which showed crude production surging in the Middle East. Local economic leads had little impact on trade last week given their low impact nature. Wholesale sales, which rose in June beat expectations and were helped by strength in autos, whilst local corporate profits for Q2 were seen dropping to their lowest levels since 2010, were impacted by falling profits amongst insurance carriers in the finance sector. Data this week starts with the Q2 current account and numbers on raw material and industrial product pricing today, GDP on Wednesday, manufacturing on Thursday and trade and labour productivity on Friday.

Major Announcements last week.
  • Japanese Nikkei Manufacturing PMI, 49.9 vs 49.3 prior (Aug.)
  • EU Markit Manufacturing PMI, 51.8 vs. 52.0 exp. (Aug.)
  • US New Home Sales Change, 12.4% m/m vs. -2.0% exp. (Jul.)
  • NZ Trade Balance, -433M m/m vs. -320M exp. (Jul.)
  • Australian Q2 Construction Work Done, -3.7% vs. -1.9% exp.
  • German IFO - Business Climate, 106.2 vs. 108.5 exp. (Aug.)
  • US Durable Goods Orders, 4.4% vs. 3.5% exp. (Jul.)
  • US Markit Services PMI, 50.9 vs. 52.0 exp. (Aug.)
  • Japanese Inflation, -0.4% y/y as exp. (Jul.)
  • UK Q2 GDP (second est.), 0.6% q/q as exp.
  • US Q2 GDP Annualized, 1.1% as exp.