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FX Update : US Presidential election the focus

Written by Ian Dobbs on November 8th, 2016.      0 comments

All eyes in the FX markets will be on the outcome of tomorrow’s highly uncertain US Presidential election. Current polling marginally favours a Clinton victory which is viewed as a status quo result and should lead (initially at least) to a rally in the ‘risk’ currencies like the AUD and NZD and an exit from ‘safe haven’ currencies like the JPY. A Trump victory would likely trigger the reverse as investors move to minimise their positioning on currencies which have a high exposure to Trump’s protectionist trade policies. Look for volatility to surge in the coming hours ahead of the result which should begin to be known by around 4 pm NZ time.
It has been a quiet but solid start to the week for the AUD which has seen it enjoy gains in overnight trade against the greenback. This came as the markets embraced the risk trades on the back of a lift in confidence that Hillary Clinton would win tomorrow’s US presidential election. Last week was a relatively uneventful one for the AUD. The RBA left interest rates on hold on Tuesday as inflation was seen tracking in line with expectations. Friday’s RBA Statement on Monetary policy also noted inflation and growth expectations which were little changed from three months ago. Data released over the week was mixed. Surging coal prices helped the trade deficit improve and September retail sales had a decent gain, although retail volumes were soft in Q3. Private sector credit was in line with expectations, although home building approvals fell sharply and the Melbourne Institute Inflation Gauge showed low inflation continuing into the current quarter. Focus locally this week starts with today’s NAB business confidence indicator and Westpac consumer sentiment tomorrow, although look for direction to come from the outcome of tomorrow’s US presidential election.

New Zealand
This week has understandably started quietly for the NZD ahead of Thursdays RBNZ interest rate decision and tomorrow’s US presidential election result. News yesterday of an error in the Stats department calculation of the recent NZ Q3 inflation release saw the annual rate revised to double that reported previously (0.4% from 0.2%), although the news had little impact on trade. Local leads last week helped the NZD trade higher over the week. They were led by stronger than expected employment growth which rose 1.4% q/q during the third quarter. The number came despite a rise in the participation rate and helped the unemployment rate (4.9%) fall to lows last seen in 2008. The other key news was the strong rise in the GDT dairy auction which rose 11.4% and was driven by a strong jump in whole milk powder prices (+20%). Focus for this week is on political events in the US and Thursday’s RBNZ interest rate decision where market expectations are skewed in favour of a cut in the cash rate to 1.75% given the RBNZ’s key inflation target focus.
United States
Political sentiment looks set to drive trade in the greenback this week. Markets appear to be pricing a Clinton victory tomorrow, although polling indicates a very tight race. Focus last week centred on the FOMC decision and Friday’s Non-farm payrolls (NFP) employment release. The Fed left rates on hold, although noted a strengthened case for a hike. Friday’s employment data was solid, although failed to budge market pricing on a December rate hike. NFP rose 161k in October (mkt. 175k), although revisions to prior months added 44k. Average hourly earnings rose at a seven year high of 2.8% year-on-year and underemployment fell to eight year lows of 9.5%. Other data included the trade deficit which fell to a 19 month low, a small rise in the ISM Manufacturing PMI and a weaker than expected ISM Non-manufacturing ISM (although it remained strong). Personal spending registered solid growth in September and the services and Markit composite PMIs all easily remained in expansionary territory.
United Kingdom
Dominating news in the UK last week was the BoE monetary policy meeting and a court ruling on Article 50 (the formal mechanism for leaving the EU). The BoE’s decision to hold rates at 0.25% was expected, although the market was surprised by its shift from its previously strong dovish outlook. The BoE raised their inflation forecast to 2.7% in 2017 (+0.7%) and noted limited tolerance for CPI overshoots which indicates potential policy response ‘in either direction’. Last week’s other key event was the High Court ruling that PM Theresa May cannot invoke Article 50 which sets the scene for a Supreme Court challenge by the government in lieu of more time consuming construction of a full Bill for parliamentary vote on the issue. Data released during the week was dominated by the PMI reads which saw the manufacturing read marginally underperform its consensus and the construction and services reads outperform their respective expectations. Data this week has started with Halifax house prices which lifted above expectations in October, although this week’s UK data focus will be on today’s manufacturing and industrial production data.

This week has seen the Euro ease in recent trade on the back of strength in the greenback after news that the FBI had cleared Hillary Clinton of any crimes in the classified email scandal. Data out of Europe last week included numbers on eurozone growth which continued at a moderate pace of 1.6% year-on-year in the September quarter. Core inflation remained at a low 0.8% (only 0.5% on a headline basis) and unemployment, which sits at 10%, will maintain pressure on the ECB to extend its quantitative easing programme beyond March. PMI data from the manufacturing sector showed a minor expansion across the eurozone and included solid gains in Spain and France and continued strength in Germany. The services and composite PMI reads were more mixed however, and included declines in both across the eurozone led by the ex-German regional falls. Data this week has started with an unexpected fall in German factory orders and lift in eurozone Sentix Investor Confidence. Focus for this week will be on tomorrow’s US election outcome given the light-weight data due in Europe.

The appetite for safety ‘barometer’ of the Yen has been the dominant force in trade this week. This has seen the Yen drop in trade against the greenback on the back of the news from the FBI which has cleared Hillary Clinton on the classified emails (risk on status quo move). The minutes to the September BoJ meeting released yesterday had little impact and noted continued concern from policy makers over the effectiveness and timing of the new policy framework to achieve the 2% inflation price target. Last week saw the BoJ leave policy unchanged at its meeting and reduce its forecasts for inflation. Data released during the week included flat industrial production and disappointing retail sales and household confidence reads. Positives includes better than expected housing starts data and a lift in construction orders. Focus for this week will be on tomorrow’s US election outcome whilst locally we look forward to the September current account and machinery orders data (amongst other minimal impact releases).

The Canadian dollar has experienced some relief in trade this week on the back an increased appetite for risk (oil +) after the FBI said no new evidence was found to warrant charges against Hillary Clinton. Markets see Clinton as the status quo candidate (vs. Trumps elevated uncertainty). News last week in Canada included August GDP which came in line with expectations. The RBC Manufacturing PMI edged higher in October and the Ivey Manufacturing PMI indicator lifted to its strongest level since January, although neither release stirred the market. Employment data for October was strong, although the lift in employment was all driven by part-time roles as full-time employment fell 23k during the month. The September trade balance was worse than expected after the deficit was seen expanding to a record level, although the one-off import of machinery for an oil project was a key contributor .Local leads this week come in the form of housing and building data which starts later today, although all the interest will be on tomorrow’s US election and fears of a Trump win which would introduce considerable uncertainty in US-Canadian trade.

Economic Events.
  • Japanese Industrial Production, 0% m/m vs. 1.0% exp. (Sep.)
  • NZ ANZ Business Confidence, 24.5 vs. 27.9 prior (Oct.)
  • Australian Private Sector Credit, 0.4% m/m as exp. (Sep.)
  • EU Inflation, 0.5% y/y as exp. (Oct.)
  • Australian Cash Rate, on hold at 1.5% as exp.
  • Canadian GDP, 0.2% m/m as exp. (Aug.)
  • US ISM Manufacturing PMI, 51.9 vs. 51.7 exp. (Oct.)
  • NZ GDT Dairy Prices, 11.4% vs. 1.4% prior.
  • NZ Q3 Unemployment Rate, 4.9% vs. 5.1% exp.
  • UK Construction PMI, 52.6 vs. 51.8 exp. (Oct.)
  • US FOMC Interest Rate Decision, on hold at 0.5% as exp.
  • UK Services PMI, 54.5 vs. 52.4 exp. (Oct.)
  • UK BoE Interest Rate Decision, on hold at 0.25% as exp.
  • US Nonfarm Payrolls employment, 161k vs. 175 k exp. (Oct.)