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FX Update : Yellen cautions over US rate normalisation

Written by Edited by Ian Dobbs on April 5th, 2016.      0 comments

Market Overview
It was a busy week for the US dollar last week which saw it fall markedly over the week. This came about as the market moved to lower its expectations for 2016 US rate hikes after Fed Chair Janet Yellen’s dovish comments on US rates. The asymmetric position of current rate settings has her fearing moving too quickly down the rate normalization path. This has led the market to believe that the Fed Chair would much prefer to overshoot the inflation target than risk tightening monetary policy settings too early. Offshore developments continue to have a large impact of the Fed’s thinking, although look for the USD to again find support when the Fed moves to acknowledge the sound incoming domestic data (which included another solid Non-farm payrolls employment report on Friday). In doing so they would acknowledge the need for another move in rates in the not-too-distant future. Expect the volatile and rangy price action of the markets to continue.
The AUD has eased in trade against its US counterpart so far this week. A ~2.2% overnight fall in the CRB commodity index has seen the commodity currencies underperform so far this week. The move follows on from the strong gains which were seen last week after the dovish comments from Fed Chair Janet Yellen. US data released on Friday was generally solid, although overall the USD has failed to make any ground after the jobs report and solid March ISM manufacturing read. The jobs data showed a US economy which continues to add jobs at an impressive rate (631k in Q1), although rising workforce participation has kept a lid on wage inflation so far and helped the unemployment rate tick marginally higher in the latest report. The busy week for Australian events began yesterday with the release of better than expected Building Approvals data (although still in a downtrend) and flat February Retail sales (m/m) which fell well short of the 0.4% rise expected. The main event for the AUD this week is this afternoon’s RBA monetary policy announcement where no change in rates is expected (~5% chance pricing of a move currently). No change in the rhetoric is expected although watch for any commentary around the recent AUD strength and particularly the potential for reintroducing a strategy of “talking down” the AUD. Trade data for February released earlier in the day is unlikely to create any stir.

New Zealand
The NZD has eased in trade since Friday’s report, in the most part on the back of a fall in commodity prices overnight and decline in the latest NZIER business confidence reading. The move comes in an environment in which the USD has side-tracked after the release of the US Non-farm payrolls employment report on Friday. The report was broadly in line with expectations and displayed a continued solid rate of jobs growth (631k in Q1) in what is now the seventh straight year of expansion. Modest wage inflation was joined by an uptick in the unemployment rate driven by a lift in workforce participation. The US ISM manufacturing data was positive and included a surge in prices paid and new orders. Local data releases last week were few in number. Releases of note included a sharp rise in building consents and continued deterioration in business confidence. Offshore events look likely to again set the tone for trade this week with just the GDT dairy auction tonight of any interest. Some traction may also be gained if the AUD reacts to any surprises in today’s RBA cash rate announcement.
United States
The USD has consolidated in trade since our report on Friday. Highlights from last week included dovish comments on US rates from Fed Chair Janet Yellen who expressed the need for caution in raising rates, especially given the asymmetry in current policy settings which allow little room for adjustment should rates be raised too early. The data week concluded on Friday with the release of the Non-farm payrolls report for March which moderately exceeded expectations, revisions to the two previous months were uncharacteristically small. The data shows a robust jobs market averaging growth in jobs of 209k a month only moderately lower than the 229k and 245k averages of 2015 and 2014. A marginal tick higher in the unemployment rate was noted as more workers joined the workforce, a factor which helped keep wages inflation under control. The ISM manufacturing data also released on Friday was better than expected whilst the Michigan Consumer Confidence data showed stable inflation expectations (2.7%) and a slightly higher sentiment reading. Data from earlier in the week included a lift in Pending Home Sales for February and improvement in the Chicago PMI. Comments from the Fed’s Rosengren overnight included one of surprise over the low level of expectations by the market for the Fed funds rate. The remainder of the week will see many other Fed speakers comment including that of Fed Chair Janet Yellen on Friday.

United Kingdom
The GBP is easing in current trade although it bounced well yesterday following on from last week’s soft close. Construction PMI data released overnight remained steady in March on the month prior a result which marginally exceeded expectations of a small decline. Last week’s direction was heavily influenced by the USD which fell for the majority of the week against the GBP as it felt the weight of comments from Fed Chair Yellen. Chair Yellen raised the need for caution on US rates going forward as she noted the asymmetric position of policy settings which allow considerably more room for upwards adjustment in the event of an overshoot in inflation. Solid US employment and ISM manufacturing data at the week’s end allowed the USD to regain a little ground by the close. UK events of interest last week included a poor Q4 Current Account which reached the worst on record and consumer confidence which plumbed 15 month lows in March. Financial Stability risks from a Brexit continue to weigh on investor sentiment and were noted in comments from the BoE Financial Policy Committee. The week concluded with Manufacturing PMI data which was a touch weaker than that forecast. Services PMI data is scheduled for release tonight along with the Financial Policy Committee meeting minutes. Industrial and Manufacturing Production data will round out the week

Trade in the EUR against the USD has largely side-tracked since our report on Friday. Direction last week like the other currencies covered was heavily influenced by flow which exited USD’s after US Fed Chair Yellen’s dovish commentary on US rates. European data was light during the week but included a dip in the latest headline Euro-zone Economic Sentiment Indicator and moderate upside surprise in flash German inflation. The final read of the European PMIs exceeded expectations on the back of an improvement in the German read. Data released overnight showed a fall in the euro area unemployment rate as it continued its gradual decline which has seen it fall 0.9% (to 10.3%) over the last 12 months. Producer price data which fell markedly in the latest read, shows that disinflationary pressure remains severe across the euro-zone. The fall was the largest since December 2011. Other events of interest included reports that the IMF is reportedly contemplating exiting the Greek bailout programme, reports that the body is trying to push Greece towards default were dismissed by the fund chief Christine Lagarde yesterday. Service sector PMI reads are due for release tonight, comments in a speech from ECB President Draghi will feature later in the week.

The JPY finished on a strong note last week despite the firm US data which was released later in the day. The move continued the trend from earlier in the week which gained impetus after the dovish speech on US rates which was delivered by Fed Chair Janet Yellen. An uptick in the demand for safety helped cement the JPY gains into the end of the week on the back of broad weakness in global equities (US equities aside). Japanese equities were amongst the worst performing on Friday after the Nikkei 225 index fell 3.6%. Data releases out of Japan last week were numerous and included amongst others misses in the latest retail sales, industrial production and Tankan Large Manufacturers data. Positive reads were noted from the latest household spending and housing starts data. Data from the Corporate Price Expectations survey showed that Japanese companies’ long-term inflation expectations weakened in March from 3 months prior. The data reinforces concerns over the ability of the current BOJ monetary stimulus to bolster spending on the expectations of rising prices. The data wrap is quiet this week out of Japan; items of interest include wages and current account data.

The CAD is easing in trade this week in a move which is partially reversing some of last week’s impressive gains against the USD. Last week’s move was dominated by the influence from dovish US Fed chair commentary on US rates and a better than expected monthly Canadian GDP report. Sound US data released late in the week (jobs and ISM manufacturing) has placed some pressure on the CAD (against the USD), although the majority of the decline comes on the back of pressure being placed on the price of oil. This comes amidst commentary from Saudi Arabia who has said they will not agree to a production freeze at this month’s Doha meeting unless the pact is also signed by their Iranian rivals. Recent commentary from Iran has insisted that production will not be frozen until pre sanction levels have been reached.  Moves by Saudi Arabia to reduce their dependence on oil money are also indicative of a greater willingness to tolerate oil prices at lower levels for longer. Canadian data of interest this week starts with trade data tomorrow (low impact). Thursday will see the release of the Ivey PMI  before the release of March Housing Starts and Employment numbers on Friday.

Major Announcements last week: (Tuesday only)
  • Japan Retail Trade, 0.5% y/y vs. 1.7% exp. (Feb.)
  • NZ Building Permits, 10.8% m/m vs. -7.8% prior (Feb.)
  • German Inflation, 0.3% y/y vs. 0.2% exp. (Mar.)
  • NZ ANZ Business Confidence, 3.2 vs. 7.1 prior (Feb.)
  • UK Q4 GDP, 0.6% vs. 0.5% exp.
  • US Chicago PMI, 53.6 vs. 50.0 exp. (Mar)
  • Canadian GDP, 0.6% m/m  v. 0.3% exp. (Jan.)
  • China NBS Manufacturing PMI, 50.2 vs. 49.3 exp. (Mar.)
  • US Non-farm payrolls, 215k vs 205k exp. (Mar.)
  • US Average Hourly Earnings, 0.3% m/m  vs. 0.2% exp. (Mar.)
  • EU Markit Manufacturing PMI, 51.6 vs. 51.4 exp. (Mar.)