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FX Update: ECB meeting on Thursday in the spotlight

Written by Edited by Ian Dobbs on December 1st, 2015.      0 comments

Market Overview:
It will be a busy week for forex markets this week despite a quiet start to the week, as the markets gear up for the ECB’s policy decision on Thursday. The Euro has traded heavily over recent weeks. This is in anticipation of an expansion and/or extension to the current EUR 60Bn per month bond buying programme, which for now is set to continue until September 2016. A failure to satiate market expectations could therefore lead to a nasty squeeze higher in the Euro exchange rate. Later today will see the RBA in focus; whilst the meeting is likely to be uneventful (rates to stay at 2.0% after last week’s RBA Governor Stevens comments), the comments which accompany the cash rate announcement will be closely examined. The focus will be on any signs of a change bias given the recent data which has included strong employment and weak capital expenditure numbers. The U.S. employment report on Friday will round out the busy week; where a large downside miss would likely be required to disrupt the FOMC from raising rates later this month.

It has been an innocuous start to the week for the Australian dollar as the market awaits today’s RBA cash rate decision and Australian Q3 GDP data tomorrow. Odds of a cut in rates from the current 2.0% cash rate are low despite last Thursday’s weak Q3 private capital expenditure data (-9.2%) release. Market focus has instead centred on last week’s surprise comments which indicated that the RBA is comfortable with the current cash rate setting and would likely remain in monitor and assessment mode (Governor Stevens words were “chill out”) over the Christmas period. However, the tone of today’s accompanying statement will attract considerable interest. Data released yesterday was mildly positive although elicited little market response. Private sector credit was seen rising 0.7% m/m in October (vs. +0.6% exp.). Q3 company profits rose 1.3% q/q, higher than the 1.1% expectations. October trade data on Thursday and retail sales data on Friday round out what should be a busy week for the AUD. Chinese PMI data due for release this afternoon will also be eyed.

New Zealand
The NZD sits near the upper end of its recent .6500/.6600ish range in recent trade as it followed a firming AUD higher in overnight trade. NZ ANZ business confidence data for November released yesterday was solid after it was seen rising to six month highs at 14.6, well up from the 10.5 print seen last month. October building consents rose 5.1% m/m, a sharp improvement from last month’s revised 5.8% decline and well above the 3.0% expectation. The Q3 terms of trade index showed a larger than expected decline this morning as import prices rose sharply. Next focus for the NZD will be tonight’s release of the GDT dairy price data, where current indications point to a 5% lift in prices. Direction for the remainder of the week will come from offshore, with Thursday’s ECB monetary policy meeting and Friday’s U.S. employment data being amongst the most important events to watch. Next week’s RBNZ decision also looms, market pricing currently indicates a 50/50 chance of a cut to the present 2.75% cash rate. The case for a cut includes low inflation, pressure on the dairy sector and global uncertainty as potential reasons for a move. Built-up housing market pressures and a continued decline in fixed mortgage rates are amongst the key reasons that we consider a cut unlikely.

United States
The USD remains well sought after in current trade and near the 5 year highs set in March this year (Dollar index 100.39 highs, ~120.20 last). An empty data calendar on Friday helped bring a quiet finish to the holiday shortened week last week. Little changed in trade overnight despite some weak releases which included a 0.2% m/m gain in October pending home sales data (1.0% exp.) and a decline to 48.7 in the Chicago PMI in November from 56.2 the month prior (54.0 exp.). The subdued volatility of the last few days comes mostly as a result of focus being on Friday’s U.S. Non-farm payrolls employment report and two scheduled appearances by Fed Chair Janet Yellen this week (Thursday and Friday). Only an extremely poor result on Friday would have a chance of scuppering this month’s likely rate hike at the December 17th FOMC meeting. Currently the market pricing apportions around a 70% chance of a hike. Markit/ISM manufacturing and construction spending data is due for release tonight, ADP employment data tomorrow night will also be of some interest.

United Kingdom
The GBP continues to trade with a heavy tone mirroring a heavy Euro, this sees both currencies trading near their recent lows presently. The second estimate of the U.K. Q3 GDP released on Friday met expectations after posting growth of 0.5% q/q and 2.3% y/y. Strength in domestic activity drove the result, notably investment rose 1.3% q/q vs. expectations of a 0.9% rise. In data released overnight U.K. Mortgage approvals for October at 69.6k surpassed last month’s 68.9k print, mortgage lending at GBP 3.6bn was unchanged on the month prior. U.K. consumer credit was a touch weaker than expected at GBP 1.2bn. M4 money supply and lending secured on dwellings continued to show strong gains. The data brings into focus tonight’s BOE Financial Stability report especially given the recent steps which have been taken to reign in the robust U.K. housing market. Manufacturing PMI data is also due for release later today; this is expected to show a continuation in the slowing of activity. The construction and services PMI data releases will follow on Wednesday and Thursday respectively.

The Euro remains heavy in early trade this week as focus on this Thursday’s ECB monetary policy meeting continues to dominate investor sentiment. Expectations of an expansion and/or extension to the current EUR 60Bn per month bond buying programme (currently in place till Sept. 2016) and a cut to the present -0.2% deposit rate are high, although market positioning is well placed for such an outcome. Data released overnight failed to excite after the German November inflation data printed exactly on expectations. The equivalent Italian data disappointed falling 0.5% m/m, which helped served to offset Friday’s better than expected Spanish print. Euro area confidence data also released on Friday showed a lift in the consumer, services and economic indicators and came on the back of a solid German IFO release earlier in the week. Euro area manufacturing PMI data and German unemployment numbers will feature later today before the scheduled release of euro-zone inflation numbers tomorrow. Euro area services PMI and euro-zone retail sales data on Thursday will take a back seat to the all important ECB meeting later in the day.

It has been a slow start to the week for the JPY so far after the market showed little interest in yesterday’s commentary from the BOJ Governor Kuroda and raft of second tier data releases. Governor Kuroda’s comments included one which indicated his belief (again) that extra monetary easing wouldn’t be required to revive inflation. Inflation data released on Friday showed just a 0.3% rise y/y in October, well below the BOJ’s 2.0% target. Amongst yesterday’s releases was housing starts data which showed a 2.5% y/y slide in October, well below the +2.6% consensus forecast. Vehicle production was seen falling 0.5% y/y (prior -2.6%) whilst preliminary industrial production data for the same month rose 1.4% m/m, less than the 1.8% expectations. Retail sales data showed a 1.1% m/m gain, above the 0.3% rise expected. Direction for the remainder of the week should now come from any safe haven flow before the important U.S. employment data due for release on Friday.

It has been a relatively quiet start to the week for the CAD with any movement again being dictated by gyrations in the oil price. Initial oil price gains from overnight were erased after data which was released in the past few hours showed OPEC oil output rising 130k bpd in November. The OPEC oil cartel meets on Friday, current indications point to there being no change in output of the (commonly flouted) production quotas. The market showed little interest in the Canadian Q3 Current Account release overnight which showed a small improvement on the prior period’s revised number (-16.21B vs. -16.57B and -15.1B exp.). Immediate focus for the CAD now turns to today’s Canadian Q3 GDP data and the later RBC manufacturing PMI release. The BOC interest rate decision on Thursday will be followed by market moving Canadian and U.S. employment data and the Ivey PMI on Friday.

Major Announcements last week: (Tuesday only)
  • German Q3 GDP 1.8% y/y, on exp.
  • German IFO 109.0 vs. 108.2 exp.
  • US Q3 GDP 2.1% ann. vs 2.0% exp.
  • US Consumer confidence 90.4 vs. 99.5 exp.
  • US Durable goods orders (Oct. 3.0% vs. 1.5% exp.)
  • US Markit PMI composite (Nov. 56.1, 55.0 prior).
  • NZ Trade balance (Oct. -3.24Bn vs. -3.37Bn exp.)
  • Australian Q3 CAPEX -9.2% vs. -4.4% prior.
  • UK Q3 GDP 2.3% y/y on exp.