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FX Update: Fed Chair Yellen set to draw focus this week.

Written by Howard Wilcox on February 14th, 2017.      0 comments

Equity markets continue to rally on the back of the return of risk. US markets were at record highs overnight, following Trump’s U-turn last week on ‘One China’ policy and his more realistic approach in dealing with Japan’s Abe over the weekend summit meeting. Good data from China released last week and heightened odds of a “phenomenal” tax cut deal in the US have spurred renewed demand for more risk-on trades. In the weekend Japan/US summit talks exchange rate concerns previously espoused by President Trump were not discussed and he did not demand a bilateral trade deal. Trump’s talks with Canada’s PM Trudeau have also gone smoothly with supportive comments from both leaders around bilateral trade. So with all Trump related news flow this week being risk positive look for the equity market rally to continue over the next few days. Also of note this week are inflation expectations, with CPI numbers for the UK out later tonight and data from the US on Wednesday night. Fed Chair Yellen is giving her 2 day Humphrey-Hawkins testimony in front of the US Congress from tomorrow and any suggestion that a March rate increase is still in the mix, would see further USD advances.

A surge in iron ore prices of around 6.5% helped extend its rally on increasing demand from the Chinese market. The AUD failed to follow through as it has encountered strong resistance around the 0.7700 level against the USD and the market is perhaps a little nervous pushing the currency too far, ahead of Thursdays January employment data. The RBA forecasts released on Friday confirmed earlier expectations showing a bounce back in economic growth of 2% in the year to June 2017 to 3% in the year to December. One of the factors responsible for a large part of the boost is an increase in liquid natural gas exports as projects are completed and come into production. These have the ability alone to boost GDP growth by 0.5% in both 2017 and 2018 years.
The 0.5% drop in GDP in the September quarter was largely attributed to “temporary” factors, disruptions to coal supply and bad weather that caused a delay in construction. The chances of any further RBA rate cuts are starting to look even more remote, which will over the medium term be AUD supportive.

New Zealand
The New Zealand dollar has continued to drift lower over the last few days, a knock-on effect from the more dovish than expected RBNZ statement last week and reflection of the stronger US unit. The New Zealand economy is still solid and dairy prices on the uptrend, which to some extent will continue to underpin the New Zealand dollar. However the USD will hold sway over the Kiwi and at the moment all the news is positive for the US and any increase in the US Fed’s tightening profile will pressure the NZD. But, if President Trumps “Phenomenal” tax deal disappoints the New Zealand dollar may well regain its wings and head towards the 0.7500 level.

United States
The US market has opened the week on a very positive note with US equities again making record highs. This is still attributed to the promises of the “phenomenal” tax package by President Trump. The risk of course is that if this is further delayed or disappoints any market retracement could be sharp and brutal. Also adding to the positive sentiment were the outcomes of Trump’s meetings with both the Japanese PM Abe and Canadian PM Trudeau. Both of these meetings ended on a positive note with little mention of contentious trade or currency issues that were a feature of Trump’s campaign rhetoric. Markets will also be watching for any signs of a March date for another rate hike from the Fed when Fed Chair Yellen gives her semi-annual testimony before the US Congress starting from tomorrow. Any deviation from that previously advised would see a USD spike.

United Kingdom
A slew of economic data due on Tuesday night is expected to show higher petrol and food prices lifting inflation to 2% in January compared with a year earlier, up from 1.6% in December. This would be the first time consumer prices inflation has hit the Bank of England’s target of 2% since December 2013, with Office for National Statistics data predicted to show the rate of price growth has doubled in four months. Further price rises are expected to flow through given the substantial drop of the GBP after the Brexit result acts to push up import costs. The GBP was more resilient to a firmer USD as December data for Industrial and manufacturing production more than doubled forecasts with the first up 1.1% (yoy 4.3%) and the second 2.1% (yoy 4%) when compared to the previous month. Also encouraging was the goods trade balance for the same month which showed a smaller deficit than was expected. With this more resilient data, we may be starting to see the GBP’s overall decline at an end.

More confirmation over the weekend that Greece is back on the front burner with comments from EC President Jean-Claude Junker, that the Greek bailout program may fall apart. This helps to reaffirm recent IMF comments that more debt write-off for Greece was needed to restore debt sustainability. This will no doubt be one of the key subjects at this week’s Eurogroup finance ministers meeting, starting February 20th where the Greek bailout will be discussed. The IMF wants other eurozone countries to offer debt relief to Greece, writing off some of their loans in a bid to stop its debts running out of control once again. But there is a firm pushback from other EU members on this, with arguments from Germany’s finance minister that it violates the terms of the Lisbon Treaty. Greek PM Tsipras has rejected any suggestion of further austerity for Greece commenting that other EU nations need to be “more careful towards a country that has been pillaged and people who have made, and are continuing to make, so many sacrifices in the name of Europe" much for European unity..!!
In other news, IMF Christine Lagarde at a conference in Dubai warned that political instability also threatens the continent and that she was worried about the outcome of several of the upcoming European elections and the threat they pose to Eurozone unity. The EUR dropped to 1.0607 on Friday, the lowest level since mid-January and capping off a week of the worst declines since November. It has opened today even lower around the 1.0590 mark.

The Japan/US summit appeared to go well over the weekend with Japanese PM Abe commenting that he was optimistic that a good outcome could be achieved in later trade talks. Initially the USD rose against the JPY back over the 114.10 level as the leaders delegated the task of overseeing economic discussions to the vice president and deputy prime minister. Overshadowing the talks were heightened security concerns, after North Korea conducted a test missile firing, but this prompted a solid statement of support from the US president.
The latest release of Japanese GDP data for Q4 was slightly lower-than expected at 0.2% QoQ vs 0.3% exp and 0.3% previous. While annualized GDP (seasonally adjusted) YoY was 1% vs 1.1% exp and 1.3% previously. Although the headline data was disappointing, inflationary trends were marginally higher, which is encouraging given the efforts by the Bank of Japan and government to increase inflation.

News out for Canada that ratings company, Fitch Ratings, is warning that the country’s prized standing in the eyes of creditors may suffer because of protectionist measures proposed by U.S. President Donald Trump. In a report last Friday, a Fitch research team commented that nations with close ties to the world’s largest economy, such as Canada, are “most at risk” of damage to their credit fundamentals. Although most of Trump’s rhetoric has centred on Mexico, Canada’s reliance on US trade is huge, with around 75% of Canadian exports going to the US and concerns were mounting that Canada could end up as collateral damage in any trade action against NAFTA. Yesterday’s meeting between Trump and the Canadian PM Trudeau appear to have been positive, allaying Canada’s fears that they may be lumped into the same unfair trade assertions levelled at Mexico. The ending press conference was respectful and benign with nothing particularly negative or positive for the Canadian dollar.  Trump simply said in regards to NAFTA, they will tweak trade with Canada - commenting that it's a much less severe situation than on the Southern Border, which is an extremely unfair situation.

Major Announcements
•    RBNZ leaves rates unchanged
•    Chinese Trade Balance 355b vs 295b expected
•    UK Manufacturing Production 2.1% vs 0.3% expected
•    US Consumer Sentiment 95.7 vs 97.9 expected
•    Japanese GDP 0.2% vs 0.3% expected
•    Chinese GDP 2.5% vs 2.4% expected