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FX Update: FX Update: Markets tread water ahead of the Fed.

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

Stocks and the dollar have opened the week trading in tight ranges ahead of a week full of crucial central bank meetings, economic data releases and heightened political risk. In line with expectations created after the strong ADP jobs data on Wednesday, the Non-farm payroll figure was a good one, showing 235,000 additional jobs were created in February with a corresponding drop in the unemployment rate from 4.8% to 4.7%. This strong NFP result reaffirms the case for a Fed rate hike this week with  markets expecting three rate rise this year, the first in March, another probably around June/July then again in December. Yellen noted in her speech that four rate hikes would be one to many, as it would bring monetary policy back from accommodative to neutral and the Fed is still committed to supporting the economy through an accommodative monetary policy stance. Also by spreading out the hikes as well as allowing more economic data to emerge it will also allow the effects of Trumponomics to be seen on the economy. The FOMC meeting will be held Tuesday/Wednesday with the all-important statement coming out on Thursday morning NZ time.  In addition to the Fed, this week also contains meetings for the Bank of Japan and the Bank of England, both central banks are expected to keep rates unchanged. Also this week will see the Netherlands election, held on Wednesday, the right wing populist, anti-EU party led by Geert Wilders is now running in second place behind prime minister Mark Rutte’s party. It is however unlikely to be a clear-cut result due to Holland's proportional representation system and there is likely to be a messy process of trying to cobble together some sort of coalition that can govern effectively. However a negative outcome for markets seems unlikely as anti-EU candidate Geert Wilders will struggle to form any sort of alliance. Brexit developments continue to roll on for the UK, with one report suggesting that UK PM Theresa May, could trigger Article 50 to start Brexit divorce talks in the House of Commons on March 14, where she is scheduled to make a statement. It is felt that she will avoid further delays if the chance is there, as the next window of opportunity will not come until March 27, which some advisers feel is dangerously close to her deadline of the end of the month. Also overnight the Scottish First Minister Nicola Sturgeon announced her intention to hold a second referendum on Scottish independence to be held in the next two years.

Interesting comments out yesterday by Aussie Treasurer Scott Morrison, who said the biggest worry for the economy is low wage growth and that he was working to ease the pressure on house prices. Later today there are business confidence figures for February, tomorrow will bring Consumer confidence data and on Thursday, February employment data. The Australian dollar has slowly clawed back some the last two week’s previous losses and currently is trading around the 0.7272 level against the USD. This is not only largely due to a pause in the USD rally but also continued strong commodity prices, iron ore is up over 1.5% in the last two days. The Fed meeting is also crucial for future Australian dollar direction, but interest rate differentials still benefit the AUD as its 1.5% rate remains attractive over a US 0.50%-0.75% rate level. However the 0.7600 level is a tough nut to crack, initial support is now at 0.7535 but we expect the AUD to cycle in a 0.7550-0.7585 level for the next two days ahead of the FOMC statement.

New Zealand
There are several major data releases for New Zealand this week.  Q4 GDP is the main one out on Thursday with an expected 0.7% result, much below this may see more New Zealand dollar selling. There is Q4 current account data on Wednesday, and on Friday both manufacturing PMI and consumer confidence.  The New dollar has had a tough time losing over 5% against the USD over the last two weeks where it reached a low of 0.6890 (a 2month low) late last week on the back of the weaker GlaobalDairyTrade auction. It now looks to have established a base around the 0.6910/40 level, helped by the USD rally taking a breather. It is currently around 0.6924 as the market awaits the results of the 2 day FOMC meeting starting tonight. However the New Zealand dollar needs to trade back to and hold above the 0.6250 mark to indicate that a short term low is in place. The chances of a move to the 0.6860/65  lows, last seen in December although possible, have reduced in probability given the last few days of NZD consolidation at current levels that have taken place. Tightening by the Fed has already been built into the market, but if comments at the subsequent press release are more assertive on further rate tightening than expected, we could then see a test of the 0.6860/65 support.

United States
The USD rally has taken a pause, as markets await the Fed’s decision at the conclusion of its two day meeting on Wednesday. With markets fully pricing in a 0.25% rise, reaction will be muted unless the Fed disappoints, which would then see a slump in the USD and lower bond yields. Conversely if there is a hawkish tone in the press conference look for the USD rally to resume and bond yields to track higher. The meeting between President Trump and German Chancellor Angela Merkel has been postponed until Friday due to a severe snowstorm in Washington, but this meeting although important politically is unlikely to have any lasting effect on market direction. Look for consolidation around current levels for equity and currency markets, with the USD benefiting from superior rate differentials look for the EUR/USD to break below 1.0635 with an initial target of 1.0600 then 1.0565.

United Kingdom
Brexit, Brexit and more Brexit. That continues to be the biggest volatility factor for the UK. Success for PM May overnight as the House of Commons defeated the House of Lords amendments to the Brexit bill. The bill has now passed back through the House of Lords in its original form and now gives a clear path for the government to trigger Article 50 and set in motion the negotiations for the UK’s exit from the EU. An announcement has been made that Article 50 will now not be invoked before March 27th. PM Theresa May has also ruled out Nicola Sturgeon’s plans for a new Scottish independence before the outcome of the Brexit negotiations are known which would make a late 2019 early 2020 date more likely. The GBP has rallied against the USD, currently at 1.2210 after making a high overnight of 1.2250, resistance is at 1.2260 a break of which should extend to the 1.2345 level, although unlikely ahead of the Fed announcement.  

The EUR held better than expected against the post Non Farm Payrolls USD, with the USD/EUR coming close to the 1.0700 level. It was boosted by a report from Bloomberg that ECB policy makers considered the question of whether interest rates could rise before their bond buying programme ended at year’s end. However the reality is that ECB policy normalization is a long way off whereas the Fed process is expected to take another big step forward on Wednesday. Later tonight will see the release of German inflation figures and the January EU Industrial Production data, this will give further pointers to the strength of the EU recovery.  EURUSD gains last night peaked around 1.0713 the highest level for almost a month , given the interest rate divergence of the two currencies we still think the EUR is a fundamental sell against the USD and a downward move towards the 1.0630/35 zone  looks likely, with a break of this level extending to 1.0600 then 1.0565...upside at 1.0755 looks distant

This week will see the BoJ Monetary policy statement which is expected to leave rates unchanged. The JPY could strengthen however, should the Bank give any indication of any reduction in its QE programme. Any JPY strength will be tempered by the FOMC and continuing mixed Japanese economic data. The Producer Price Index came in at 1.0% YoY in February, matching expectations, but above previous 0.5%, while machinery orders plunged at the beginning of the year, down by 3.2% in January from a 6.7% advance in December, and falling 8.2% yearly basis. There was increasing speculation about the BOJ reducing their facilities, after headlines suggesting that, given the decline in yields, the Central Bank would need to buy less than the 80 trillion yen per year. Clear direction for USD/JPY remains elusive, currently at 114.92 support is at 114.50 with resistance at 115.00/10 then 115.50. It’s hard to call but we favour a test of 115.50 over the rest of this week if the FOMC delivers.

Good data in the form job figures helped the Canadian dollar over the last few days. According to the latest figures from Statistics Canada, the labour market added 15,000 jobs in February, following January's increase of 48,300 and beating the estimate of 2,500. Also encouragingly, the unemployment rate fell to 6.6% from 6.8%, while the participation rate dropped to 65.8% from 65.9%. Other details of the report showed that Canada's full-time employment rose by 105,100 last month, while part-time employment fell by 89,800.  This  increase in full-time jobs may finally allow Bank of Canada to be a little more optimistic. The CAD has had a better couple of days with the USD/CAD rate dropping to 1.3429, there is support at 0.3420 but once the Fed meeting is out of the way the USD/CAD may push for a test of the 1.3365/70 level seen last week.

Major Announcements last week:
•    GDT Price Index -6.3%
•    ECB leaves interest rates unchanged
•    UK Manufacturing Production -0.9% vs -0.6% expected
•    Canadian Employment Change 15.3k vs 0.6k expected
•    Canadian Unemployment rate 6.6% vs 6.8% expected
•    US Non-Farm Payrolls 235k vs 196k expected
•    US unemployment rate 4.7% as expected