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FX Update: Geopolitical concerns continue to be the main market mover

Written by Ian Dobbs on April 19th, 2017.      0 comments

Market Overview:
Geopolitical concerns have been front and centre over the past week with Trump’s unleashing of the military in Syria and Afghanistan coinciding with heightened tensions around North Korea. US relations with Russia are also at a low point, despite the media having suggested to everyone for the past 3 or 4 months that Trumps some sort of Russian stooge! It seems the one thing Trump really is, is unpredictable and that should see risk aversion remain heightened to a degree. We also have the French elections looming large and the potential for some real volatility in the EUR if Le Pen comes out ahead in the first round of voting.

Australia produced some very strong employment numbers last Thursday which were much better than forecast. They were in fact so strong as to raise a few eyebrows as to the accuracy of the data. Employment change for March came in at +60.9k vs expectation of +20.0k. Full time employment was up a whopping 74.5k, with part time jobs down 13.6k.The unemployment rate remained unchanged at 5.9%. In recent years the Australian Statistics Bureau has had issues with employment numbers and these latest results would suggest things may still be somewhat amiss. The best approach is to look at the 3 month average to as to eliminate the monthly swings. That all being said, the data is very supportive of the economy going forward and it certainly boosted the Australian dollar in the latter stages of the week. Also on Thursday the RBA release their Financial Stability Review. In it they mentioned that vulnerabilities in housing and household debt have increased. They say those risks are more to the economic outlook than to financial institutions and that regulators are carefully watching bank lending and are ready to tighten rules further if needed.

New Zealand
Last week was a very quiet one in terms of economic data from New Zealand. We had the Business NZ Manufacturing Index which came in at 57.8, up from 55.7 prior. The impact on the currency was negligible. This week should prove a little more interesting with a dairy auction tonight and then inflation data tomorrow to draw focus. The New Zealand dollar has largely been driven by offshore events recently with swings in risk sentiment, geopolitical concerns and broad movements in the USD dominating. We expect more of the same over the coming weeks.

United States
The United States saw a mixed bag of data last week along with some Trump comments that added volatility. Positive data results were seen from weekly jobless claims, and consumer sentiment while retail sales and inflation data came in weaker than forecast. There has been a notable divergence in recent months with ‘soft data’ such as confidence surveys etc coming in strongly, while ‘hard data’ like retail sales, durable goods orders etc, largely disappointing. At some stage the soft and hard data will have to converge. Either confidence surveys will come back to economic reality, or the hard data will pick up to support the high levels of optimism. Our feeling is that the soft data is more likely to correct lower, but time will tell. Late last week President Trump caused the USD to come under pressure after he made comments that the USD was too strong and the he like low interest rate policies. The USD lost significant ground across the board. At this stage it’s just Trump making comments, but if the US actually moved away from the official “strong dollar” policy which has existed for a generation, the impact would much greater. So far there’s no indication of this but it’s something to be wary of.

Data out of Europe has been showing signs of improvement recently and that continued last week with better than expected outcomes for German ZEW Economic Sentiment and Italian Industrial Production. Unfortunately political uncertainty is going to limit any EUR gains for the time being. We have the French election kicking off next week with the first round of voting. The polls are tight and any combination of candidates could make it through to the second round in May. There is also a very large amount of undecided voters, around 30%, and they will prove key. As was the case with the US election, it may well be that many of those voters are simply too embarrassed to admit to pollsters that they are going to vote for the candidate the media like to attack, in this case Marine Le Pen. If that’s the case, her support could be significantly better than the polls suggest. The undercurrents that drove the Brexit vote and Trumps win in the US election are all prevalent in France. But added to this France, more than any other country, has suffered numerous devastating terrorist attacks over the past few years and that has help to drive Le Pen’s candidacy. She’s anti the Euro so if she does surprise with a win, the entire Euro project will start to look very shaky. Germany's Schaeuble said last week that if Le Pen and Melenchon were the finalists for the second round, it would be a ‘nightmare’. I would say there’s a very good chance this will in fact be the case.

United Kingdom
Data from the United Kingdom continues to suggest the UK economy is taking the whole Brext uncertainty thing in its stride. Last year there was talk that the economy would be in recession by now, but nothing could be further from the truth. The unemployment rate is currently at a very healthy 4.7%, inflation is running at 2.3% and even wage data is showing signs of strength. Uncertainty about how Brexit negotiations with the EU will go are obviously keep the GBP under some pressure, but the current economic data doesn’t support a dramatically weaker GBP. This week we have a speech from Bank of England Governor Carney to digest along with the latest retail sales figures.

The Japanese Yen has been strengthening lately driven by in part by risk aversion as the geopolitical situation creates nervousness. Economic data has also been reasonably supportive and late last week we saw Industrial Production revised up to +3.2% from 2.0% prior. This week we have the trade balance, manufacturing PMI and Tertiary Industry Activity data to digest. Expect the Yen to remain broadly supported as the geopolitical situation remains front and centre in terms of near term risks.

The bank of Canada had their rate meeting last week and they chose to leave interest rates unchanged at 0.50%. They did however boost their growth forecasts acknowledging that economic data has generally been stronger than expected. Governor Poloz did stress however that there is a lot of uncertainty and that’s it’s too soon to make any conclusion on interest rates. Declining oil prices have kept a lid on any potential CAD strength and we see that continuing over the coming week. In terms of economic data to keep an eye on we have inflation numbers on Friday. The market is expecting an uptick to 0.4% from the prior month's reading of 0.2%.

Major Announcements last week:
• UK Claimant Count Change +25.5k vs -10.2k expected
• UK Average Earnings Index +2.3% vs 2.1% expected
• BoC leaves interest rates unchanged at 0.5%
• Australian Employment Change 60.9k vs 20.3k expected
• Australian Unemployment rate 5.9% as expected
• Chinese Trade Balance 164b vs 76b expected
• Canadian Manufacturing Sales -0.2% vs -0.4% expected
• US UoM Consumer Sentiment 98.0 vs 97.1 expected
• US Inflation -0.3% vs 0.0% expected
• US Retail Sales -0.2% vs 0.1% expected