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FX Update: Global monetary policy expectations provide the lead

Written by Edited by Ian Dobbs on November 17th, 2015.      0 comments

Market Overview:
The USD continues to be in vogue in recent trade despite a miss on Friday in the U.S. October retail sales release (+0.2% m/m vs. +0.4 % exp.). Terror events over the weekend have dominated media headlines and have perhaps contributed to some of the dollar’s strength as the market seeks the safe-haven status of the USD. The EUR continues to trade heavily. It is near lows not seen since April as the market continues to re-price the case for additional monetary policy accommodation at the December ECB meeting. Friday’s lower than expected Eurozone Q3 GDP number only adds to the argument. U.S. and U.K. inflation data tonight along with the FOMC minutes and BOJ monetary policy meeting on Thursday will dominate the landscape for the remainder of the week.

Today’s RBA minutes are the only event out of Australia of any note this week, although little new information is expected after the recent RBA statement on monetary policy. The AUD has outperformed many of its peers after last week’s solid October employment report saw the unemployment rate fall to 5.9%, with 40k full-time jobs added in the month. Low impact new motor vehicle sales for October released yesterday fell 3.6% m/m from +5.9% the month prior. The weekend’s terror events have seen the markets seek safety in US dollars. Direction for the AUD for the remainder of the week will be dictated by risk sentiment and the key U.S. data flow which includes tonight’s inflation report and Fed monetary policy meeting minutes on Thursday morning.

New Zealand
The weekend’s terror events and falling equity bourses on Friday have seen the NZD slide at the start of the week as investors sought safety in USD’s. Yesterday’s NZ Q3 retail sales report has done little to change the momentum after it rose 1.6% in the quarter, better than the 1.3% expectations. The core number (ex-autos and fuel) rose a more modest 1.0% (1.4% exp.) however. Focus for the week now turns to tonight’s latest Fonterra GDT dairy auction where prices look set for a third consecutive decline. The local data calendar for the rest of the week lack’s punch, this will see offshore events/risk sentiment and data take central stage, the key U.S. releases are tonight’s inflation report and the FOMC minutes on Thursday morning.

United States
The USD has continued to advance this week as the market sought to buy dollars after the weekend’s terror attacks in France and Beirut. Data released on Friday was dominated by the weaker than expected U.S. retail sales report for October which posted a 0.2% m/m gain, half the 0.4% rise expected. Core producer prices were seen falling 0.3% m/m for the month against the +0.1% forecast. The brightest note was the University of Michigan consumer confidence release which beat forecasts rising to 93.1 against the 91.5 forecast (90.0 prior). The improvements were seen in both the current conditions and expectations series. Inflation expectations 5-10 yrs out stabilised at 2.5%, although remain at their lowest levels since 2002. Focus will now turn to October inflation and industrial production data due for release tonight. Adding to interest are various Fed officials are also due to speak. The FOMC minutes will be of primary interest on Thursday morning, building permit and housing start numbers will feature the same day. The week is rounded out with weekly employment data and the Philly Fed manufacturing index on Friday.

United Kingdom
It has been a quiet start to the week for the GBP as the market waits for tonight’s inflation and Thursday’s retail sales reports. Yesterday saw the release of the low impact Rightmove House price index. This posted a fall of 1.3% m/m in November against the +0.5% expectations (0.6% prior),  and further house price data is due for release tonight. Expectations for this week’s inflation and retail sales releases are low and may leave the GBP open to a further rally, a rally which gathered momentum after last week’s solid U.K. Q3 labour market data which saw the unemployment rate reaching near seven year lows (5.3%).

The Euro trades heavily near its lows last seen in April currently as the market continues to re-weight the case for further monetary policy accommodation from the ECB at its December meeting. Preliminary Euro area Q3 GDP data released on Friday added to the case after it climbed just 0.3% q/q and 1.6% y/y, against the 0.4% and 1.7% expectations. The growth was supported by a modest increase in consumer spending and reasonable momentum in exports. European core inflation data released overnight was seen marginally beating expectations after it climbed 1.1% y/y in October against the 1% rise expected. Focus will now turn to tonight’s German and euro area ZEW economic confidence data, before a speech by ECB president Draghi scheduled for Friday.

Data released yesterday showed Japan falling into a recession for the second time since late 2012. The GDP was seen declining by an annualized 0.8% in the 3 months ended Sept. 30, much worse than the -0.2% fall predicted. Weakness in business investment and shrinking inventories drove the contraction, as company spending and production faces pressure from slow growth in China and a weak global outlook. The release could place additional pressure on the BOJ to boost fiscal and monetary stimulus at this Thursday’s BOJ meeting. However, key to this will be whether yesterday’s report has had any impact on the BOJ officials outlook for the improving trend in inflation.  Industrial output released on Friday advanced 1.1% in September (1.0% exp.), although it failed to make up for the contractions seen in July and August. The safe haven status of the JPY will also be important this week given the recent offshore events.

A sharp rally overnight in oil prices from their lows seen near $40 (WTI) yesterday has helped the CAD recover from its lows. This came after it temporarily experienced a minor rally on the back of a weaker than expected U.S. retail sales report on Friday. The market will continue to focus on energy market developments this week, especially given the heightened geopolitical tensions seen in Syria after the weekend’s terror attacks. Canadian retail sales and inflation data due for release on Friday will also be watched in what is likely to otherwise be a quiet week.

Major Announcements last week: (Tuesday only)
  • China inflation (Oct. -0.3% m/m vs -0.2% exp.)
  • China Industrial Production (Oct. +5.6% y/y vs. +5.8% exp.)
  • UK ILO Unemployment rate 5.3% vs 5.4% exp.
  • Australian Unemployment rate (Oct. 5.9% vs. 6.2% exp.)
  • Australian Employment change (Oct. +58.6k vs. +15.0 k exp.)
  • Euro-zone Q3 GDP +0.3% q/q vs. +0.4% exp.
  • US Retail Sales (Oct. +0.2% m/m vs. +0.4% exp.)
  • US University of Michigan Consumer Confidence +93.1 vs. 91.5 exp.