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FX Update: Markets tread water waiting for a lead

Written by Howard Wilcox on April 4th, 2017.      0 comments

A slight risk-off tone has pervaded the markets, with gold and the JPY higher, equities lower overnight, given that economic data has been relatively solid, it would appear geopolitical concerns are more to the fore currently. Ffor example, the difficulties the US administration is having in getting fiscal promises enacted and the many questions that linger over the European political situation.  Although the Tax and infrastructure plans for the Trump administration have run into trouble, the USD has staged a recovery based on continued economic statistics which show a continued slow and steady recovery for the US economy. Given the ructions the Trump administration is experiencing, it now looks as if it will be many months (our read is Q3) before the widely anticipated tax cuts and increased infrastructure spending come into effect to further galvanise the economy. However this timeframe does not preclude the Fed from continuing to hike rates at its already well advertised timetable and as long as economic indicators remain solid, with ADP jobs data on Wednesday, a precursor to the Non-farm payroll on Friday just how on-track the US recovery remains will be clearer.  In Europe, attention is still mainly centred on the twists and turns of French politics and the extrication of the UK from the Eurozone as the reality of Brexit sinks in. Economic fundamentals continue to improve for the Euro bloc albeit at a slower pace than expected, but allied with core inflation still below the 2% ECB target any rate increase is unlikely to come this year. Also of note at the end of this week is the meeting between the US president Trump and Chinese President Xi Jinping which is expected to be contentious given the rhetoric from the US President on trade. Any press releases on the outcome will come over the weekend, so markets this week should remain largely unaffected.

Today will see the RBA rate decision later this afternoon.  No change is widely expected to the current 1.5% rate, but expect comments around concern over the household income, debt levels and labour market conditions. Concerns around the build up of risks associated with the housing market effectively rule out any further rate cuts. The RBA is also likely to be keeping a wary eye out on iron ore prices, as although iron ore exports to China are likely to have continued unabated in March, it now looks  increasingly likely that the first quarter of 2017 may prove to be as good as it gets this year. With spot iron ore prices slipping below US$80/tonne overnight, 15% down from the February peak, it looks like a market that has realised it got a little ahead of itself. The spot price is now virtually flat from the $US 78.87 at the end of last year, showing that the rally from December 2015 to February, which resulted in prices more than doubling, is starting to unwind. Much of the focus on why the price gains were unsustainable has been on the rapid build up of iron ore stocks at Chinese ports. The AUD is currently at 0.7505 against the USD after dropping from 0.7750 2 weeks ago. Weakening economic data is continuing to pressure the AUD and the latest weaker retail sales add to the story that the Aussie economy is currently more about deterioration than improvement. If the RBA is downbeat the AUD could extend into the  0.7550 region.

New Zealand
The New Zealand dollar is still trading within a narrow range based on weaker commodity prices over the past fortnight. Closing the week around the 0.70 the figure it dipped briefly to 0.6985 before reversing to 0.7020 the high Monday. Later in the week we have Dairy Auctions and US Payrolls, currently the NZD looks for direction and could be tested to the downside based on current venerability. Short term resistance is 0.7100 with support at 0.6890

United States
US equity markets opened the new quarter lower as the auto sector was sold off after reports of lower sales. The USD held steady as investors await a raft of data later this week, kicking off with a solid result for the ISM manufacturing PMI last night, that will  give further pointers to the health of the US economic recovery. Expectations are for the US ADP figures, Wednesday and Non-farm payroll data on Friday to come in toward the high side.  The stunning surge in consumer confidence last week and healthy regional PMIs together with the expected strong payrolls data will be welcomed by Fed officials as they talk up the case for more rate hikes. Markets are now pricing in a 60% chance of a June rate hike. However there are some threats on the horizon, as markets are likely to switch their focus to debt ceiling/govt shutdown risks in mid-to-late April, jeopardising continued USD strength. The US/China meeting starting on Thursday between the two Presidents is not expected to initially be market moving, but the press release will be watched closely for comments around trade and geopolitics which have the ability to affect longer term trends.
Overall we expect the USD trend to remain positive as economic data remains supportive and firming inflation, in excess of its trading partners, keeps Fed rate hikes on the front burner.                                                                     

United Kingdom
Brexit continues to overshadow most other issues although UK economic data continues to show modest strength. UK manufacturers are set to make a “solid” contribution to growth in the first quarter, even signs emerged that cost pressures were starting to weigh on activity, according to the latest IHS markit survey. Future outlook among manufacturers also remained “positive”, which encourages firms to take on more staff. Employment was higher for the eighth month running, with the rate of growth rising at the fastest pace in almost 18 months. The UK economy grew by 0.7% in the first 3 months of the year, exceeding most economists’ expectations of growth to slow to around 0.5% for the period. Similar surveys of the construction and dominant services sectors for March, released later this week are also expected to show robust growth.
However the GBP has drifted lower to currently sit around the 1.2490 level under support at 1.2500. A move above 1.2540 would target 1.2590 unlikely this week. A break below 1.2480 would signal a move towards 1.2430/40. It’s hard to see major moves on the GBP ahead of the US jobs data Friday.

Main market drivers continue to be around political developments, with the latest opinion polls more consistently showing that right wing, anti-EU Marine Le Pen is unlikely to win the presidential election in France, however there still remains a large percentage of “undecided” voters. Data releases were generally positive with seasonally adjusted unemployment rate falling to 9.5% in February from 9.6% in January,  the lowest since May 2009, The final Markit manufacturing PMIs for March, confirmed the region grew at its fastest pace in nearly six years as the final revision of the index matched the preliminary estimate of 56.2. However on a negative note, the EU PPI for February came in flat, after advancing 1.1% in February, while the year-on-year price index grew by 4.5%, above estimates of 4.4. US data releases over the week will drive this currency pair, but the EUR needs to surpass the 1.0710 region to be able to recover further, whilst below 1.0620 the bearish momentum will likely accelerate with a target of 1.0565. Support is now at 1.0620, with resistance at 1.0710.

The Japanese yen continued its run lower on the weekly open down to 110.50 early Tuesday. The JPY slowly picking up pace against the US Dollar as the general risk averse mood spreads through markets. 110.13 the last week’s low may be tested this week, if key support is broken we can expect to see a larger pullback and a possible freefall to 105.00 in the medium term. Running up to the US Payroll numbers at the end of the week investor appetite will stay mellow as caution remains.

The Canadian Dollar expanded by 0.6% in January beating the forecast of 0.3% Friday, this is the highest GDP figure since August 2016. The CAD opened the week on the back foot across the board and remains above 1.3300 against the US Dollar with oil prices having a negative impact on the economy. Later this week we see Canadian Employment change which is expected to be positive and boost sentiment running into US Non-Farm Payroll figures. This week we may see a run up to the post high mark of 1.3500 with volatility on the table.

Major Announcements

•    US GDP 2.1% vs 2.0% expected
•    US unemployment claims 258k vs 244k expected
•    UK Current Account -12.1b vs -16.3b expected
•    Canadian GDP 0.6% vs 0.3% expected
•    Australian Retail Sales -0.1% vs 0.3% expected
•    UK Manufacturing PMI 54.2 vs 55.1 expected
•    US ISM Manufacturing PMI 57.2 as expected