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FX Update: Political uncertainty keeps the NZD subdued

Written by Howard Wilcox on October 10th, 2017.      0 comments

It has been a subdued start to the week for currency markets, with the US, Japan and Canada all enjoying a long weekend. We look for the USD trend to remain positive this week after solid economic data and more hawkish Fed Reserve comments over the past week provided upward impetus. The highly anticipated US Non-farm payroll data on Friday was impacted more significantly by the two hurricanes than economists anticipated (they were looking for 80K job growth but instead saw -33K job losses), investors quickly discounted the headline number and instead focused on the upward revision in August, the strong 0.5% rise in average hourly earnings and the lowest unemployment rate since 2001 at 4.2%, down from 4.4%. These better than expected numbers reinforce the Fed's hawkishness and have driven up the odds for a year-end rate hike to 77% from 70% the previous week. Expectations are now that the September payrolls will be revised higher and rebound next month, as seen in 2005 after Hurricane Katrina. The coming week will be highlighted by growth, in the form of inflation and GDP numbers, in both the US and Europe. Trade data, from China and Europe, will is also likely to impact demand for commodity currencies. With the final New Zealand election count released in the weekend resulting in the Labour/Greens bloc gaining two seats at the expense of National, NZ First remains the king-maker, with major blocs National/Act (57 seats), on the centre right, and Labour/Green (54 seats), on the centre left, both shy of the 61 seat majority required to govern alone. NZ First leader Peters is expected to give a decision as to who he will side with by Thursday. Consequently election uncertainty persists hanging over the NZD but to some extent given the current lower New Zealand dollar level is already priced in by the market. North Korean events are still on the back burner as the week begins, which saw some retreat of the risk-averse sentiment last week, however the situation remains very fragile continuing to overhang markets, with any intensification having potential to ramp-up volatility substantially.  

After hitting a 3 month low last Friday at 0.7731 against the USD on the back of the dovish RBA monetary policy statement and mixed economic data, the AUD/USD opens the week flat at 0.7752, only trading around a 20 pip range overnight.  Today, business confidence and Thursday, consumer confidence, will provide the balance of economic data releases for the week with a focus on consumer confidence to help guide clarification on economic sentiments. A stronger reading could help AUD regain some of the lost ground as AUD/USD is trading near 2-month lows as the market woke up to the prospects of Fed hikes continuing unabated in December. A further slip of consumer confidence would align with the recent trend of weaker 'hard' data on economic activity, which could keep Australian dollar struggling. The strong positive correlation to Iron ore also looks to be a liability to the Aussie as the Chinese winter curbs are expected to provide a headwind to any bounces in the base metal.  The AUD/USD is now around 0.7055 after making an overnight low at 0.7746 and then rebounding modestly. The pair remains moving in a small range, between 0.7745 and 0.7765, but downside is favoured with a break of 0.7730 support targeting 0.7700.

New Zealand
The New Zealand dollar opens the week with a heavy tone, as ongoing USD strength and the continuing uncertainty of government coalition negotiations remain the main NZD drivers.
The overall feeling that the NZ economy has come off the boil a little appears to be gaining some traction as economic data reinforce a softening picture, today's electronic credit card sales being a case-in-point, below expectations at 2.9% in September down from 4.4% in August. An election result should be known on Thursday, according to NZ First leader Peters and we expect the NZD to hold around current levels ahead of this announcement. With the NZD/.USD now around 0.7062 a break of immediate support at 0.7050 would target 0.7000 with initial upside resistance at 0.7100. Although an upside move is not likely before Thursday’s election result is known. The downside is favoured.

United States
U.S. stocks retreated in light holiday trading, while the dollar held in a tight range as investors assessed the latest political developments in Washington before the earnings reporting season kicks-off. With rising expectations of a rate hike in December from the Federal Reserve, particularity after Friday’s NFP, along with the potential that the Trump tax reform proposal could pass the legislative process over the next few months, the USD remains well supported. With manufacturing and service sector activity accelerating and wage growth rising, we expect the dollar to extend its gains over the coming week. The FOMC minutes scheduled for release on Wednesday should have a hawkish tone and with gas prices rising and wage growth increasing, economists are also looking for a sharp recovery in retail sales that should be supportive of the US dollar. Later in the week will see retail sales and inflation (CPI) data, also expected to be USD supportive. Currently the EUR/USD is around 1.1742 with a break of the 1.1820/30 level required for further EUR gains. A more likely scenario is a test of the 1.1730 support level which if breached would see an extension to the 1.1695 level.

United Kingdom
After a shocker of a week where the GBP was down over 2% against the USD, the UK pound has managed to regain the 1.3100 critical support level and opens the week at 1.3150. The UK units recovery from its test towards 1.3000 before the weekend, was aided by a report suggesting the UK Prime Minister May is considering a cabinet reshuffle following the EU Summit on October 19-20. The over-riding two themes persist, that of Brexit and political leadership. Despite the 30 Tory MPs that are said to seek a leadership challenge, there seems to be a general recognition that ousting PM May could have disastrous consequences. In the first instance, it would deal a setback to Brexit negotiations. In the second, it would open the door to a Labour government, which according to recent surveys, enjoys greater popular support than the Conservatives. The fifth round of Brexit talks starts this week, with fading hopes that there will be “sufficient progress” in separation issues in time for the EU leaders’ meeting later this month. As such, the next stage of negotiations on the future relationship seems unlikely to start until December at the earliest. Domestic political uncertainties have raised concerns about the outcome of complex and time-limited Brexit negotiations. Data releases have not been GBP friendly, with household  spending falling by 0.3% annually in September, marking the fourth decline in the past five months as consumers continue to show signs of 'belt tightening' amid financial uncertainty. Also tonight there is a report out by the UK Office for Budget Responsibility. It is expected to show new research that shows how it over-estimated productivity growth for the past seven years. This latest rally could see the GBP/USD back over 1.3240, overnight high has been 1.3182, but given the Brexit/political problems we view this as likely a correction and look for another test of the 1.3100 level and extension towards 1.3000.

The EUR has opened marginally firmer against the USD, receiving a boost overnight, as protests in Spain against Catalonia’s bid for independence abated and German industrial output and investor confidence data releases came in ahead of expectations.  Reversing a 0.1% fall in July German industrial output grew 2.6% m/m in September, well ahead of the predicted 0.9% increase, while investor confidence in October strengthened to a 10-year high with the Sentix index unexpectedly rising to 29.7 up from 28.2 in September. Economists had expected the index to pull back to 28.0. The Catalonian issue has potential to be a “slow burner” for the EUR, with Spanish courts still trying to block the independence move and suspended an important meeting of Catalonia's regional parliament which was to be held on Monday. This would have been the Catalan President's first opportunity to formalize their declaration of independence under a referendum law that the Spanish Constitutional Courts have ruled as illegal. This back and forth will continue for some time and while the outcome will have a significant near and possibly long term impact on the EUR, for the time being investors have moved on. The next big focus will be the European Central Bank's monetary policy announcement after the ECB meeting at the end of the month where the ECB is widely expected to recalibrate policy. Later this week there are several speeches from ECB officials, including ECB head Draghi on Thursday,  which are likely to mention  previous concerns around the volatility and speed of the EUR rise and comments on the continued need for stimulus. Currently EUR/USD is at 1.1745, a break of the 1.1820/30 level required for further EUR gains. More likely scenario is a test of the 1.1730 support level which if breached would see an extension to the 1.1695 level.

The JPY has started the week around the 112.80 level against the USD, with the USD/JPY strengthening after comments from BoJ head Kuroda saying that monetary expansion will continue until they get inflation above their 2% target. His comments included;
-Japan's economy expanding moderately.
 -Bank of Japan will maintain QQE with yield curve control for as long as needed to achieve 2% inflation in stable manner.
-BOJ will adjust monetary policy as needed to maintain the economy's momentum to achieve its price target.
-Will continue expanding monetary base until consumer inflation stably exceeds 2%.
Given this stance, buying the USD on dips looks to be the preferred trade with the current USD/JPY range 112.00-113.00 over the next few days. A break of 113.00 should see an extension to the 113.45 area a breach of which would target 113.80 then beyond to 114.40...any move to risk-off would test support at 112.00.

The Canadian dollar remains resilient and the USD/CAD was unable to break through the 1.2600 level on Friday and is now back at 1.2540. Although net job growth in Sept was slightly less than anticipated (10K vs. 12K) and the participation rate fell slightly, full time jobs rose at its strongest pace on record. Canada has now experienced its 10th straight month of employment gains and its fastest pace of wage gains in 17 months. It is too early to say if these numbers will change the Bank of Canada’s mind on another rate hike especially after the larger trade deficit and decline in oil prices. USD/CAD direction is still uncertain, given USD strength another test of 1.2600 is possible over the next few days with support at 1.2500 likely to hold.

Major Announcements
•    UK Serviced PMI 53.6 vs 53.2 expected
•    US ISM Non-Manufacturing PMI 59.8 vs 55.5 expected
•    Australian Retail Sales -0.6% vs 0.3% expected
•    Australian Trade Balance 0.99b vs 0.88b expected
•    Canadian Trade Balance -3.4b vs -2.6b expected
•    Canadian Employment Change 10.0k vs 13.9k expected
•    Canadian Unemployment Rate 6.2% vs 6.3% expected
•    US Non-Farm Payrolls -33k vs 82k expected
•    US Unemployment Rate 4.2% vs 4.4% expected
•    US Average Hourly Earnings 0.5% vs 0.3% expected