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FX Update: The new Trump administration continues to draw focus, but AU and NZ data looming

Written by Howard Wilcox on January 25th, 2017.      0 comments

Main event over the last few days has been the inauguration of President Trump and the implementation of his policies and how they will begin to affect financial markets. Already he has signed an executive order for the US to back out of the TPP trade deal as well as announcing over the weekend that he is seeking to renegotiate the North American Free Trade Agreement. Investors are now looking for details on previous promises to boost growth and Government spending. He has also commented that tax cuts are coming and that regulation will be cut by 75%. With data showing that the US is almost at full employment, Trumps expansionist policies are likely to lead to a jump in growth with a corresponding boost to inflation, which may bring forward rate increases already signalled by the Federal Reserve. This would elevate the USD amongst its major trading partners Japan and the Eurozone, as those economies still remain stagnant and the differential between US GDP starts to increase.

The Australian market has remained resilient with equities remaining firm, underpinned by support in mining stocks as commodity prices stay buoyant. Data last week showed that consumer spending remained above average in December with spending for the holiday period exceeding the 10 average for the month. As inflation and interest rates stay at record lows, leading to continued growth in house prices and better job prospects (after a poor start early in 2016) consumers retain the ‘feel-good” factor leading to the recovery in spending patterns.

New Zealand
We expect this week's Q4 CPI data on Thursday to show that inflation is starting to tick up towards the bottom of the RBNZ’s target at around 1.1-1.2%. Continuing house price increases are joined by higher petrol prices and a tightening labour market, helping to begin the trend of a gradual increase in underlying inflation over the coming months. Although the RBNZ is unlikely to pull the trigger on rate rises anytime soon, there is now no doubt that the next move is up and with the global inflation cycle turning, if the economy remains on track our pick is that a June increase of 0.25% may be the kick-off mark. Today’s announcement of an increase in the minimum wage by 50cents an hour to $15.75 from 1st April also provides another pointer. The New Zealand dollar remains well supported although as always susceptible to offshore swings, our relative political stability in an uncertain world and continued solid economic performance should ensure that any sell-offs in the New Zealand dollar will be shallow and short.

United States
The US remains in the throes of the Presidential handover, although the market is now starting to return to more fundamental issues such as corporate earnings results and data releases. Any large infrastructure sped-up will be positive for the US economy although as mentioned earlier with employment running close to capacity any major boost will be expansionary and likely to boost inflation and bring forward interest rate moves by the Fed. It is interesting to note that as the new US Trump administration ends its involvement with the TPP, China’s communist government is ramping up their efforts to engage with the rest of the world and advocating the advantages of free trade.

United Kingdom
Tonight will see the UK Supreme Court decision on the UK government’s appeal of the High Court decision that recognised the right of the UK Parliament to have a vote on triggering the Brexit Article 50. With Parliament not keen on a “hard” Brexit this decision was seen as a major hurdle, however UK PM May, with her speech last week reframing the exit issue and providing more details on Brexit has to some extent side-lined this ruling. Interestingly President Trump has been supportive of forging a trade deal with the UK, but this cannot happen while the UK remains within the EU for the next 2 years. The UK economic data continues to be positive and remains supportive of the GBP, given the still anaemic recovery in other European countries.

The EUR has held firm against a weaker USD as the Bundesbank’s latest report commented that German inflation could reach 2% in January. European stocks were lower as a report by European bank UBS recommended buying the Euro as it believes it is undervalued against the USD because of the more rapid euro-inflation growth. It also said that investors should begin to adjust to a less dovish ECB policy tone over the next 6 months and appreciate that the Euro remains extensively undervalued on a longer-term purchasing power parity basis. However to counter this view it should be remembered that there are upcoming elections in several EU member states that could present an unexpected outcome thus increasing political risk for the region and its currency unit.

Little news out for Japan, with today’s PMI data little changed from that expected at 52.3 coming in at 52.8. Japanese data has been more encouraging of late with the leading index upwardly revised in November from 102.70 to 102.8, up from a final October reading of 100.8 confirming a 15 month high. Japanese equity markets were softer for a second day as the JPY rallied to the highest level against the USD since November. Japanese trade balance is the only major release for later today, expected to show 270 bio up from the previous 153 bio figure.

Canadian data releases were light, but Canadian wholesale trade sales were lower than expected showing +0.2% against a forecasted +0.5%...the motor vehicle and parts subsector posted the largest decline, while the miscellaneous subsector , including wholesalers of agricultural supplies, chemicals and allied products, paper, paper products and plastic products showed the largest increase.

Major Announcements

    UK Average Earnings 2.8% vs 2.6% expected
    UK Claimant Count -10.1k vs +4.6k expected
    US Inflation 0.3% as expected
    Bank of Canada leave rates unchanged
    Australia Employment Change 13.5k vs 10.2k expected
    Australian Unemployment Rate 5.8% vs 5.7%
    Canadian Manufacturing Sales 1.5% vs 0.2% expected
    ECB leave rates unchanged
    Chinese GDP 6.8% vs 6.7% expected
    UK Retail Sales -1.9% vs -0.1% expected
    Canadian Inflation -0.2% vs 0.0% expect