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FX Update: The USD loses ground post Fed hike

Written by Howard Wilcox on March 21st, 2017.      0 comments

The USD tone has moderated over the last week as the US Fed failed to signal any acceleration of the pace of rate increases. The prospect of other central banks increasing rates has also added to the softer USD. The new US Administration still appears to be struggling for traction as the replacement bill for Obamacare is attracting widespread criticism and any “phenomenal” deal to substantially cut taxes looks some way off. In the UK the Brexit story rumbles on but with the Bill passed to trigger Article 50 now given Royal consent , PM May has indicated that this will be triggered next week, on the 29th of March. For the moment the 2nd Scottish referendum sideshow looks to now be on the backburner. Data out of the UK has been mixed, but better than expected, although we expect the GBP to be sold lower after the official Brexit announcement is made next week. Some interesting comments overnight on the subject from EU commission president Juncker, that no-one else will want to leave the EU after they see how harshly Britain is punished. His comments have largely been derided by UK officials.  The Brexit negotiations will no doubt be torturous, with the Brussels negotiators preparing to present the UK with a “divorce” bill of up to GBP50 bio to settle what they regard as the UK’s share of liabilities. However the UK government is expected to take a tough line after receiving legal advice that it has no obligation to pay any such sum. It will be an interesting 2 year period!  The Eurozone continues to see a slow improvement in economic data and inflation is now lifting towards the 2% ECB target level. The EUR has enjoyed a bounce back over the last few days as comments around the possible increase of the deposit rate as initial step towards a EUR rate hike start to fuel speculation that it may come relatively soon. However the biggest Eurozone risk remains political as attention shifts from the Dutch elections to France where the right wing party of Marine Le Pen continues to gain in the polls. New Zealand and Australia continue to be buffeted by the offshore breeze. The Australian dollar has rallied over the last few days and is now back above the 0.7700 level against the USD supported by the stronger commodity prices. Last week's jobs figures were an unpleasant surprise and the RBA will be on watch to ascertain if a trend is developing. The New Zealand dollar after being solidly supported by good fundamentals dropped last week on weaker Q4 GDP data which caught the market a little by surprise. This week will see the RBNZ OCR review on Thursday but expect rates to stay on hold at 1.75% with a neutral bias maintained  as although near term inflation is a little stronger, activity growth has fallen short of the RBNZ’s previous forecasts. There is also another GlobalDairy auction on Wednesday, after the last price drop, this week is expected to see more price stability.

The Australian dollar opens the week back over the 0.7700 level against the USD around 0.7720, buoyed by the softer USD tone and continued supportive commodity prices. There is little meaningful economic data for Australia this week, with only the release of the RBA March policy meeting minutes later today as the major event of the week. Close attention will be paid to any comments the RBA makes on their view around the housing and jobs market. The AUD has had real trouble maintaining gains above the 0.7720 level for nearly 18 months and given the paucity of supportive data this week a move back into the 0.7680/90 level looks possible, although as long as commodity price action is positive, AUD downside will be limited. 0.7660 is support which if broken would expose a move to 0.7600 a level that should see buying interest re-emerge. For the Australian dollar to hold a sustained up move there needs to be continued strength in base metal prices and no more surprises on the jobs data front. The Australian dollar is now trading at 0.7730 after a spike overnight to the 0.7748 level, breaking previous 0.7740 February highs, consolidation at current levels build a good base to push for a test of 0.7780 last seen in early November 2016.

New Zealand
The New Zealand dollar starts the week on a more positive note rising back above the 0.7000 mark to 0.7058. It has spiked to 0.7072 overnight but was unable to hold that level. Tomorrow there will be another GlobalDairy auction where prices are expected to again be down with future pricing in a fall of 5%. Migration figures released today again show the strong influx continues, with annual net migration at a record 71,333 in the 12 months ended February, up from 67,391 for the same period last year. The New Zealand dollar remains remarkably resistant to downside pressure and has bounced back well after last week’s tepid Q4 GDP result. A push over 0.7100 now looks likely over the next few days as the USD rally abates look for a test of resistance at 0.7130 by weeks end.

United States
Markets generally muted overnight with the both US equity markets and the USD lower, the S&P 500 was down for the 3rd day in a row, as the more dovish message delivered by the Fed continues to be evaluated. There has been little talk over the last week of the tax cut package and this has also contributed to the softer equity tone as it becomes apparent that any stimulus from this will be many months away before it flows into the economy at large. The Trump administration is largely concentrating on passing legislation for the repealing/replacement of Obamacare, with the tax-cut issues seemingly deferred.  The USD looks to be in corrective mode, but we expect this to be relatively short term as even if there are only two more Fed rate hikes, these are certainly likely to be more than other major central banks this year and if the economy continues to perform and jobs growth continues, the possibility for a 3rd hike will remain alive. The USD/JPY continues to remain under pressure and even with Japan closed yesterday, the USD after sinking  below the 113.00 mark on Friday, is now down at 112.52 after making a multi-week low of 112.45. The risk is to the downside next support at 112.10; upside at 113.05 looks far away. The USD/EUR  is currently around 1.0735 with risk remaining on the upside as talk of ECB hikes circulates,  a break of 1.0782 would then target major resistance at 1.0820 look a move to the 1.0750/75 level over the next day or so.

United Kingdom
With the Brexit trigger to be pulled by the UK government on 29th March, this has given some certainty to the market. However with German and French elections looming this may delay the start of meaningful negotiations and give rise to more weakness in the GBP. How negotiations will progress is difficult to predict, we know the UK will seek immigration controls so a “hard” Brexit is likely and the EU is pressing for a repayment of a GBP50 bio “bill”, the UK government refutes any payment obligations. However like any deal there will be give and take and it is likely that the UK will get a favourable trade deal on exit, but will have to pay a sum in return. We are still of the view that potential for GBP weakness in the short term remains.

Political risk is back to the fore again, as French polls show that Marine le Pen’s far right party is gaining ground. There is the first televised presidential debate tonight and Le Pen has commented that it is “absolutely urgent “ to defend  France’s sovereignty and that she does not want to be a Vice Chancellor for Madame Merkel (ouch..!). After her visit to the US and clashing with US President Trump on economic policy at their first White House meeting, Merkel has called for swift conclusion of a trade accord between Japan and the European Union. That followed a renewed German-Chinese commitment to open markets on the eve of her trip to Washington and Merkel’s backing for a free-trade accord between the EU and Mercosur, the South American economic bloc. The EUR has strengthened against the USD as the dollar rally lost momentum late last week and talk of potential ECB rate hikes surfaced. After initially trading higher against the JPY up to a month high at 122.88 it has slipped back to the 120.75 level. Data recently released shows wage growth increasing for the region, but a 1.6% increase for 2016 it remains disappointing and far removed from the 3% of the 2000’s. We remain of the view that although economic data is looking better for the Eurozone bloc, political risk will hold sway over the short term

After what are increasingly looking like unsatisfactory visits to the White House, Japanese Prime Minister Shinzo Abe and German Chancellor Angela Merkel have called for a concerted effort to defend free trade, expanding the list of economic powers joining together to counter the U.S. shift toward protectionism. Talks on an EU-Japan accord began in 2013 with the goal of lowering barriers to trade and investment on both sides. Japan and the EU jointly account for more than a third of global economic output. However given the time it has taken for the Canadian/EU trade agreement to conclude it still could take years to be settled.  The JPY has made good progress since last week’s Fed rate hike with the USD/JPY rate moving from knocking on the door of 115.00 at 114.87 dropping to its current level at 112.50. With Japan on holiday yesterday there have been no economic releases and trading appears to be largely driven by sentiment, the downside is favoured with a break below 112.50 targeting 112.00 with a possible extension to the 111.60 low seen several times over the last 12 months.

The Canadian budget is due tomorrow with Canadian Finance minister Morneau signalling that he wants to reduce debt levels in relation to the size of the economy, which would show fiscal discipline. Canada’s low growth, combined with new spending on infrastructure has already forced the abandonment of other fiscal pledges. Several other challenges remain going forward; exports have been disappointing and business investment remains low over concern that the US may impose border taxes. Continued low borrowing costs have also fuelled a housing bubble in some of Canada’s metropolitan centres. After hitting a high of 1.3496 last week the USD/CAD then reversed directions and dropped to a low of 1.3275. It is currently trading at 1.3325 and we expect range trading at current levels ahead of the budget tomorrow.

Major Announcements
•    UK Average Earnings Index 2.2% vs 2.4% expected
•    UK Claimant Count -11.3k vs 3.2k expected
•    US Inflation 0.1% vs 0.0% expected
•    US Retail Sales 0.1% vs 0.2% expected
•    FOMC hikes interest rates 0.25% as expected
•    NZ GDP 0.4% vs 0.7% expected
•    Australian Employment Change -6.4K vs 16.3k expected
•    Australian Unemployment rate 5.9% vs 5.7% expected
•    Bank of Japan leaves rates unchanged
•    Bank of England leaves rates unchanged
•    US Consumer Sentiment 97.6 vs 97.1 expected