The U.S. Federal Reserve is set to lift interest rates for the first time in over nine years on Thursday. This comes after it has kept interest rates between zero and 0.25% since December 2008. The steady U.S. growth of recent years and a strong labour market will allow the hiking cycle to begin this week, although the real interest will surround the indications given on how quickly the Fed will follow up with additional rate hikes in 2016. The continued rout of the energy markets and recent cracks appearing in the high yield junk bond will give the Fed chair Yellen cause for concern when moving this week. These concerns should likely see her express caution in signalling her approach for further moves as she attempts to reduce the likelihood of inducing further market volatility in the weeks after the announcement.
The AUD eased lower in trade late last week as the market chose to overlook Thursday’s solid Australian employment report in favour of selling on the back of the continued weakness seen in commodity prices and falling international equities. The health of the high yield U.S. junk bond market which has a large exposure to the energy sector weighed on sentiment towards U.S. equities in trade on Friday. The AUD lifted in early trade yesterday after the release of solid Chinese retail sales and industrial production data over the weekend. The gains were initially short lived however, before the strength renewed in trade overnight. This strength came on the back of more generalised USD selling prior to this week’s Fed interest rate decision. Investors generally expect the Fed to deliver a cautious forward statement, given the elevated market concerns around the vulnerabilities of emerging markets and the U.S. energy sector to an overly aggressive U.S. rate tightening path. Immediate focus for the AUD will be this afternoons RBA minutes.
The NZD has rallied well in trade overnight after starting the week on a soft footing. Initially it sunk on the back of further commodity currency selling and weakness in U.S. equities (risk-off selling). Concerns over the health of the high yield junk bond market which has a heavy exposure to the energy sector helped contribute to the weakness seen in U.S. equities on Friday. These concerns amongst others have many fearing the fallout that may result from a Fed rate hike this week. These fears have compounded given the current vulnerability of the energy sector. The USD eased in trade overnight ahead of the Fed decision, investors are expecting the hike to be accompanying by a cautious forward statement given the current volatility seen in international markets. Immediate focus for the NZD will be the overnight GDT dairy auction, and NZ Q3 current account data tomorrow. The FOMC decision and the NZ Q3 GDP release on Thursday will set the tone for trade into the end of the week.
The USD has had a quiet start to the week into the lead up to this Thursday’s key FOMC interest rate meeting. Last week was a relatively quiet one for the USD which saw if drift lower as the week progressed. Data releases on Friday eclipsed the largely soft second tier U.S. releases of earlier in the week. November retail sales rose 0.2%, whilst the important retail control reading (which feeds into GDP) beat market expectations. The University of Michigan consumer sentiment number was broadly in line with expectations, producer price data which beat expectations failed to excite. However, the data took a back seat to headlines out of China over the release of a new currency index which fuelled expectations that the Yuan may weaken as Chinese reserves are re-weighted, this led to buying of EUR’s, GBP and the JPY. Immediate focus for the USD now turns to tonight’s U.S. inflation data release. This comes before the key FOMC interest rate meeting on Thursday, where expectations remain high for the first interest rate hike in nearly a decade. The accompanying statement will be closely monitored especially in light of the crack’s appearing in the U.S. high yield junk bond market and the concerns that exist over the impact that rate hikes may have on emerging market economies and U.S. equities.
It has been a quiet start for the Euro this week in what is likely to be a week which will see the EUR moves dictated by events in the U.S. German inflation data released on Friday met the market’s expectations, whilst the overnight release of European industrial production saw an expansion at double the rate of that expected by the market. The final read of Italian inflation also beat expectations, although all the releases took a back seat to the general USD sentiment. German IFO confidence data on Thursday is the main local event of note for the EUR this week. USD sentiment post the FOMC meeting on Thursday will be the key driver for EUR pricing later in the week, expectations are for a Fed rate hike although interest will also centre on the forward outlook especially given the recent declines seen in the global equity bourses.
The GBP has eased in trade early this week, after posting solid gains into the end of last week. These gains were helped to some extent by speculation on Friday that the new Chinese trade weighted currency index will lead to an increase in Chinese reserves allocated to the GBP. Last week’s BOE meeting was seen to provide little in the way of fresh news to move the market. Dovish comments last night from BOE member Shafik has placed the GBP under pressure in recent hours. Her comments included ones which noted the need for a pick-up in wage growth in order for inflation to recover towards the BOE’s 2% inflation target. This is seen as a necessary requirement before the BOE would be seen to be seriously considering raising rates. It should be a busy week for the GBP this week, starting with the release of inflation data tonight before the latest employment data tomorrow. November U.K. retail sales on Thursday will follow on from the earlier all important U.S. FOMC interest rate meeting.
The JPY has continued to firm in recent trade on the back of safe-haven demand and the solid round of local data releases seen last week. Safe haven JPY demand spiked in trade on Friday on the back of the weakness seen in international equities. The recent heavy declines seen in the commodity space spread to the wider equities market last week, concerns remain high over the fall-out that the sector may have on the wider generalized economies. The Japanese Tankan survey released yesterday showed a general theme of better than expected current conditions and pessimism regarding the outlook. The focus for the remainder of the week will be dominated by the BOJ monetary policy meeting on Friday; yesterday’s Tankan survey contained very little good news for the BOJ’s current low inflation nemesis.
The story for the CAD this week continues to be a familiar one as it struggles under the weight of a depressed oil price which has traded to fresh cyclical lows in trade overnight (WTI lows $US 34.50). News from the International Energy Agency which said that it expected the current glut in oil supply to continue until late 2016 helped contribute to the latest oil price falls. Energy market developments will continue to be the primary driver of the CAD in trade this week. Canadian inflation data on Friday will be of interest but will likely quickly take a back seat to the high CAD$/oil price trading correlation.
Major Announcements last week:
- Japanese Q3 GDP 0.3% q/q vs. 0.0% exp.
- Chinese November Trade balance $54.10B vs. $63.30B exp.
- UK Industrial Production (Oct. 1.7% y/y vs. 1.2% exp.)
- Chinese Inflation (Nov. 1.5% y/y vs. 1.4% exp.)
- NZ cash rate 2.5%, 25 bps cut as expected.
- Australian Employment change (Nov. +71.4k vs. -10k exp.)
- Australian Unemployment rate (Nov. 5.8% vs. 6.0% exp.)
- UK cash rate 0.5%, unchanged as exp.
- US Retail Sales (Nov. 0.2% m/m vs. 0.3% exp.)
- Chinese Retail Sales (Nov. 11.2% y/y vs. 11.1% exp.)