The New Zealand dollar fell sharply yesterday after the quarterly CPI figure missed expectations. Economists had forecast a 0.5% quarterly increase in the index, however the data showed a weaker 0.3% rise. The annual change was also weak at 1%.
The Kiwi dollar declined by over one cent after the release, touching as low as 0.7795 against the US Dollar. This morning’s trade Balance figure also showed a deterioration, however that was on the back of an increase in both Imports and Exports; the trade balance was -1.35 Billion against an expected -0.620 Billion.
PMI’s released yesterday were broadly positive, with Chinese HSBC Flash Manufacturing PMI announced at 50.4 on expectations of 50.2 – the Australian Dollar rose half a cent in the following hours, but later erased all gains. European PMI’s were likewise quite strong with German Manufacturing showing a reading of 51.8 on a forecast of 49.6; this was also reflected in the Euro wide figure which showed expansion at 50.7 against expectations of 50.0. The Euro rallied half a cent on the news.
Still to come tonight will be the release of UK Preliminary GDP (11:30 server time). The figure is expected to show quarterly growth of 0.7%. The Pound sits at 1.6040 after recovering from losses yesterday due to the release of dovish minutes of the MPC meeting.
The Australian dollar jumped higher on the news that Chinese growth had fallen less than expected yesterday; GDP growth came in at 7.3% against a forecast of 7.2%, though this was lower than last quarter’s 7.5% and was the weakest growth number since the GFC. Industrial production bounced back after the previous 6.9%, reading at 8.0% which was seen as a positive for Australian commodity exporters. The Australian dollar jumped three quarters of a cent after the announcement, but later retraced this move ahead of today’s CPI release.
The CPI data showed a much expected moderation in the inflation rate, due to the removal of the carbon tax – which put downward pressure on utilities and energy prices. The fall in the Australian dollar also came a little two late in the quarter to provide an impact on imported goods. Quarterly CPI rose at 0.5%, while the year on year figure was down to 2.3% after 3% last time. The RBA’s chosen measure of inflation – the Trimmed Mean – fell slightly below expectations at 3.5%; this is right in the middle of the RBA’s 2-3% target band and would not create any drastic calls for a rate movement. The majority of the increase came from food, alcohol & tobacco as well as housing.
For those wanting some direction on the future path of Australian interest rates it will be a long 3 months until the next data point.
Tonight focus will shift to the UK and America, firstly with the BoE/MPC to release the committee’s votes on the interest rate (11:30 server time). After the recent fall in oil prices and the decline in inflation expectations, calls for interest rate rises have been played down; committee members are expected to remain unchanged from the previous release where two members (McCafferty and Weale) voted for rate increases and the remainder for no change.
The US will follow Australia in releasing its monthly CPI figures today (15:30 server time) – both the Core CPI and CPI figure are expected to rise from last month, at 0.2% and 0% respectively, despite the fall in commodity prices and the rise of the US Dollar. Just after this (17:00 server time), the Bank of Canada will decide its key interest rate; as has been the case for some time the bank is not expected to make a move on rates while Inflation remains benign at 2.
Focus will shift back to Asia on Thursday morning when RBA Governor Glenn Stevens will be speaking at the AGM for APCA (00:00 server time). Stevens is unlikely to announce anything drastic given today’s inflation rate, however as central bankers are always inclined to do – be on the lookout for jawboning of the Australian dollar and any discussion of Property prices and the introduction of Macro Prudential policy. New Zealand CPI follows shortly after (00:45 server time) – economists expect a reading of 0.5% growth, quarter on quarter. Asian trading should wrap up with the release of HSBC Flash Manufacturing PMI (04:45 server time) which is expected to be unchanged at 50.2.
It’s looking like an interesting week for Asian and Australasian economies; Australian and New Zealand Inflation data will be due for the previous quarter as well as Chinese GDP growth. All are likely to be market movers as well as potential new information from the RBA on the path of interest rates. Australian dollar volatility should be expected through the week.
Tuesday will start with two crucial points of information – the RBA Monetary Policy Meeting Minutes (03:30 server time), followed shortly by Chinese GDP (05:00 server time). The RBA has continually signalled a period of interest rate stability while it tries to give some leeway to a hot property market in order to offset the end the mining capital expenditure boom that peaked in 2013. If the RBA board begins to lean one way convincingly it is likely to show up in the minutes first, followed by a change in the wording of the policy statement at subsequent meetings. By the time a rate decision comes there should have been ample clues dropped through both of these channels.
Chinese GDP is also likely to be watched closely; it has been 3 months since the last figure and global fears have accelerated as the US Federal Reserve has been removing its stimulus measures. During this time the Chinese housing market has been in a broad decline, and Iron Ore prices have been plummeting with other commodities such as oil. Such weakness indicates both an oversupply from Australia’s mining boom, as well as a general weakness in demand from the world’s largest Iron Ore importer. Such weakness it expected to be reflected by a slowdown in Chinese growth; economists now expect the manufacturing powerhouse is now growing at 7.2%. Any deviation towards the psychological panic level of 7% is likely to bring calls for stimulus measures – something the Chinese government wishes to avoid if possible in order to re-balance its economy away from unsustainable sources of growth.
The first half of the week should wrap up with the Australian CPI figure on Wednesday (03:30 server time) – another release which is likely to be in strong focus. The quarterly inflation figure is forecast to be 0.4% in Q3, with inflation due to the rapidly depreciating Australian dollar not expected to show up until the next quarter as it occurred quite late in Q3. Economists are also expecting the removal of the Carbon Tax to take out some of the inflationary sting by lowering the cost of power and utilities. Traders should be on alert for the figure, as it is only released every three months it can have a strong impact on the AUD.
It has been a fairly wild week in markets, with volatility expanding from FX to Equities and Fixed Income. The much-tracked SP500 index dropped sharply and US long term treasuries spiked higher on what appeared to be capitulating short positions. This unwinding of positions also took place across most USD currency pairs, causing some very dramatic moves on Wednesday.
US Retail Sales and PPI data showed weakness in the US economy, with Core and Non-Core Retail Sales coming in at -0.2% and -0.3% against expectations of 0.2% and -0.1% respectively. The PPI figure also fell in to negative territory, at -0.1%.
The figures were bad, however much of the extreme market reaction is likely due to the lop-sided positioning on most assets which are US Dollar denominated. Long positioning on the US dollar was overwhelming, and Wednesday’s figures put a damper on sentiment towards the US economy – putting many trades in to reverse.
The Euro rose two and a half cents against the US dollar after the release, while GBP, AUD and NZD all rallied between one and one and a half cents. Interest rate and bond markets remain in disbelief over the path of interest rates for the US economy, with the market now pushing back US rate rises until around the end of 2015.
There has also been some suggestion that the Federal Reserve may in fact need to continue with its asset purchase program at the end of this month; while this is currently a rumour, it would certainly not be against the Federal Reserve’s dual mandate of tending to Employment and Inflation. Inflation expectations are currently plummeting, and with the price of Brent and WTI plummeting in tandem, a strong US dollar is putting pressure on FOMC members to reconsider their expected policy tightening. This month’s volatility makes the October Fed meeting one to watch out for.
The US dollar gained again against most major currencies after a slew of economic data released overnight showed worse than expected figures. The bad data started in the UK, with CPI, PPI and HPI all coming out worse than expected; 1.2% vs. 1.4% for CPI; -0.6% vs. -0.4% for PPI; and 11.7% vs. 12.3% for HPI. The figures indicate that talk of a rate hike in the UK may be premature – a realisation that seems to be spreading across developed countries in the wake of falling inflation numbers and failure for economic growth to take off to any substantial degree.
The Pound fell 130 pips after the announcement and reached as low as 1.58828. With the inflation numbers out of the way, focus will move on to tonight’s employment numbers. As a reminder, economists are expecting a fairly strong report, with Earnings forecast to grow 0.7% and the Claimant Count to decrease by around 32,400 – in line with trend.
The Euro also fell, with German ZEW Sentiment revealing a deterioration in conditions in the eyes of analysts; the index fell from 6.9 to -3.6, well below expectations of 0.2 and edging in to pessimism territory – the Euro dropped half a cent after the release, helped lower by US Dollar strength. Mario Draghi is set to speak twice today at a Statistics conference, followed by ‘European Cultural Days’ – both organised by the ECB. Neither speech is expected to be market moving, however it may be helpful to be aware of both.
In the US, Retail Sales and PPI numbers are due tonight; the Core Retail Sales figure is expected to remain positive though slightly lower at 0.2%, while the Non-Core figure is forecast to dip in to negative territory at -0.1%. PPI is expected to be barely changed at 0.1% month on month. Due out within the hour is Chinese CPI, with economists expecting a weak read of 1.7%
Despite little news and bank holidays across Japan and North America markets have kicked off the week in a volatile manner. Broad US dollar weakness saw Gold rally over 100 pips from the open, while popular trades of being short EUR/USD and long USD/JPY have continued to reverse, both moving over half a cent against their respective trends. It looks like volatility is back in a big way in FX, as the central banks across major economies have started to diverge on their monetary policy paths – causing US officials to push back against the surging demand for US dollars.
The AUD was little moved by Chinese trade data today, after rallying nearly half a cent up until the announcement. The Chinese figures showed a weaker headline number at 31 Billion against expectations of 41.2 Billion, while the import and export numbers showed that both had grown more than economists expected in September with the import/export numbers growing by 15.3% and 7% respectively. The AUD will remain in focus early in the week with NAB business confidence due tomorrow and Chinese CPI due Wednesday – analysts expect that inflation will continue to fall to new lows of 1.7% this week.
Also likely to be a focal point up until mid-week will be the Pound, as tomorrow sees the release of UK monthly CPI – expected at a slightly lower 1.4% – as well as employment numbers on Wednesday. For the employment data economists expect a fairly strong showing, with Earnings forecast to grow 0.7% and the Claimant Count to decrease by around 32,400 – in line with trend.
US Retail Sales are due on Wednesday; the Core figure is expected to remain positive though slightly lower at 0.2%, while the Non-Core figure is forecast to dip in to negative territory at -0.1%. Traders are likely waiting for the next FOMC statement to see just how hawkish the members are for direction on the US Dollar.
Wednesday’s FOMC minutes took the market by surprise, in that the recent appreciation in the US dollar caused some concern from the FOMC members:
“During participants’ discussion of prospects for economic activity abroad, they commented on a number of uncertainties and risks attending the outlook. Over the inter-meeting period, the foreign exchange value of the dollar had appreciated, particularly against the euro, the yen, and the pound sterling. Some participants expressed concern that the persistent shortfall of economic growth and inflation in the euro area could lead to a further appreciation of the dollar and have adverse effects on the U.S. external sector. Several participants added that slower economic growth in China or Japan or unanticipated events in the Middle East or Ukraine might pose a similar risk. At the same time, a couple of participants pointed out that the appreciation of the dollar might also tend to slow the gradual increase in inflation toward the FOMC’s 2 percent goal.”
This new paragraph threw cold water over the US dollar’s recent unrelenting strength, causing other currencies to rally strongly such as the Euro – which gained one and a third cents against the US dollar in the hours afterwards. Such concerns were likely to appear eventually, given the pace and acceleration of the move downwards in EUR/USD. Such a rapid appreciation has the potential to lower the cost of imported goods such as oil and put downward pressure on inflation; for a central bank that is yet to reach its 2% inflation target this could be seen as a dangerous impediment. The market has been in disbelief over the FOMC’s interest rate forecasts, with the bond market pricing a lower federal funds rate than expected by the FOMC in their forecasts for some time.
Australian employment data surprised to the downside yesterday – even after the seasonal adjustments were removed – with the number of employed people falling 29,700 against expectations of a 15,000-20,000 gain. If the seasonal adjustments were kept, this would have resulted in an even worse fall. The unemployment rate held steady at 6.10%. The data point was taken with a grain of salt; the Australian dollar fell initially as would normally be expected by a worse than expected data point, however the currency found many bidders soon afterwards and found itself a full cent higher before the end of the day. After the rally, the AUD fell back towards earlier levels and sits around the 0.87700 level.
The rest of the trading day is light on for high impact news, however Canadian employment data should provide some trading opportunities tonight, with economists expecting the addition of 18,700 employed people and the Unemployment Rate to hold firm at 7.0%
The RBA left rates unchanged yesterday as expected by a survey of economists; the RBA kept interest rates at 2.50% and did not substantially change the concurrently released statement dramatically. The bank kept the key phrase ‘a period of interest rate stability’ in the statement but discussed the level of the AUD in the wake of its recent decline:
“The exchange rate has declined recently, in large part reflecting the strengthening US dollar, but remains high by historical standards, particularly given the further declines in key commodity prices in recent months. It is offering less assistance than would normally be expected in achieving balanced growth in the economy.
Looking ahead, continued accommodative monetary policy should provide support to demand and help growth to strengthen over time. Inflation is expected to be consistent with the 2–3 per cent target over the next two years.
In the Board’s judgement, monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target. On present indications, the most prudent course is likely to be a period of stability in interest rates.”
The Australian dollar did not move much on the initial announcement, however the currency began to rally in line with broad US dollar weakness following Japanese Prime Minister Abe’s announcement that the weaker Yen was hurting small companies and households – rallying over a cent to reach 0.8833 against the US Dollar.
Abe’s comments fuelled a further sell-off in the USD/JPY pair yesterday; the pair fell almost one and a half cents after the comments – part of a broader sell off since last week’s strong Non-Farm Payroll number. The Bank of Japan voted unanimously to keep monetary policy unchanged in a statement released after Abe’s comments.
Despite this sell-off in the US Dollar across various pairs, the currency has still appreciated quite strongly this year – likely putting downward pressure on imported inflation. Some members of the FOMC have been relatively hawkish recently, with a split between those who would like to see interest rates rise as soon as possible, and those who would rather err on the side of caution and wait for inflation to show up before acting on short term interest rates. This battle is what analysts are looking for in tonight’s FOMC Minutes including whether there is substantial debate about removing the phrase “The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends” as a conditionality on rate increases.
Also of interest later in the week will be Australian employment data. The ABS announced today that following criticism on two volatile data points in its employment data series that it will be removing the seasonal adjustment for the employment figure from July to September; the adjustment was found to be increasing volatility. Two of these removals involve adjustments to previous announcements and have already taken place – from the ABS:
“As there is little evidence of seasonality in the July, August and September months for 2014, the ABS has decided that for these months the seasonal factors will be set to one (reflecting no seasonality). This means the seasonally adjusted estimates (other than for the aggregate monthly hours worked series) for these months will be the same as the original series and this will result in revisions to the previously published July and August seasonally adjusted estimates.”
As a result the previous figures were adjusted as follows -11,900 is the new July figure instead of -4,100 while August was adjusted to +32,100 instead of the previous record breaking +121,000. For traders using the previous estimates of the employment figure for tomorrow it may pay to note that these estimates are likely to be adjusted to reflect the lack of seasonal adjustment.
After a quiet Monday, markets should find some interest in Australian and US central banks this week. Tomorrow the RBA will decide on the Australian overnight cash rate; analysts are not expecting any change this month as the RBA has signalled that any change in interest rates would be preceded by a change in the wording of the bank’s statement. Because of this, the statement is in focus as much as the rate decision for clues as to which way the RBA will move next.
With the AUD falling over 750 pips since August, the RBA is likely to be less concerned about the exchange rate and more focused on controlling housing prices. While macro prudential controls have been revealed as one potential measure, it is quite possible that interest rates rise in tandem to assist; this is reflected in the Shadow RBA moving towards rate rises this week. With the AUD falling substantially already, imported inflation is also likely to begin to show up in the coming months, giving the RBA a further degree of room to manoeuvre. Traders will be watching the statement for any signs of this intention, and Australian employment data will follow on Thursday.
On Wednesday the FOMC Meeting Minutes will be released. While nothing dramatic is expected to be released, this is the final minutes release before QE is scheduled to end; it will be interesting to read for the battle between dovish and hawkish members for a signal as to when the Fed will change the wording of its statement. There are few more important words at the moment than ‘considerable time’ and economists are waiting for the removal of this sentence to indicate that an interest rate rise is coming in the near future.
The ECB disappointed most market participants last night, causing some increased volatility in Forex markets without creating much strong direction; stock markets reacted negatively with an emphasis on peripheral Europe, with most markets down around 1-3%. Draghi did not disappoint in the size of the ABS program, but rather in skirting around actually revealing any firm figures on the stimulus measures. During the Q & A session Draghi chose to avoid answering direct questions about the amount the ECB would purchase, directing listeners to the press release sent out after the press conference. From the statement:
- Programmes will last at least two years
- Will enhance transmission of monetary policy, support provision of credit to the euro area economy and, as a result, provide further monetary policy accommodation
- Eurosystem collateral framework is guiding principle for eligibility of assets for purchase
- Asset purchases to start in fourth quarter 2014, starting with covered bonds in second-half of October
The announcement fell short of announcing specific details, as well as extending the program to 2 years which indicates the rate of purchases may be slower than expected. However, without firm details the announcement left analysts to pick over the details that were announced to try and gauge the scale, such as what would be included under the ‘simple and transparent’ securities:
“The third point is that we want to be as inclusive as possible. But with prudence, so that we have decided to include countries that have a rating below BBB-, like Greece and Cyprus, applying certain derogations, with two caveats. The first is that there is a series of measures that mitigate risk for the specific purchases that are to happen there, so that the assets bought there would be risk-equivalent to assets bought elsewhere, so for example, size-wise, type-wise. Then there is a second, I would say, caveat or prudence which is basically that the countries ought to have an ongoing programme with the EU. I think I gave you the broad lines of what we have decided really. Then the rest will be clearer in the press communiqué.”
The ECB also chose not to act again on interest rates after last month’s surprise cut, with Draghi signalling several times that they had reached the lower bound for interest rate, but also indicating strongly that the bank would be willing to act with further unconventional policies if it was required. The Euro oscillated within 75 pip band during the announcements, reaching as high as 1.2700.
With the ECB meeting out of the way, focus will fall on tonight’s Non-Farm Payrolls figure due from the US. Economists expect a number of approximately 216,000 – up from last month’s 146,000 – with the Unemployment Rate expected to remain at 6.1%. The US Trade Balance is forecast to come in near to last month’s number at a deficit of 41 Billion. The US dollar has firmed recently on diverging monetary policy and improving data coming out of the US, however popular trades such as long USD/JPY have reversed this week – falling 200 pips.← Older posts