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Forex Market Review – Focus on Asian Data

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.

Forex Market Review – US Rate Path in Question

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.

Forex Market Review – US Dollar Strength Returns

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%

Forex Market Review – Ongoing Volatility Despite Light News

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.

Forex Market Review – FOMC Surprises on Exchange Rate Concerns

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%

Forex Market Review – RBA Holds Rates, FOMC Still to Come

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.

Forex Market Review – Traders Look for Clues in Policy Statements

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.

Forex Market Review – Draghi Coy on ABS Details

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.

Forex Market Review – ECB Meeting in Focus

Tomorrow the European Central Bank will meet to announce their monetary policy decisions including the details of two new stimulus measures which are scheduled to begin this month – an Asset Backed Security purchase program and a Covered Bond purchase program.

The ECB has been one of the more active central banks recently; with the announcement of the scale of the new liquidity measures this week the market has the potential to move quite dramatically. Economists are expecting that after a weak uptake from last month’s first T-LTRO that the ECB will need to act more aggressively in the size of its other easing measures in order to meet its balance sheet growth target. The ECB indicated in September that it was seeking to increase the size of its balance sheet back to 2012 levels, which implies easing of around one trillion Euros; the first T-LTRO saw demand for only 82.6 billion, though Mario Draghi stated that this fell within their expected range.

Expectations are high for the size of the new easing measures, and the market is likely to move strongly on whether the ECB satisfies or disappoints in the announcement. It is expected that the combination of both new purchase programs could reach as high as 500 billion, however analysts are expecting a little less than this on average.

As Draghi previously stated:

 “The Eurosystem will purchase a broad portfolio of simple and transparent asset-backed securities (ABSs) with underlying assets consisting of claims against the euro area non-financial private sector under an ABS purchase programme (ABSPP). This reflects the role of the ABS market in facilitating new credit flows to the economy and follows the intensification of preparatory work on this matter, as decided by the Governing Council in June. In parallel, the Eurosystem will also purchase a broad portfolio of euro-denominated covered bonds issued by MFIs domiciled in the euro area under a new covered bond purchase programme (CBPP3). Interventions under these programmes will start in October 2014. The detailed modalities of these programmes will be announced after the Governing Council meeting of 2 October 2014. The newly decided measures, together with the targeted longer-term refinancing operations which will be conducted in two weeks, will have a sizeable impact on our balance sheet.”

With the majority of the balance sheet expansion expected to come from the ABS program rather than the covered bond program, economists have rightfully called in to question the size of the ABS market in Europe as a potential obstacle to scale – around one trillion Euro. The size of the program will also be affected by the composition of the ECB’s portfolio; from the statement above, the ABS program is likely to be limited to “simple and transparent asset-backed securities (ABSs) with underlying assets consisting of claims against the euro area non-financial private sector” which further reduces the possible size of the program. This meeting will be crucial for traders to get some confirmation of the scope and scale involved in the two programs.

On interest rates, while the ECB has indicated that it is not impossible that rates could further be adjusted the weight of expectations is for no change on the current levels at this meeting. Should the ECB act further on rates it would take the market by surprise again. If the ECB stays with the current rate levels then most of the meeting’s surprise is likely to come from the size of the program relative to expectations. The Euro continued to drop sharply yesterday, falling a further cent to 1.2570.

US Non-Farm payrolls are also likely to rattle markets on Friday when the figure is released alongside the Unemployment Rate and Trade Balance. 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% and the US Trade Balance 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.

Posted in Market Review | 1 Comment

Forex Market Review – NZD Capitulates

The New Zealand Dollar plummeted further on news today that the RBNZ had been a heavy seller of the country’s currency in the previous month, comments by Prime Minister John Key supported this by stating that the ‘Goldilocks’ level for the NZD was around 65 US cents and indicated that the RBNZ could intervene to push the dollar lower. The NZD fell a further one and a half cents today against the US Dollar.

Markets are set for another volatile week, with the ECB’s Thursday Press Conference hotly anticipated for fresh details about the central bank’s ABS and covered bond purchase programs. At the September meeting Mario Draghi announced that the details (or modalities) of the ABS purchase programs would be announced following October’s meeting:

“The Eurosystem will purchase a broad portfolio of simple and transparent asset-backed securities (ABSs) with underlying assets consisting of claims against the euro area non-financial private sector under an ABS purchase programme (ABSPP). This reflects the role of the ABS market in facilitating new credit flows to the economy and follows the intensification of preparatory work on this matter, as decided by the Governing Council in June. In parallel, the Eurosystem will also purchase a broad portfolio of euro-denominated covered bonds issued by MFIs domiciled in the euro area under a new covered bond purchase programme (CBPP3). Interventions under these programmes will start in October 2014. The detailed modalities of these programmes will be announced after the Governing Council meeting of 2 October 2014. The newly decided measures, together with the targeted longer-term refinancing operations which will be conducted in two weeks, will have a sizeable impact on our balance sheet.”

This meeting will be crucial for near term direction in the Euro; the size and composition of the programs important for determining the impact on both the size of the ECB’s balance sheet as well as impact on the broader economy. Many are now expecting that the ECB will be forced to implement a full scale QE program before the end of the year.

Before the ECB can meet there will be further European data to shape expectations; German CPI is released today with expectations that inflation will remain weak at -0.1% month on month; on Tuesday Eurostat will release Euro wide Flash CPI with expectations that the measure will show continued weakness – economists are expecting an inflation rate of 0.3% year on year. While at some point the recent depreciation in the Euro should begin to swing these measures back towards inflation, it may take some time and the ECB will face continued calls for additional stimulus until this happens.

Other data will likely be of less importance this week, apart from Friday’s Non-Farm Payrolls figure out of the US. However, of some note early in the week will be tomorrows Japanese monthly numbers, with Average Cash Earnings, Retail Sales and Household Spending all watched to gauge both the success of Abenomics as well as the potential for the central bank to do more to stimulate sustainable inflation. Also in Asia, Chinese HSBC Final Manufacturing PMI and Manufacturing PMI are both expected to signal expansion at 50.5 and 51.5 respectively, potentially bringing some respite for the Australian dollar after a 7 cent fall this month.

 

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