Markets are in for a rollercoaster week of important data, bringing some much needed volatility and trading opportunities. The first week of the new month, as always, is heavy with important central bank announcements and PMI data. The focus early in the week will be on the Australian dollar, however later in the week the news flow centres around the ECB meeting on Thursday and US Non-Farm Payrolls on Friday.
Chinese PMI figures were the first major data to affect the Australian dollar this morning. The manufacturing data confirmed that China’s manufacturing sector is still expanding, though at a slower pace than the previous month and below expectations. The Manufacturing PMI and HSBC Final Manufacturing PMI came in at 51.1 and 50.2 respectively. The ABS also released company operating profits data, which showed a decrease of 6.9% – the largest decrease since 2009. The AUD is up slightly on the news at 0.93340.
Still to come this week for Australian news will be tomorrow’s RBA Cash Rate Decision and Wednesday’s GDP figure and speech by Glenn Stevens. The RBA is not expected to make a move on interest rates due to the conflicting data coming out on the state of the Australian economy, and the RBA allowing for time for interest rate cuts to assist the process of rebalancing away from the mining boom. The RBA has also signalled that it is likely the language of policy statements should be changed from signalling a ‘period of interest rate stability’, in advance of any actual policy shift. However, even if no change is evident, it will be of interest to traders to see if this statement wording is altered in any way this month.
The quarterly GDP figure is expected to remain low, at only 0.4% – consistent with the RBA’s expected period of lower than trend growth while interest rate cuts take a firmer hold. With record low interest rates putting pressure on house prices, and growth and inflation remaining low there does not yet appear to be a strong driver for a change in the cash rate. Nevertheless, Governor Stevens may take the opportunity to jawbone the currency when he speaks at the Economic Development luncheon on Wednesday.
Aside from the heavy Australian data flow, the PMI figures out of the UK and US should provide some focus for traders in the lead up the important end of week data from the ECB and US. UK PMI’s are released on Monday, Tuesday and Wednesday beginning with Manufacturing, then Construction and finally Services PMI – the figures are forecast to show continues expansion at 55.1, 61.5 and 58.6 respectively. US ISM Manufacturing PMI is also expected to show moderate expansion – the figure anticipated to be 57.0 by a survey of economists.
Australian private capital expenditures surprised to the upside on Thursday, with the quarter on quarter figure showing a 1.1% increase rather than the expected 0.6% decline. Conversely, New Home Sales disappointed, falling by 5.7% instead of an expected 1.2% increase. While the Cap-ex figure was a positive surprise, government forecasts expect cap-ex figures to remain under pressure in coming years as mining investment decreases. The AUD rallied briefly after the announcement to rise one third of a cent, however selling pressure brought the currency back to end the day approximately even.
German Preliminary CPI showed an as-expected 0% change, month on month. The low figure highlights the lack of impact that low interest rates have had on inflation in developed nations. Low inflation, low interest and low expected inflation in the future has pushed German Bunds in to negative yields several years in to the future. This week the short end of the yield curve was negative out to the 3yr bond. Euro Area Flash CPI is still to be released tonight, and is expected to show a year on year inflation rate of 0.3% – a new low since the GFC. At some point, the recent decline in the Euro of 8 cents against the US dollar should begin to have a stabilising effect on inflation, however in the nearer term there has been speculation ahead of next week’s ECB meeting that Mario Draghi may need to add to recently announced stimulus measures in order to prevent a renewed slide into European recession. The Euro fell nearly half a cent in trading yesterday.
US Growth data showed that the US economy was expected to have grown 4.2% last quarter. This was a positive surprise for the US Dollar, as economists had only expected a 3.9% growth rate for the world’s largest economy. US Unemployment claims failed to surprise, coming out roughly as expected at 298,000. Markets did not react strongly to the data, but the US SP500 index closed above the 2000 level for the first time in low volume trading. With many waiting to see tonight’s Euro CPI figure and Mario Draghi’s response next week, other potential shocks may come in the form of US rhetoric in response to the alleged invasion of the Ukraine by Russian forces
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Currencies remain range bound ahead of next week’s significant central bank meetings and employment data. Most major currencies are holding within ranges of approximately half a cent, with USD/CAD forming the widest range of 80 pips. With the ECB meeting and Non-Farm Payrolls out next week, some traders are waiting for more data before putting on new positions.
US data was uneventful early in the week, with Core Durable Goods orders slightly disappointing analyst expectations. The figure was expected to grow 0.5% over the month, while the true figure was revealed to be a 0.8% decline over the month. While the Core Durable Goods figure disappointed, the CB Consumer Confidence index did not – beating expectations of 89.1 to increase to 92.4. The data failed to cause a strong reaction for the US Dollar.
Also of note yesterday was the S&P/ Case Shiller Composite 20 House Price Index, which has revealed further slowing in house price growth. The year on year figure was up only 8.1%, less than the 8.2% expected and below last month’s 9.4%. The growth rate of the index has been declining since the start of this year, following the decline in US long term interest rates as well as the onset of the Fed’s reductions to its asset purchase program. US preliminary GDP is due to be released on Thursday, with economists anticipating a growth rate of 3.9%.
Tonight is not expected to be very eventful, with little news of consequence out to shake markets, however tomorrow traders will get a glimpse at Australian Private Capital Expenditure, which is expected to decline by 0.6%, quarter on quarter. Cap-ex in Australia has been trending lower since 2011, as the peak of the mining investment boom was passed and projects moved from the construction and infrastructure phase through to the export and production phase. This changing dynamic has put pressure on capital expenditures in recent times, and government forecasts are for continued pressure on mining cap-ex, with the hope that non-mining investment offsets this.
European data should be worth watching as well, with inflation data from the continent coming initially from Germany tomorrow, with Preliminary CPI expected to show 0% growth from the previous month. On Friday, the Euro wide CPI Flash Estimate is also expected to show low inflation of 0.3%, down from 0.4% last month. While inflation has been low and declining for some time, recent falls in the Euro should begin to stabilise this as import prices such as energy begin to rise.
Pepperstone has just released two new commodity pairs for trading: XBR/USD and XTI/USD.
XTI/USD is a spot commodity pair based on West Texas Intermediate crude oil, or WTI, which is a light ‘sweet’ oil traded in Cushing, Oklahoma – the sweetness referring to the oil’s low sulphur content. XTI/USD can be considered US Oil, and is heavily affected by developments in Northern America.
Since the early 2000’s and especially following the global financial crisis, a combination of lower interest rates, improved technology and sustained higher oil prices made previously unused oil fields economical for drilling. This opened up vast areas of the country for exploration, and sparked a boom in areas such as North Dakota, and completely reversed the decline in US oil production volumes.
This development in US oil production caused a diversion between WTI and Brent Crude between 2011 and 2014, which saw WTI trade over 20 dollars per barrel lower. The massive supply shock of the renewed US oil production cause stockpiles to increase, depressing the price of WTI against other worldwide prices.
XTI/USD opens for trading at 01:00 server time and trades through to roll-over each day.
XBR/USD is a spot commodity pair based on Brent Crude Oil, while Brent technically refers to oil produced in the North Sea it is often referred to as UK Oil. Brent Crude is used as the pricing benchmark for two thirds of the world’s oil production.
Brent Crude has been trading higher than WTI due to the large supply increase in Northern America and the associated bottleneck in transporting the oil to other areas. However, this has been exacerbated by the decline of North Sea oil production and continuing oil scarcity outside of the US.
XBR/USD opens for trading at 03:00 server time and trades through to roll-over each day.
Markets may be lacklustre this week, with the news flow expected to be mainly ancillary data before a much more important news period in the following week. This week does see some important figures out of the US, Europe and Canada.
The UK is closed for trading today, with a summer bank holiday. Europe is still open for trading, and at 11am server time German Ifo Business Climate is due to be released. The business conditions indicator has been heading lower since April, with today’s figure expected to come out slightly lower than last month at 107.1 with German growth slowing and conditions worsening. US New Home Sales is also another potential market mover out tonight. The US data point has ticked up in recent years after the collapse of the US housing bubble, but has reached something of a plateau since mid-2013. Tonight’s figure is expected to show that 426,000 new homes were sold, up from 406,000 last month.
The US data continues over Tuesday, with the announcement of both Core Durable Goods Orders and the Conference Board’s Consumer Confidence Index. Core Durable Goods Orders are forecast to grow 0.5% over the month, a little down from last month’s 1.9% growth rate. Consumer confidence is also expected to remain high, with analysts expecting a read of 89.1 – slightly down from last month but still quite high relative to recent history.
Many traders have next week’s central decisions from the UK, Australia and Europe in mind, as well as the all-important Non-Farm Payrolls. While this week may be quiet on the news front, it should be compensated next week with a series of high profile announcements.
The Pound briefly spiked higher on Wednesday as the MPC’s Bank Rate Votes showed that two members had voted to increase rates – a break from expectations and several years of interest rate stability in the UK. The last dissenting votes occurred in 2011, and rates have been unchanged since 2009 at 0.50%. While the Pound did spike 75 pips higher on the news, consistent downward pressure saw the gains erased and the currency reach new lows of 1.6565 for the week.
The FOMC minutes revealed further discussion of the eventual exit strategy for its extraordinary stimulus program and zero interest rates: “Participants agreed that adjustments in the IOER rate would be the primary tool used to move the federal funds rate into its target range and influence other money market rates. In addition, most thought that temporary use of a limited-scale ON RRP facility would help set a firmer floor under money market interest rates during normalization.”
As a reminder, the reason for the need to use three policy tools to raise interest rates is due to the current level of excess reserves in the banking system. Fed purchases of financial assets generate reserve account balances in participating banks. Because there is no reserve requirement attached to these reserve balances, they are excess reserves.
The Fed must pay interest on these reserves to keep a floor under interest rates. Because the reserves are not needed by the banks, absent interest on reserves (IOR), the excess reserves would be lent in the interbank market, putting downward pressure on the interbank rate. This occurs because banks would rather lend the funds at any rate, rather than receiving nothing in interest from the Fed.
By paying IOR, the Fed places a floor under interbank lending rates and prevents losing control over this policy tool when it finally moves to raise the Fed Funds Rate. The Reverse Repurchase Facility expands the list of counterparties to include those such as money-market funds and government sponsored entities (GSE’s) such as Freddie Mac and Fannie Mae. These parties previously could not receive interest on reserves. This will lead to a combination of the three policy tools to normalize interest rates, and the FOMC will continue discussing these factors through to the first rate rise.
In other news, China HSBC Flash Manufacturing PMI was announced yesterday. The PMI figure showed that Chinese manufacturing expanded, but at a slower than expected pace. The figure of 50.3 was well below expectations of 51.5, and the AUD sold off following the announcement before finishing the day higher. European PMI’s were mixed, largely indicating expansion in the services sector. The Euro was largely unaffected by the data.
Tonight sees important speeches by central bank heads Mario Draghi and Janet Yellen at the Jackson Hole Symposium. Economists and analysts are unsure of whether the meeting will be used to strike a dovish or a hawkish tone, and whether any new policy direction will be announced.
Pepperstone is announcing the release of the new currency-cross pair: ZARJPY
This addition gives Pepperstone traders direct access to this highly sought after cross from the interbank market.
The combination of the South African Rand (ZAR) and the Japanese Yen (JPY) is attractive to traders due to its swap benefits and the ability to “carry trade”.
Carry trading is a strategy of buying a high interest bearing currencies against another where the interest rate is very low, this way the trader earns interest through swap payments each roll-over.
Due to the South African Central bank’s official cash rate of 5.75% versus that of the Bank of Japan’s cash rate of 0.25%, traders using the carry trade strategy can look to this pair as a possible addition to their portfolio.
To view this exciting new pair within your MT4 Platform simply Right Click on Market Watch and select ‘Show All’.
If you wish to learn more about swap payment / charges, please click here.
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The New Zealand dollar fell strongly against its Australian counterpart in trading yesterday. The NZD declined on the back of a worse than anticipated release of New Zealand’s PPI figures. The release showed that Producer Prices fell for both inputs of productions and the final output, with inputs falling -1.0% and outputs -0.5%. The decline indicated a clear miss in economists’ expectations for the data points, which were expected to be increases of 0.7% and 0.8% respectively. The release of inflation expectations also lagged expectations at 2.2%, falling short of a forecast 2.4% and further weighing down the Kiwi. The movement in AUD/NZD was accentuated by the release of the RBA’s Monetary Policy Meeting Minutes. The minutes showed some growing caution about forecasts, and indicated that recent higher inflation figures were unlikely to prevent inflation remaining within the 2-3% target band. AUD/NZD rallied around 85 pips yesterday before retracing half of the move in the overnight session. This morning’s testimony by RBA Governor Stevens did not provide a clear direction for the currency.
The Pound was hit by another wave of selling last night on the release of UK CPI figures. The data showed that both the CPI and HPI measures declined from last month, missing expectations. Analysts had forecast a reading of 1.8% and 11.2% for CPI and HPI respectively, but the results came out lower at 1.6% and 10.2%. The poor results shocked the market, with the pound falling just over a cent against the US Dollar yesterday. Pound traders have had a rude shock this month. After Governor Mark Carney had indicated that interest rate rises were likely to occur sooner than expected, the rhetoric and data recently has indicated that the original expectations might not have been misguided. The Pound has declined over five cents against the US Dollar since July. Still to come tonight will be the release of the Monetary Policy Committee’s Bank Rate Votes, which are not expected to change from a unanimous hold vote.
For the rest of the week it is likely the major focus will be on tonight’s FOMC meeting minutes as well as the Jackson Hole Symposium which is scheduled for the end of the week. Expectations have are that the meeting minutes will not surprise the market and the Fed is likely to remain on course to conclude its tapering in October. Speeches coming out of Jackson Hole are more of a wild card, with economists still unsure whether to expect any surprise policy shifts at the meeting.← Older posts