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Boris and Kathy Forex Weekly 25/9/2017

Posted on: 25 September 2017 , by: Boris & Kathy , category: Market Review

FX Weekly with Boris and Kathy

The Federal Reserve breathed new life into the U.S. dollar this past week by confirming that they see one more rate hike year.

The announcement, which was accompanied by plans to reduce the balance sheet caught investors by surprise sending the dollar sharply higher. However, since Wednesday’s announcement, the greenback has been unable to extend its gains and instead ended the week slightly higher against the Japanese yen, British pound, Canadian and Australian dollars, flat versus the euro and lower against the New Zealand dollar. In the week ahead, the main driver of currency flows should be politics. General elections will be held this weekend in Germany and New Zealand and sometime in the coming week, more details on U.S. tax reform is expected. In addition, investors should be watching U.S. – North Korea tensions as the recent name calling could spiral into something worse that could rattle the FX market.

Spot Returns Month to Date 25/9/17

US DOLLAR

Data Review

  • FOMC Keeps Rates Steady at 1.25% as Expected, Expects 1 More Hike, 3 in 2018
  • NAHB Housing Market Index 64 vs. 67 Expected
  • Housing Starts -0.8% vs. 1.7% Expected
  • Building Permits 5.7% vs. -0.8% Expected
  • Current Account Balance -$123.1b $-116.0b Expected
  • Import Price Index 0.6% vs. 0.4% Expected
  • Existing Home Sales -1.7% vs. 0.2% Expected
  • Philadelphia Fed Business Outlook 23.8 vs. 17.1 Expected
  • House Price Index 0.2% vs. 0.4% Expected
  • Manufacturing PMI 53 vs. 53 Expected
  • Services PMI 55.1 vs. 55.7 Expected
  • Composite PMI 54.6 vs. 55.3 Prior

Data Preview

  • New Home Sales and Consumer Confidence- Potential for downside surprise given Weaker existing home sales and University of Michigan index
  • Durable Goods Orders and Pending Home Sales- Durable good orders are hard to predict but can be market moving
  • GDP Annualized and Advance Goods Trade Balance- Revision to GDP is difficult to predict but changes can be market moving
  • Personal Income, Personal Spending and PCE Deflator- Potential for downside surprise given weaker wage growth and retail sales
  • Chicago PMI and U. of Mich. Sentiment Report- Potential for upside surprise given Stronger Philly slightly weaker Empire so should be healthier

Key Levels

  • Support 110.00
  • Resistance 113.00

The most important takeaway from the news flow this past week is the Federal Reserve’s hawkishness.  Although U.S. data has been mixed, Federal Reserve officials looked beyond the strain caused by the hurricanes and the unevenness of U.S. data to call for another rate hike this year along with 75bp of tightening in 2018. This hawkishness caught the market by surprise because most people just expected the Fed to announce plans to shrink their balance sheet (which they did) and provide little in the way of guidance. However with stocks hitting record highs on a daily basis, Federal Reserve officials saw no reason to back away from their plans to tighten as they see spending expanding at a moderate rate, investment activity increasing and labor activity strengthening. The Federal Reserve believed that the hurricanes would not alter the economy’s general course because according to Janet Yellen, the recovery is on a strong track. This unambiguously positive monetary policy outlook and the prospect of tax reform should limit the slide in the dollar barring any geopolitical risks.  On Friday, Yellen’s hawkishness was reinforced by hawkish comments from Fed Presidents Kaplan, George and Williams. 

Next week we’ll hear from Dudley, Evans, Kashkari, Mester, Bullard, Rosengren, Fischer, Harker and Yellen again. If most of these policymakers confirm that they see another rate hike before the year is out, we could see renewed gains in the greenback. Fed speak should overshadow the new home sales, consumer confidence, GDP revision, personal income and personal spending reports.

 


BRITISH POUND

Data Review

  • PM May Nothing Substantial on Brexit Plans
  • Rightmove House Prices -1.2% vs. -0.9% Prior
  • Retail Sales 1.0% vs. 0.1% Expected
  • Retail Sales Inc. Auto and Fuel 1/0% vs. 0.2% Expected
  • PSNCR 0.04b vs. -3.7b Prior
  • Public Sector Net Borrowing 5.1b vs. 6.4b Expected
  • CBI Trends Total Orders 7 vs. 13 Expected
  • CBI Trends Selling Prices 18 vs. 19 Prior

Data Preview

  • Current Account Balance, Mortgage Approvals and GDP Revision- UK GDP data not generally revised but if changes are made, they will be market moving

Key Levels

  • Support 1.3400
  • Resistance 1.3700

Once again, U.K. Prime Minister Theresa May disappointed the market.  In her widely publicized Brexit speech on Friday she provided nothing of substance and made no mention of the terms of exit including the divorce payment they expect to make to the European Union. While this could be interpreted to mean that she is open to discussion it could also be viewed as lack of progress.  Either way investors sold sterling after her speech, leaving GBP/USD vulnerable to further losses.  Like the euro sterling’s slide will be limited by the Bank of England’s hawkishness. U.K. retail sales rose significantly more than anticipated in the month of August, hardening the case for a rate hike. There are a handful of second tier UK economic reports scheduled for release in the new week. They are not expected to have a significant impact on sterling. Instead investors will be watching Bank of England Governor Carney’s speech on Thursday and BoE member Broadbent’s speech on Friday.  


EURO

Data Review

  • EZ CPI 0.3% vs. 0.3% Expected
  • EZ CPI Core 1.2% vs. 1.2% Expected
  • EZ Current Account Balance 25.1b vs. 22.8b Prior
  • GE ZEW Survey (Current Situation) 87.9 vs. 86.2 Expected
  • EZ ZEW Survey (Economic Sentiment) 31.7 vs. 29.3 Prior
  • GE ZEW Survey (Economic Sentiment) 17.0 vs. 12 Expected
  • GE PPI 0.2% vs. 0.1% Expected
  • ECB Economic Bulletin sees improving economic growth and improving labor prospects but inflation yet to respond in kind
  • EZ Consumer Confidence -1.2 vs. -1.5 Expected
  • GE Manufacturing PMI 60.6 vs. 59 Expected
  • GE Services PMI 55.6 vs. 53.8 Expected
  • GE Composite PMI 57.8 vs. 55.7 Expected
  • EZ Manufacturing PMI 58.2 vs. 57.2 Expected
  • EZ Services PMI 55.6 vs. 54.8 Expected
  • EZ Composite PMI 56.7 vs. 55.5 Expected

Data Preview

  • IFO Report- Potential for upside surprise given stronger ZEW and stronger EZ PMI’s
  • EZ Economic and Consumer Confidence- Will update after German GfK and IFO but ZEW up
  • GE CPI- Potential for upside surprise given Stronger GE PPI
  • GE Unemployment Change- Potential for upside surprise given PMIs show strong job creation
  • EZ CPI- Inflation should be on the rise

Key Levels

  • Support 1.1800
  • Resistance 1.2100

German Chancellor Angela Merkel is widely expected to coast to victory at this weekend’s election. She is running for her fourth term (12+ years) and her position is so secure that many have looked beyond the election to her next government. Germany won’t be hit by populism as the latest polls show her party, the Christian Democratic Union and its sister party the Christian Social Union have 36-37% support with many exit polls showing last-minute voters favouring the incumbent.  

A victory for Merkel will mean a victory for the euro. Although EUR/USD backed off 1.20 on Friday, investors are anticipating a win.  In the very unlikely scenario that she loses, EUR/USD will crash quickly and aggressively and could fall below 1.18.  If she wins, it will be under the backdrop of an improving Eurozone economy and a hawkish central bank.  Manufacturing and service sector activity accelerated in the month of September according to the PMIs. This has and should continue to limit the slide in EUR/USD and could extend the gains for EUR/JPY and EUR/CHF.  Next week’s Eurozone economic reports should continue to support the euro as we are looking for improvements in the German IFO, unemployment and inflation reports. 

 


AUD, NZD, CAD

Data Review

Australia

  • AU House Price Index 1.9% vs. 1.3% Expected
  • RBA Meeting Minutes show optimism with improvements in the labor markets. Notes that appreciation in the AUD is mainly due to USD weakness

New Zealand

  • Services PMI 57.3 vs. 56 Prior
  • Westpac NZ Consumer Confidence 112.4 vs. 113.4 Prior
  • GDT Auction Prices increase by 0.9%
  • Current Account Balance -0.618b vs. -0.900b Expected
  • Q2 GDP 0.8% vs. 0.8% Expected

Canada

  • Manufacturing Sales -2.6% vs. -1.9% Expected
  • Wholesale Sales 1.5% vs. -0.7% Expected
  • CPI 0.1% vs. 0.2% Expected
  • Retail Sales 0.4% vs. 0.2% Expected
  • Retail Sales Less Autos 0.2% vs. 0.4% Expected

Data Preview

Australia

  • No Data

New Zealand

  • Trade Balance- Potential for downside surprise given stronger manufacturing PMI index
  • RBNZ Official Cash Rate- Likely to reiterate neutral bias

Canada

  • GDP- Potential for upside surprise given stronger CAD trade balance and retail sales

Key Levels

  • Support AUD .7900 NZD .7250 CAD 1.2200
  • Resistance AUD .8100 NZD .7450 CAD 1.2400

Between the 3 commodity currencies, the New Zealand dollar should be the most active with a general election and a monetary policy announcement on the calendar. Based on the end of week rally in NZD, the incumbent Bill English is expected to win. However the race has been close and we do not rule out an unexpected victory by Jacinda Ardern. If Arden wins, NZD is likely to sell off and if English secures a victory we could see a slight bounce in the currency. As for the RBNZ, the last we heard from the central bank they expressed concerns about the strong currency and said they were very much neutral on rates. Since the last monetary policy meeting in August, we’ve seen improvements and deterioration in the economy. Inflation and housing activity seems to have ticked up slightly but credit card spending and service sector activity slowed. The currency is trading marginally weaker. 

The bottom line is there hasn’t been enough improvement or deterioration for the RBNZ to change their guidance and if they maintain a cautious outlook, NZD will end up selling off against currencies where rate hikes are anticipated. 

Reserve Bank of New Zealand Rate Decision

USD/CAD rose above 1.2300 on Friday on the back of softer Canadian data. Consumer prices rose 0.1% in the month of August which was slightly less than anticipated. Retail sales beat expectations rising by 0.4% but excluding auto, the increase was far more modest and less than anticipated. It is difficult to say if these reports eliminate the chance of another rate hike from the Bank of Canada because inflation and spending still increased from the previous month but the mere fact that they cast doubt on additional tightening could be enough of an excuse for more profit taking on short USD/CAD positions. Canadian GDP is due for release at the end of next week but the main focus for CAD will be Governor Poloz’s speech on Wednesday. 

Meanwhile the Australian dollar ended the week lower after S&P downgraded China and RBA Governor Lowe expressed little desire to follow in the footsteps of other central banks. Unlike the Federal Reserve, European Central Bank, Bank of England and the Bank of Canada, the RBA is in no rush to raise interest rates. According to Governor Lowe who spoke on Thursday the Australian economy looks to be improving and is on course for further progress in jobs and inflation but global rate rises have no automatic implications for Australia as the flexible A$ allows independence on the timing of rate rises. While he admits that rates are more likely to go up than down, therefore, investors should be prepared for higher rates, the market clearly interpreted Lowe’s comments to mean that the RBA will lag behind the Fed, ECB, BoE and BoC. There are no major Australian economic report scheduled for release in the week ahead so the main driver for AUD should be the market’s appetite for U.S. dollars and speeches delivered by RBA Debelle and Bullock. 


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