The NZD recovery may be continuing but the US Non-farm payroll data released on Friday contained mixed messages. On one hand it was softer than the 310 K+ job gain expected coming in at a 261k gain, however the previous month of September was upwardly revised to a 90K gain instead of the earlier -33K loss. Also of a positive note was a fall in the unemployment rate from 4.2% to 4.1%, a level not seen since 2000. Wage growth was lower dropping from 2.8% to 2.4% pointing to the scenario of the scenario where steady growth continues with not a lot of inflationary pressure. Enough positives for a December Fed rate hike to all but assured. ISM non-manufacturing data for October was also solid, up to 60.1 pointing to a strong start to Q4 activity. On release of the NFP report, the USD rallied against both the JPY and EUR, and US equities markets made new highs. Over the weekend there were some interesting comments from China’s Central bank Governor, warning that China’s financial system is becoming significantly more vulnerable due to high leverage and that risks were accumulating that were “hidden, complex, sudden, contagious and hazardous.”
These comments, although not new, are the latest in a string of rhetoric from the PBOC, signalling that policy makers remain committed to a campaign to reduce borrowing levels across China’s economy. There was little international market reaction, but Chinese 10 year bond yields pushed to a 3 year high. After a week of heavy data releases, this week looks quiet, with no big movers in the US or Europe while in the UK, Brexit negotiations will resume on Thursday. The arrest in Saudi Arabia of several Princes and high placed officials on corruption charges could markets by surprise, oil has risen over 3% overnight, to levels not seen for just over two years. This is a story that will be watched closely over the coming weeks and has potential to elevate international risk levels significantly, if the situation begins to destabilise the region.
The disappointing Australian retail sales data on Friday, which came in flat for September against forecasts of a 0.4% advance, saw the Australian dollar sold lower, as the softer data continued in line with previous releases. The RBA is having its exchange rate announcement later today and is expected to maintain interest rates at current levels for the 15 month in a row and continue with its dovish stance. After today’s Board meeting, focus will then shift to the Statement of Monetary Policy (SoMP) on Friday. Also this week there are multiple Chinese data releases, including trade balance figures, inflation, PPI and money supply all of which has potential to affect Australian dollar direction.
New Zealand (NZD):
The main event this week will be the RBNZ Monetary Policy Statement release on Thursday, the first under Acting Governor Grant Spencer. No change to interest rates is expected, with the OCR forecast to remain consistent with that in August which is for rates to remain unchanged until 2019 and only gradually rise thereafter. However there may be some subtle changes, with the RBNZ downgrading GDP and housing market expectations to reflect the cooling seen in recent data. GDP has been below forecasts, building sector growth has plateaued for most of the year and businesses’ confidence has dropped. The booming house price growth is now showing initial signs of shifting into decline and consumer spending remains flat. Inflation still remains below the 2% RBNZ target. On top of this is a new Government finding its feet in what is shaping up to be an economically challenging next 12 months. There is also a Global Dairy auction on Tuesday night, results will be known early Wednesday morning NZ time, expectations are for prices to stay relatively steady.
United States (USD):
Last week’s positive US economic data allied with solid, albeit not spectacular, Non-farm payrolls data on Friday added to the story that the U.S. economy appears to have bottomed out during the June/July summer months and has embarked on a clear upward trend since then. Investors are still reviewing the payrolls figures from Friday along with the potential for the tax reform prospects to pass in some form by the Thanksgiving holiday on 23rd of November. However Friday’s payrolls data continued to solidify the view that the US economy is back on solid footing and that the Fed will continue the course of a slow gradual return to normalise interest rate policy. President Trump embarked on Friday on his longest foreign trip to date, heading for the Asian region. The trip is ostensibly about trade, with a full trade delegation of US businessmen accompanying the President, but given geopolitical tensions in the region, security concerns and North Korea are likely to overshadow the agenda. There is little in the way of data releases for the US this week, with markets likely to take their cue from the progress of the tax reform bill through Congress and any highlights of Trump’s Asian tour. The USD/JPY rallied up to 114.73 last night, a 7 month high , on continued evidence that the monetary policy path between both central banks of US and Japan will diverge over the coming years, it is now back around 113.76 but look for a target of 115.00 over the next week or so. The EUR/USD is at 1.1605 with immediate support at the 1.1572 level, initial resistance around 1.1625…USD downside looks limited.
More positive data out yesterday for the Eurozone’s main driver, the German economy, which showed German factory orders unexpectedly increased in September with the report revealing factory orders increased by 1% following August’s 4.1% surge and surprising economists who had forecast orders to decrease by 1.1%. The report also revealed that although domestic orders remained the increase was driven once again by offshore demand. The outcome of the German elections last month has still not been settled with German coalition discussions likely to be protracted and so policy clarity is unlikely before 2018. Across in Spain although the Catalan political debacle appears to have been contained it will continue to rumble on, although Spanish Economy Minister Luis de Guindos recently commented that he was expecting the Catalan issue to have only a small impact on overall Spanish economic growth. Italy looks to be the next political inflection point with the potential now being floated for an early election to be called. The EUR/USD is currently trading around 1.1609 with support at 1.1572 and immediate resistance up at 1.1625. We look for further EUR weakness
United Kingdom (GBP):
The Brexit situation grinds on with talks set to resume on Thursday between the European Commission’s chief Brexit negotiator Michel Barnier and UK Brexit Secretary, David Davis. Hopes for progress remain thin at this stage, with only three full rounds of talks pencilled in before the EU summit in December. With the BoE rate hike of 0.25% to 0.5% now out of the way, attention on Friday centred on the PMI data which saw the services sector extended its rebound into a second month. October saw business activity across services, manufacturing, and construction grow at its fastest rate for six months. After Thursday’s sharp drop of the GBP/USD to the 1.3042 the GBP has managed to rally back overnight on a softer USD, weighed down by the higher oil price, to the 1.3170 level. Also helping GBP strength was an article in the UK Times newspaper, suggesting that the EU has started work on a Brexit trade deal. Immediate resistance is at 1.3175 then 1.3200, support at 1.3125. We view any GBP rally as temporary and shallow given the ongoing in certain Brexit situation.
Yesterday, Bank of Japan Governor Haruhiko Kuroda stressed the need for powerful easing to continue as he stated that the BoJ is still a long way from achieving their 2% inflation goal. The statement reiterates what we heard from the BoJ last week at their monetary policy meeting that left rates unchanged, and saw the USD/JPY hit a seven month high at 114.73. The main news from Japan over the last few days has centred around the Trump visit and trade/foreign policy discussions he has had with Japanese PM Abe. The visit has now concluded with Trump heading to the Philippines, but it would appear that he has left without securing any major trade concessions or deals from Japan to narrow the $69 billion trade deficit with Japan, driven largely by U.S. imports of cars and electronics.
Canadian jobs data on Friday was better than expected, with employment up 35K, above market expectations in October with the unemployment rate ticking up to 6.3%. The data was CAD supportive and saw the USD/CAD drop to 1.2714 in late Friday trading. It has opened for the week around 1.2763 and is currently trading down at 1.2705 as the rally in oil prices helps fuel demand for the commodity linked CAD. USD/CAD resistance is up at 1.2800 with support now at the physiological 1.2700 level then down at 1.2620. The CAD is favoured with the prevailing stronger crude prices.
Major Announcements last week:
• NZ Employment Change 2.2% vs 0.8% expected
• UK Manufacturing PMI 56.3 vs 55.8 expected
• US ISM Manufacturing PMI 58.7 vs 59.5 expected
• FOMC leaves interest rates unchanged
• Australian Trade Balance 1.75b vs 1.42b expected
• UK construction PMI 50.8 vs 48.3 expected
• Bank of England increases interest rates 0.25% to 0.50%
• Australian Retail Sales 0.0 vs 0.4% expected
• Canadian Employment Change 35.3k vs 15.3k expected
• US ISM Non-Manufacturing PMI 60.1 vs 58.5 expected
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