Overview
U.S. stocks surged higher to begin the week as Hurricane Irma came ashore in Florida with a less catastrophic result than anticipated and the perceived threat of a North Korean missile test failed to materialize. As Florida dealt with one of the worst storms in its history, investors took a separate and distinct outlook away from the potential human toll. History shows that financial markets are not usually fazed by natural disasters partly due to the subsequent pickups in spending which in this case should begin to be reflected in Q4 data releases. The United Nations Security Council has just unanimously stepped up sanctions against North Korea over the country’s sixth and most powerful nuclear test on September 3, imposing a ban on the country’s textile exports and capping imports of crude oil. These new sanctions ratchet up to the pressure on North Korea, though they are far less sweeping than the US originally sought, as it had to drop several key demands, and toned down others, to keep China and Russia from exercising their veto over the measure. Generally the better risk environment to start the week has seen US Treasury yields move higher while the safe haven Japanese yen retreated. Focus for the week will centre on US retail sales and CPI data on Thursday/Friday as a precursor to next Thursday Fed interest rate decision. Locally, economic data which largely continues to be positive, has been side-lined as the general election continues to dominate, however given the similar centre right agenda of both National and Labour, ultimately whoever wins there is likely to be little in the way of major policy reversals which should not have too much lasting effect on New Zealand dollar levels.
Australia
The Australian dollar continues to hold firm above the key 0.8000 level against the USD and on Friday rallied to a two year high at 0.8125 as the USD sell-off gathered pace on fears that North Korea may fire another missile over the weekend. Chinese PPI and CPI data released over the weekend was better than expected which has also helped underpin the Australian dollar. The AUD opens a little easier for the week around 0.8030 as the more risk-off tone has benefited the USD and softer gold price also adds a small negative to the AUD. Locally, we have Australian employment data on Thursday to draw focus with the market expecting a gain in employment of around 19.2k and the unemployment rate to remain stable at 5.6%. Any break below 0.8000 against the USD would be negative and likely see further downside but this should be limited on approaches to the 0.7965 price zone, a strong static support.
New Zealand
The New Zealand dollar continues to react to the whims of offshore trading. It spiked to a high of 0.7336 on Friday and after opening at 0.7250 then it rose towards the 0.73 handle against the USD again in the first few trading hours of the week, amid an improved risk sentiment. However it failed to extend its gains over the rest of yesterday and turned flat around mid-0.72s. Currently, the NZD/USD is trading around 0.7260 after bouncing around a 0.7240-0.7293 range overnight. Economic growth continues to remain solid although yesterday the New Zealand Institute of Economic Research (NZIER) announced that it had revised its 2017/18 growth forecast lower to 2.9% from 3.1%. “Recent indicators have provided more evidence of how New Zealand’s economic growth has throttled back in the last year. However this is by no means a gloomy outlook for the economy – we look for continued moderate growth over the next few years. But the NZIER view stands in contrast with the Treasury and the Reserve Bank, whose views rest on a substantial acceleration in growth over the next couple of years. Overall the NZD looks a little on the back foot and this week’s US retail sales and CPI data have potential to push the NZD/USD back into the 0.7100 region if support at 0.7240 gives way. The NZD continues to struggle against the AUD, although the cross at 0.9045 currently is better than last week price action does not feel NZD positive. Election jitters are now also having an unsettling effect on NZD trading as the outcome becomes less certain, but it should be remembered that whoever wins, a more expansionary fiscal policy is likely, which would provide further support to economic growth, and by extension the currency.
United States
The sanctions just passed by the UN, setting limits on North Korea’s oil imports and banning its textile exports in an effort to deprive the reclusive nation of the income it needs to maintain its nuclear and ballistic missile program, and increase the pressure to negotiate a way out of punishing sanctions, give the US international support and should help in toning down some of the rhetoric. US equity markets climbed to new highs overnight, as the weaker dollar and continuing ow long term borrowing costs, is a double act that is seen to keep the economy humming. Technology stocks were at the forefront of the rebound with gains in Apple and Tesla shares, providing an additional boost to the indexes. Apple rose nearly 2% as investors priced tomorrow’s new iPhone launch while news about China looking to ban vehicles using traditional fuels lifted Tesla’s shares more than 5% higher. However, sentiment toward the USD remains downbeat, and geopolitical and political news will continue to drive movements. But this week’s US CPI will also be watched. Given the market’s pricing for the Fed (with only ~8bps of hikes priced in for Dec), any signs of a firming in inflation will bring more confidence and USD strength. The EUR/USD is currently trading at 1.1960 after the stronger USD saw a retreat down from the 1.2028 high overnight. Immediate support is at 1.19215/20 level which if broken would see a move towards 1.1890 then 1.1820. Any EUR/USD upside should be limited to the 1.2030/50 region ahead of the crucial US retail sales/CPI data on Thursday /Friday.
United Kingdom
Overnight news was that UK PM May has won a vote on Brexit bill timetable and Parliament has passed a motion limiting scrutiny of the bill to 8 days. The GBP/USD rose to a session high of 1.3222 yesterday as the demand for the US dollar remains weak and the investors brace up for the data-heavy week ahead in the UK. The UK consumer price index out tonight, is seen rebounding 0.5% m/m in August, compared to a 0.1% drop in July. The annualized figure is likely to come in at 2.8%. Later in the week, UK wage growth numbers and the Bank of England rate decision will attract market attention. The GBP has now slipped below the 1.3200 level on the stronger US dollar and is at 1.3165, support is around 1.3120. Technical indicators are uncertain, but maintaining the risk towards the upside. Friday’s high is the immediate resistance at 1.3223, ahead of the 1.3266 level for today, while below the mentioned 1.3120 low, the pair can extend its decline towards the 1.3100 region. In reality despite today’s fluctuations, the pair is struggling to find clear direction and remains in a relatively tight 50-pip trading range. On one hand, the improved risk sentiment and some positive developments over the Brexit negotiations help the GBP stay resilient against the USD while on the other hand, the USD is preserving its bullish momentum as the robust performance of the US T-bond yields provide additional support. Major data for both USD and GBP due later in the week may clarify direction.
Europe
Recent comments from an ECB board member suggested that persistent exogenous shocks to FX can cause unwarranted tightening of financial conditions with undesirable consequences for inflation. Further comments were that the policy-relevant horizon is likely to be longer given persistence of subdued inflationary pressures and compared with past demand shocks, policy will remain more accommodative for longer. These comments saw the EUR weaken against the USD. This week the EUR continues with the correction that started on Friday from 1.2091 (highest level since January 2015). EUR/USD remains under pressure amid a stronger US Dollar across the board. The pair broke below 1.1970 and fell to 1.1948, hitting the lowest level since Thursday. Data releases are light for the Eurozone this week with important data on the USD side and an upcoming fed rate decision next week…A break below 1.1940 for the EUR/USD could extend to 1.1890 then 1.1820.
Japan
Risk aversion has eased over the weekend and this has pressured the safe-haven JPY which has seen the USD/JPY rate move up from 107.32 on Friday to 109.42 currently. Looking ahead, the focus remains on the broader market sentiment, given the light data calendar in the US, however sellers of the JPY need to be cautious as risk sentiment may return as North Korea may respond to the latest UN sanctions with another misadventure. Away from geopolitical considerations it is clear that the Bank of Japan remains committed to accommodative monetary policies for the foreseeable future given the only gradual momentum with which the economy is advancing. Currently the yoy pace of GDP growth is around 2%, driven by domestic demand another encouraging sign for a country that has at times relied on export growth to carry the burden. Faster growth has yet to translate into an uptick in inflation, which is hovering near zero percent. The next probable USD/JPY target and the immediate resistance is at 109.70, with gains beyond the level probably resulting on an extension up to 110.25, where the pair also has an unfilled gap from two weeks ago.
Canada
The Canadian dollar continues to hold firm, with Friday’s employment data coming in better than expected and the jobless rate dropping to 6.2%, an improvement on the 6.3% forecasted. The CAD was stronger on the release, with the USD/CAD dropping to just above support at the 1.2060 level. The CAD has softened on the USD bounce back and softer oil prices, with the USD/CAD now around 1.2120. Moves to 1.2155/60 would threaten 1.2200, but a break below 1.2060 would extend towards 1.2000 and below. However ahead of Thursdays US data look for consolidation at current levels.
Major Announcements
• Canadian Trade Balance -3.0b vs -3.2b expected
• Bank of Canada hikes interest rates 0.25% to 1.00%
• US ISM manufacturing PMI 55.3 vs 55.8 expected
• Australian Retails Sales flat vs 0.2% expected
• Australian Trade Balance 0.46b vs 0.93b expected
• ECB leaves interest rates unchanged
• UK Manufacturing Production 0.5% vs 0.3% expected
• Canadian Employment Change 22.2k vs 17.8k expected