Currency Update 2nd of November

At the moment we look ahead to Manufacturing PMI from the UK which may see a move in sterling if there is a significant deviation. As always I suggest for you to kick-start the week by reading my currency update below.

Currency Update:

USD: The greenback remains the strongest currency in the longer term as the market currently expects the Fed to raise rates in late 2015 or early 2016. The FOMC needs to be reasonably confident about inflation tracking towards 2% before increasing the fed funds target rate for the first time in nearly a decade. On October 15, CPI for September came in unchanged for the year while Core CPI ticked up to 1.9%. The Fed kept rates on hold at the October 28 meeting, and struck a hawkish tone with the statement suggesting a rate rise at the December meeting is quite possible. Fed Fund Futures price a nearly 50% chance of a hike in December. Advance GDP for Q3 slightly missed estimates at 1.5% versus 1.6% expected.

EUR: The euro remains weak medium-term due to the quantitative easing program that is underway and expected to continue. Inflation and growth readings in recent months have failed to show that the economy is recovering at a reasonable rate. The euro has come under massive pressure since the ECB press conference on October 22 where Draghi indicated that the current QE program will be re-examined in December and that inflation remains very low. On October 30, Eurozone Flash CPI for October came in flat y/y, as expected, but up from -0.1% prior. The core reading (ex-food/energy/alcohol/tobacco) ticked up to 1%, beating expectations of 0.9%. If inflation does not pick up then the market expects QE to be expanded in December.

GBP: Sterling is a long-term bullish currency given expectations to raise rates in mid 2016. However the pound has been trading mixed over recent months as rate hike expectations are pushed further out. Recent MPC Minutes showed the BOE expects inflation to remain subdued in the near term and this has the effect of delaying rate hikes. Headline and Core inflation data for September missed estimates and saw decline in GBP. Wage growth for August was positive with Average Earnings 3M y/y printing at 3%. This is only marginally below the 3.3% reading for May, which is the highest since 2010. Gross Domestic Product for Q3 missed estimates for the Preliminary reading, coming in at 0.5% for the quarter and 2.3% for the y/y. A fuller picture of the growth situation will be available with the Second Estimate reading.

AUD: The RBA are currently on hold with an easing bias. The AUD remains vulnerable to developments out of China and fluctuating commodities, despite the Australian economy running well and the RBA content with current level of interest rates. At the October 6 meeting the RBA kept rates on hold as was expected. The accompanying statement struck a somewhat optimistic tone, citing a moderate expansion in the economy, stronger growth of employment, and a steady unemployment rate. Labour figures released on October 15 showed September employment was down 5.1K, missing expectations of a 5K increase. The unemployment rate remained at 6.2%, while the participation rate ticked down to 64.9%. During October, all four big banks in Australia announced they will increase lending rates, this prompted speculation that the RBA may cut rates to compensate at the retail level. On October 28, Trimmed Mean CPI for Q3 missed expectations at 0.3% for the quarter and 2.1% for the y/y, which was a 3-year low. There is currently a less than 50% chance that the RBA will cut rates at the November 3 meeting.

NZD: The NZD has been trading higher in recent months after it appears dairy prices have bottomed and are now trending higher. GDP for Q2 missed estimates at 0.4%, however this is up from 0.2% growth in Q1. CPI for Q3, released October 15, was 0.3%, and 0.4% y/y. GDT fell 3.1% on October 20, ending four fortnights of consecutive gains. Rates were held steady at the October 29 rate decision, however dovish comments in the statement was repeated, stating that “some further reduction in the OCR seems likely”. The NZD was boosted in late October when the Chinese government announced that they will allow two children per couple, which gives a boost to dairy demand expectations.

CAD: The BOC left rates unchanged on October 21 and released a statement that was largely unchanged. The accompanying Monetary Policy Report revised lower growth forecasts for 2016 and 2017; this weighed on the CAD. The price of WTI crude continues to dictate short term movements in the CAD. GDP for the month of August came in as expected at 0.1%, following on from 0.3% in July and 0.5% in June.

JPY: The yen remains bearish medium term due to the current qualitative and quantitative easing program. CPI excluding food and energy should be watched carefully for indications that the current stimulus will be increased. The BOJ kept policy unchanged at their October 30 meeting; this was expected by majority of analysts. The semi-annual Outlook Report, released the same day, downgraded both GDP and CPI, and pushed back the 2% target for CPI until the second half of 2016. The delaying of the CPI target decreases chances of the BOJ easing further in the near term, however the BOJ may still act at any meeting going forward. Tokyo-area CPI excluding food & energy for October ticked down to 0.4% from a prior of 0.6%, below expectations of 0.5%.

CHF: The franc is fundamentally a weak currency given the SNB’s negative interest rates, however it can suddenly rally on safe-haven flows. The SNB regularly recite that the franc is overvalued and they are prepared to intervene to weaken the currency. The franc’s direction remain difficult to predict due to regular intervention by the SNB. With the ECB planning further QE, we may see a pre-emptive move by the SNB heading into December.

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