We still maintain our key view to long USD on pullbacks against weaker currencies, namely EUR and NZD which both expect further easing in December. As always for the beginning of the week I prepared you the currency update to keep you inform of the latest market changes.
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. Advance GDP for Q3 slightly missed estimates at 1.5% versus 1.6% expected. The employment release for October, released November 6, came in much better than expected across all three major components; Non-Farm Payrolls came in at 271,000 versus 180,000 expected, Average Earnings at 0.4% versus 0.2% expected, and the Unemployment Rate at 5% versus 5.1% expected. Fed Funds futures implied probability for a December 16 rate hike jumped from 30% to near 70%, after the NFP release. Accordingly the USD boomed across the board. The Fed have given strong and clear signals to the market via their various means of communication during October and November that they intend to increase the Fed Funds target rate by 25 basis points to 0.50% very soon, and the December meeting is a good opportunity to do so.
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 late 2016/early 2017. On November 5, MPC bank rate votes were unchanged at 8-1. The BOE was also more dovish than expected saying that the outlook for global growth is weaker than in August, trimming its growth outlook for this year and 2016. CPI inflation is now expected to remain below 1% until the second half of 2016. The market implied bank rate shows rate liftoff in Q1 2017 for the first rate hike, as opposed to the previous Q2 2016. 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: 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. On November 3, the RBA left rates on hold as expected but added to the statement that “the outlook for inflation may afford scope for further easing of policy”. This increases bearish bias on the AUD, however the Bank will likely need to see inflation readings for Q4 before making a decision; therefore a move in December is less likely.
NZD: The Kiwi has seen more pressure lately with declining dairy prices and lower employment figures. We remain bearish on this currency. 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. 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”. GDT, released November 3, showed the second consecutive fortnight of declines of 7.4%, following 3.1%. This weighed on NZD and increases chances of a RBNZ cut in December. Employment figures for Q3 grossly missed estimates; Employment Change came in a -0.4% versus the expected +0.4%, Unemployment ticked up to 6%, as expected, and Labour Costs missed at 0.4% versus 0.5%. This miss increases bearish sentiment on NZD.
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.
Source:: Currency Update 9th of November