Minimal releases last week continued to boost the USD and continued to support the case for an interest rate rise next week. Several FOMC members last week came out with hawkish comments recommending gradual increases and with the futures pricing in a 95% chance of a rise we are almost certainly going to see an increase on Wednesday. However, it’s an interesting conundrum as the interest rate rise has almost certainly been priced into the current strength of the US dollar, therefore my own belief is that the majority will be watching for the release of the statement and economic projections to look for signs as to how quickly we can expect to see further increases next year. Last week’s employment report certainly had an impact on the market and introduced a level of uncertainty as to the speed of interest rate rises so it could well be the following statement that drives the market rather than the interest rate rise itself.
Regardless, it’s been 12 months since the last hike and whatever happens there will be significant volatility, so expect fireworks on Wednesday evening.
It just goes from bad to worse for the single currency, with the week starting with huge swings in the Euro courtesy of Italy voting no to constitutional reforms on Sunday, followed closely by the resignation of the Italian Prime Minister. Not only does this have an impact on Italy’s political and economic stability but it could have a significant impact on the Eurozone as a whole. Once again it raises questions about the future of the Eurozone as it opens the door for the Five Star Movement, a populist anti-establishment party, to potentially win any subsequent election and form a government. They have previously advocated holding a referendum relating to whether Italy should leave the EU so once again, similar to Brexit, we have another major European economy threatening to leave. We also cannot overlook the fact that there are elections in Germany and France next year also and therefore political uncertainty is going to weigh heavily on the Eurozone both in the short and medium term.
Later in the week we also saw the ECB interest rate decision and subsequent statement. As expected bond buying was extended through to December 2017 with confirmation that this could be extended further if necessary. Draghi reaffirmed the ECB position that it would expand or extend asset purchases as required maintaining a very dovish stance. He did acknowledge that there are signs of recovery but there was no significant evidence of inflationary pressure. This has been evidenced recently with upticks in CPI and just this week German factory orders coming in 4.9%, way ahead of expectations.
Ultimately the Euro is still bearish both from an economic and political standpoint, and with so much political uncertainty on the horizon is hard to see how the Euro can really gain any significant strength over the coming months.
Quiet week for the GBP last week in terms of data with only two significant releases which showed strong expansion in the services sector with PMI coming in 55.2 and later manufacturing production dropping by 0.9%. Early in the week Bank of England chief Mark Carney cited confidence around the short-term outlook for the economy and that there was continued evidence of growth. Overall the GBP continues to fair remarkably well considering the referendum shock and remains one of the most stable currencies of the G10.
All eyes were really on the UK Supreme Court as the appeal hearing for the recent Brexit ruling was heard. It is not expected to make his decision until early in the New Year.
The Bank of Japan significantly revised down Q3 GDP on Wednesday from 0.6% to 0.3%. While this is inevitably bearish it does show that the economy has now grown for three consecutive quarters, which is a significant improvement on last year. That being said, with continued weak consumer spending there is unlikely to be any significant improvement in the Japanese economy in the near term.
As expected the Bank of Canada left interest rates on hold at 0.5% on Wednesday. The accompanying statement was relatively upbeat acknowledging improved growth in Q3 with moderate growth expected in Q4. There were also signs of inflation albeit slower than expectations and therefore the statement was generally viewed as neutral with no reference to potential easing next year. The Canadian dollar is heavily linked to oil and therefore it will be important to watch continued negotiations around the OPEC production freeze to determine the future direction of the currency.
AUD & NZD
Australia was another country who had central bank activity this week, and again who held rates as expected. The decision was accompanied by a relatively neutral policy statement citing that the current interest rate was having the desired effect and enhanced the prospect of inflation. There was no sign of any forward guidance in terms of expectations for next year. However, the very next day GDP for Q3 was reported as a drop by 0.5% which was the largest contraction of the Australian economy since 2008 and is the first contraction since 2011. This release could have a significant impact on the RBA’s policy stance going forward.
Very little in the way of news for the New Zealand dollar last week with Global Dairy Trade auction prices being the only significant event with prices an increase of 3.5%, which is once again supportive of the New Zealand economy.