Forex Major Currencies Outlook (Jan 13– Jan 17)
Q4 GDP from China that can drop below 6% for the first time in almost 30 years, inflation data from US, EU and UK and consumption data from US and UK will be highlights of the week along with signing of “phase one” deal between US and China on January 15.
Trade balance in November came in at -$43.1bn vs -$43.7bn as expected. It is both a beating on the estimates and lowering of trade deficit compared to last month. It is the smallest trade deficit in the last three years. Exports were up 0.7% while imports were down -1%. The biggest contributor to lowering of trade deficit has been shale oil. Trade deficit with China has been lowered to -$26.37bn vs -$31.3bn the previous month. The reading will have positive impact on Q4 GDP.
ISM non-manufacturing PMI for December came in at 55 vs 54.5 as expected and up from 53.9 the previous month. Better than expected reading little tainted by drop in new orders and employment sub-indicies, however both of them are well above 50 level. The reading reflects robust consumption and domestic demand.
December NFP came in at 145k vs 166k as expected. Both the unemployment rate and participation rate stayed the same at 3.5% and 63.2% respectively. Average hourly earnings on the other hand missed badly coming in at 0.1% m/m vs 0.3% m/m the previous month and 2.9% y/y vs 3.1% y/y the previous month which is the worst reading in 18 months. Although there are clear tight labour market conditions, wages are not following the suit and without rising wages, it is difficult for inflation to rise which may in turn spur Fed to action sooner rather than later.
Iran has fired missiles at two American bases in Iraq. The initial reaction in the markets was risk-off with oil and gold shooting up. Tehran has claimed that 80 lives were lost while the Pentagon has yet to report about any casualties. The attack was Iran’s response to last Friday’s killing of a top Iranian general Qassem Suleimani. The situation de-escalated during the week which brought calm in the markets putting oil back under $60 and gold around $1550.
This week we will have inflation, consumption, housing and industrial production data.
Important news for USD:
- Retail Sales
Finale Eurozone services PMI for December came in at 52.8 vs 52.4 preliminary. Better than expected results came from Germany, Spain and Italy while France stayed the same. Composite was pushed to 50.9 vs 50.6 preliminarily. Notably German composite returned to expansion for the first time since August. Domestic demand is keeping the Eurozone afloat. Final consumer confidence came in at -8.1 down from -7.2 the previous month. Economic confidence and services confidence ticked up while business climate and industrial ticked down indicating still sluggish sentiment.
Retail sales for November came in at 1% m/m vs 0.7% m/m as expected. German retail sales for the same period more than doubled expectations coming in at 2.2% m/m vs 1% m/m as expected. The readings were helped by Black Friday, so the holiday effect should be taken into consideration, although beatings on expectations are very hefty and are an additional sign of strong domestic demand in the Eurozone. Preliminary CPI reading for December came in at 1.3% y/y as expected, up from 1% y/y the previous month. Core CPI stayed the same at 1.3% y/y as expected. Stronger energy prices lifted the inflation.
This week we will have trade balance and industrial production data as well as final inflation data for the November.
Important news for EUR:
Final services PMI for December came in at 50 vs 49 preliminary. A decent revision higher putting the reading back to 50 level. Composite PMI was pushed to 49.3 vs 48.5 preliminary. BOE governor Carney stated that projected rebound in pound for this year is not assured adding that UK’s economic growth has slowed below its potential. Since there is a limited space for rate cuts BOE will be prepared to act and cut down rates if there is a significant deterioration in the incoming data. GBP has dropped on these statements with GBPUSD falling to 1.30150 before stabilizing.
European Commission president von der Leyen stated that there is not enough time for a comprehensive deal between EU and UK by the end of 2020, therefore both sides will have to prioritize what they want agreed if there will be no extension of the transition period. The Withdrawal Bill has passed House of Commons and now waits for approval in the House of Lords.
This week we will have GDP, trade balance, inflation and consumption data.
Important news for GBP:
- Retail Sales
Trade balance for November came in at AUD5800mn vs AUD4075mn the previous month. Exports were up 2%, iron ore exports surged, while the imports fell -3% m/m. The big drop in imports indicates issues with domestic demand for foreign products which, if it continues for some time, will raise serious concerns. Retail sales beat the expectations coming in at 0.9% m/m vs 0.4% m/m as expected. Black Friday sales were responsible for the result as electronic goods and online sales showed a very strong growth.
Caixin services PMI for December came in at 52.5 vs 53.5 the previous month. With manufacturing reading falling as well composite was dragged down to 52.6 vs 53.2 the previous month. CPI stayed the same at 4.5% y/y while PPI showed an improvement to -0.5% y/y vs -1.4% y/y the previous month. The price of pork fell on the month which prevented inflation from going higher. Improvement in PPI is welcomed as it will raise industrial profits, however it is still in the negative territory which is troublesome for the economy.
This week we will have trade balance, GDP, industrial production and consumption data.
Important news for AUD:
- Trade Balance (China)
Industrial Production (China)
Retail Sales (China)
GDT price index came in at 2.8%, a nice rebound after -5.1% result of the previous auction.
This week we will have consumption data.
Important news for NZD:
- Electronic Card Retail Sales
Trade balance for November came in at -$1.09bn vs -$1.2bn as expected. Exports were down -1.4% m/m all due to the drop in energy exports while imports were down -2.4% m/m. Surplus in trade with US was decreased to $4.2bn vs $5.2bn the previous month while deficit in trade with the rest of the world shrunk to $5.3bn from $6.7bn the previous month. Statistics Canada noted that the declines in exports and imports occurred at the same time as labour disruption on the railways.
December employment report showed a net change in employment of 35.2k, a big rebound from -71.2k the previous month. A Very encouraging sign is the change in full-time employment which came in at 38.4k vs -38.4k the previous month. The unemployment rate was shaved down to 5.6% from 5.9% the previous month with participation rate ticking down to 65.5% from 65.6% the previous month. A small concerning sign in overall strong report is the drop in the hourly wage rate for permanent employees to 3.8% y/y from 4.4% y/y the previous month.
Final manufacturing PMI for December came in at 48.4 vs 48.9 the previous month. Continuation of the negative trend putting the reading deeper into contraction indicates deeper issues with the manufacturing sector. Services PMI came in at 49.4, back to contraction territory after posting 50.3 the previous month, which is the weakest reading in more than 3 years. Composite PMI was brought down to 48.6. Combination of bad weather (typhoon), sales tax hike and increased global tensions will contribute to negative Q4 GDP.
Labour earnings in November fell for the first time in three months coming in at -0.2% m/m vs 0% m/m the previous month. Real cash earnings fell by -0.9% m/m vs -0.4% m/m the previous month. With cash earnings dropping there is a little hope for core inflation to pick up as headline will rise on the back of rising oil prices. Household consumption came in at -2% y/y vs -5.1 y/y the previous month indicating that consumption is slowly improving after the sales tax hike.
This week we will have data on machinery orders.
Important news for JPY:
- Core Machinery Orders
CPI in December came in flat vs -0.1% m/m and improved to 0.2% y/y vs -0.1% y/y the previous month. Core CPI came steady at 0.4% y/y. Seasonally adjusted unemployment rate stayed the same at 2.3%. Retail sales for November came in flat vs 0.4% y/y the previous month. Particularly worrying fact is that reading encompassed holiday season shopping and it still came in flat.