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FOMC & RBA Minutes, EU Leaders meet in Brussels

By OFX

The US Dollar Currency Index (DXY) continued its bullish run last week climbing further as it extends its legs to test the 96.00 handle for the first time since October 10th. The anticipated FOMC minutes release revealed that current interest rates remain accommodating and neutral monetary policy is the goal. If the Feds current economic models remain consistent with projections, we are looking at another hike this year and at least three more rate hikes in 2019. This would take rates to a more “neutral level” of 2.75-3.0 percent, the Federal Reserve considers this gradual approach to tightening policy ideal for future adjustments to economic conditions.

Driven by the bullish release in the latest federal reserve meeting minutes, the Philly Fed Manufacturing Index was also active as regional manufacturing activity continued to grow in October. Despite being slightly weaker than the September reading of 22.9, the text showed the factory sector is steady and has been uplifted this year by fiscal stimulus.

Elsewhere, United States unemployment claims have dropped to 210,000 for the week, a decrease of 5,000 for the week ended October 13th. Claims continue to fall to levels not seen since 1973.

The Bank of Canada released its 3rd quarter Business Outlook Survey last week, which showed Canadian businesses were optimistic for future growth. This helped the CAD get a boost of recovery across its G10 peers.

Despite this, the loonie gave up three-quarters of a cent after the release of some very poor economic fundamentals throughout the week. CPI figures missed expectations on all readings for CPI MoM for September posting -0.4% vs expectations of 0.0%, while Core MoM printed 0.0% vs 1.8% expected and, YoY Core CPI missed expectations of 2.7% and printed 2.2%. Also adding to the Canadian dollar's weakness was the release of Retail Sales also missing the mark. Retail Sales ex Autos for August published at -0.4% consensus was for 0.2% and the previous saw 0.8%, Retail Sales for August came in at -0.1% vs. prior of 0.2% also below the consensus of 0.3%. These fundamentals are not offering any support for the loonie as market participants eye the Bank of Canada's interest rate announcement next week and start to question if the BoC will be as hawkish as projected.

Last week confirmed that Italy has finally submitted its budget to the European Commission for 2019. The European Commission is likely to reject the draft proposal and the next risk event for Italy and the Euro comes from global credit rating agencies S&P and Moody’s both of which are set to re-evaluate the status of the country’s sovereign debt.

Currently, this debt sits two grades above junk and it’s unlikely given Italy’s current form that the agencies will be upgrading these outlooks. But what does this mean to the Euro? Italy is hugely important to the EU. Not only is it the 2nd largest manufacturer on the continent (behind Germany) it also contributes 12% of the populations and 12% of the EU’s GDP. Unlike Greece, Italy plays a major role.

Meetings are now underway in Rome between European Commission Pierre Moscovici and Italian Finance Minister Giovanni Tria as the backlash on Italy’s budget proposal gets underway. They have already taken the first steps asking Italy to clarify the ‘obvious significant deviation’ that runs throughout the budget. The next date for Italy, the market and importantly the Euro to look out for is the 22nd when the European Commission is expected to publish its findings and in all likelihood issues with the budget. With several other steps and deadlines, this saga could continue all the way up to the middle of December. There is an ECB press conference next week and it would be very surprising if the (Italian) President of the ECB Mario Draghi isn’t asked about the situation in Italy.

Another big Brexit week. The latest meeting between EU leaders in Brussels kicked off with the focus of an agreement over a future trading arrangement between the bloc and the UK on the agenda.

As recently as last week it was looking like the get-together was going to provide the breakthrough needed to enable a severance deal to be confirmed at a specially arranged summit next month. EU chief negotiator stated last week that a deal was “80-85% done” however how to avoid a hard Irish border has once again been the sticking point between the two sides. With the EU Summit now over, however, we are told that negotiations will continue over the next few weeks. Theresa May spoke and stated that she is convinced that the UK will secure a good deal; a lot of optimism but not a lot else. Sterling is a fickle currency and the lack of detail always spells bad news.

Away from Brexit, there was positive data from the UK as wages were seen to rise at their fastest pace in nearly 10 years. Office for National Statistics data showed that in the three months to August wages rose at 3.1% y/y with wages including bonuses increasing 2.7% both above the 2.5% level of inflation for the same period. Elsewhere, UK retail sales numbers for September showed that the strong spending in the summer has come to an end with a 0.8% contraction. This was much greater and larger than expected and is indeed the greatest miss this year, however, the growth for the quarter which is a much better indication of the trend activity increased by 1.2%.

The Australian Dollar began last week on a two week high, off the back of some disappointing US retail sales data for September, which missed economists’ expectations and softened the greenback against the AUD.

Tuesday saw the highly anticipated Reserve Bank of Australia (RBA) Monetary Policy Meeting Minutes which showed that policymakers are still concerned about tightening lending standards. As such, the central bank maintained the cash rate at a record low of 1.5% and looking forward, it seems unlikely that said rate will be changed until at least 2020.

Elsewhere during the week, the Australian employment report for the month of September showed the economy added a total of 5.6K new jobs, missing the market's expectations of 15.0K. However, full-time employment was up by 20.3K, with a decline in part-time jobs. Australia’s unemployment rate fell to the lowest since April 2012, printing 5.0% vs. the previous 5.3%, with the participation rate down to 65.4% from 65.7%. The Aussie finished the week softer against its US counterpart, closing at the 0.7119 mark.

The New Zealand Dollar started last week in positive territory, performing well against all the key crosses. Amid the volatility seen in global markets, the New Zealand Dollar has remained relatively insulated from a number of disputes currently roiling financial markets.

Mid-week, stronger-than-expected CPI data also supported the kiwi. The NZD initially rose 0.7% immediately after the Q3 CPI data showed that inflation was on the rise. Core measures of inflation were relatively steady, averaging 1.8% but non-tradeable inflation was up 0.2%. The CPI reading adds to the GDP posting from last month and will give the RBNZ food for thought. While a rate hike is still unlikely, it does add a positive bias to the RBNZ’s thinking. The Kiwi took the news positively but faded after the initial move higher, settling just below the 0.6590 mark.

Risk-off sentiment themed the close of the week, pushing the USD and JPY higher against a number of currencies and against this backdrop, the New Zealand Dollar remained fairly resilient, sliding only marginally downwards. The New Zealand Dollar closed at 0.6598 against the US Dollar.