Pound Falls on New Poll, RBNZ Stands Pat and Aussie Jobs Print at Record

This is a summary for the forex trading week ending Friday, September 12th 2014. The Pound fell as a new poll on Scottish independence showed the ‘’YES’’ camp in the lead for the first time. The Reserve Bank of New Zealand kept rates at the 3.5% level and the Australian jobs report printed an astounding gain of 121,000 jobs on a change in methodology.

Pound Gaps Down on New Poll

The Pound closed 60 pips down this week compared to its close last Friday. The ballot on Scottish independence is now just few days away on September 18th. On Sunday, a new poll by YouGov showed the ‘’YES’’ camp in the lead for the first time since the start of the campaign. Fifty-one percent of respondents said that they will vote for separation from the United Kingdom, versus 49% against. 1) This caused Cable to gap down on the trading open. The GBP/USD opened at 1.6166, 158 pips below its close on Friday. The losses for the UK currency didn’t stop here however as the pair continued to get sold on Monday, eventually hitting a daily low of 1.6089.

Data on Tuesday didn’t help the embattled UK Currency. While the Manufacturing Production for July came in spot on the 0.3% analyst estimate, the country’s Trade Balance disappointed by printing a larger deficit of 10.2 Billion Pounds. 2) Forecasts were calling for a 9.1 Billion shortfall. The GBP/USD got a small boost from the BOE Governor Carney. Speaking in Liverpool, at a speech at the Trade Union Congress, Mark Carney told the audience that rates will probably rise in spring of next year: ‘’If interest rates were to follow the path expected by markets, that is, beginning to increase by the spring and thereafter rising very gradually, inflation would reach the 2 percent target and 1.2 million jobs would have been created. In other words, we would achieve our mandate.’’ 3) Cable reacted positively to the comments, rallying from 1.6126 to a daily high of 1.6156. But the gains were short-lived and the currency pair soon got sold to a new weekly low in the next few hours. Wednesday’s Inflation Report Hearings caused more volatility in the Pound related currency pairs and eventually lead to a renewed rally in the Cable. The BOE Governor again hinted that the time of higher interest rates is getting closer: ‘’It is my judgment that, consistent with the guidance and our forecast, as the economy has continued to normalize, we have moved closer to the point at which Bank Rate will need to start to rise in order to achieve the inflation target’’. 4)

The GBP/USD ended Wednesday 105 pips in the green. The rally in Cable continued in the next two days, despite no major news being released in the UK. On Thursday the currency pair rallied by 49 pips. The gains on Friday were somewhat small at + 14 pips. The end result of the move up was that the Pound managed to claw back most of the losses from the early part of the week. The GBP/USD closed on Friday at 1.6264, only 60 pips in the red.

Next week will be a volatile one for Cable. Three polls released during the weekend are suggesting that the referendum is too close to call. According to a poll by Survation, the No campaign is on 54 per cent, ahead of the separatist movement, which is on 46 per cent. Another poll by Opinium/Observer showed 53 per cent planning to vote No. But a survey of 705 Scots by ICM for The Telegraph shows the opposite results, 54 in favor of independence with 46 against. 5) According to analysts, if the ‘’YES’’ vote is successful, the Pound could fall as much as 10 percent. 6) Sixty-one percent of the 31 respondents polled by Bloomberg say Cable will fall 5-10% within a month in case of Scottish independence. A smaller, 36% are calling for 2-5% drop. In case of a ‘’NO’’ the Pound could rally 2-10% against the US Dollar, say around three out of four respondents. Exciting week coming up for the UK currency!

Euro Barely Changed, No Major Data Surprises

The Euro closed the week barely changed, up by 8 pips compared to its open. The currency pair exhibited a similar pattern as Cable, selling in the first two days then a rally towards the end of the week. Part of the reason for the low volatility in the EUR/USD is the lack of major news on both sides of the Atlantic, especially on the old continent. On Monday, the German Trade Balance came in at +22.2 Billion Euros, beating the 17.3 Billion forecast. 7) : German exports rose in July by +8.5% compared to the same period in July 2013. Contrary to the good news coming out of Germany, things are still looking bleak in France. The country’s Trade Balance recorded yes another shortfall, this time of 5.5 Billion Euros. Market forecasters were hoping for a somewhat smaller deficit of 5 Billion flat. The French Government Budget Balance is also continuing to print in the red. The government had a shortfall of 84.1 Billion Euros, new figures showed.

Wednesday finally brought some good news for Paris, the French Industrial Production rose by 0.2% in July, beating the expected -0.4%. 8) The country’s manufacturing output went down slightly by –0.3%, after an increase in June of +1.6%. Manufacturing is now down by 0.9% this year. On Thursday, both the German and the French CPI confirmed earlier prints of 0% and 0.4% respectively. Later on Thursday, speaking at the Eurofi Financial Forum 2014, in Milan, the President of the ECB Mario Draghi told the audience that the Bank can’t support the Euro area alone. 9) Draghi said that fiscal policy has to go hand-in-hand with monetary policy: ‘’My main message today is that only if structural, fiscal and monetary policies go hand in hand will the euro area see investment return’’

Friday saw another mixed set of reports from the Eurozone. The Industrial Production in Italy declined by 1 percent in July, while in the whole Euro area it rose by 1 percent. 10) According to the report, the highest increases were registered in Ireland (+11.3%), Estonia (+2.8%), Slovenia (+2.3%) and Croatia (+2.1%), and the largest decreases in Denmark (-4.7%), Malta (-4.2%) and Greece (-1.7%). The data failed to cause a significant reaction in the Euro. The moves in the EUR/USD on Friday were largely caused by US data.

US Data Continues to Print in the Green

Data in the US continues to print in the green. The first three days of the week were relatively uneventful for the Dollar. On Thursday, the weekly Unemployment Claims figures disappointed by printing at 315,000 new unemployed, over the 306,000 expected number. But a slew of reports on Friday confirmed the recovery story in the States. First, the Retail Sales for the month of August rose by 0.3%. 11) The tighter measure of the report, the Core Retail Sales also beat the 0.2% estimate by printing at + 0.3 percent. Bit later in the day the Preliminary University of Michigan Consumer Sentiment survey came in at 84.6, over the 83.2 figure expected by forecasters. 12)

Despite the better than expected results, the Dollar had a mixed result on Friday. A probable explanation is that the good numbers stoked investor sentiment and led to more risk taking. This is generally negative for the USD, a currency that tends to gain during times of market turmoil. The EUR/USD rallied by 24 pips on Friday, the GBP/USD gained 7 pips. On the other hand, the Aussie Dollar sold off 57 pips to close the week at 0.9041 and the USD/JPY closed at 107.33 on Friday, 29 pips up for the day.

Russian Ruble Continues Slide

The Russian Ruble continued the slide versus the US Dollar. The USD/RUB rallied from 37 flat to a high of 37.96 last week. Toward the closing, the currency pair weakened somewhat and closed at 37.73 on Friday. Investors are still jittery about investing in Russian assets. The ceasefire that was agreed last week in the Belorussian capital Minsk appears to be kept only by the Ukrainian side. 13) Russian artillery shelled Ukrainian positions on the outskirts of Mariupol last Friday, one woman died and four others were injured. 14) This week, militants supported by Russian military stormed and took over the Luhansk airport and are currently conducting an assault on the Donetsk airport. 15)

In light of the new developments, the European Union decided to go ahead with the planned round of new sanctions against Moscow on Friday. 16) Union officials told reporters that the sanctions will be lifted if the Kremlin changes policy in Ukraine and withdraws its troops from the country. In a further escalation of events, some of the self-proclaimed ‘’rebel’’ leaders are insisting that they were not a party to the Minsk deal and are therefore free to violate the ceasefire. This is despite their signatures being clearly visible in the OSCE document. 17) Things are looking bleak for the Russian Ruble as neither the Kremlin nor the ‘’rebels’’ it supports look willing to abide by the deal. I suspect that at some point the Russian Central Bank will have to get involved and attempt to stop the slide in the currency. The Ruble is now trading at its lowest level since the 1998 devaluation.

Japanese Yen Falls on Dovish Comments

The Japanese Yen fell across the board last week. The currency lost 233 pips against the US Dollar, 292 pips against the Euro and almost 300 pips against the weak Pound. There have been a slew of dovish comments by Japanese officials that probably exacerbated the fall. Last week, Economy Minister Akira Amari said that a falling exchange rate helps consumption, boosts asset prices and corporate profits. Koichi Hamada, an adviser to the Japanese Prime Minister Shinzo Abe, said in an interview that a weak yen is a positive for the country’s economy. And on Monday, Amari’s deputy, Yasutoshi Nishimura was quoted as saying that ‘’There is no doubt that the weakening yen is positive for Japan’s economy on the whole’’. 18)

On the data side, not much has changed this week. The country’s Current Account continued to print in the green. The July balance came in at +100 Billion Yen but this was 80 Billion below the excepted figure. The Japanese GDP figures for the second quarter printed spot on the - 1.8 percent analyst estimate. 19) The 1.8% fall comes after frontloaded demand ahead of the sales tax spiked the Q1 GDP to 1.6%. On an annualized basis, the fall is 7.1 percent in Q2, the most since the first quarter of 2009.

Data Paints a Bleak Picture of Japan’s Economy

With the Japanese economy now staring at its first down year since 2009, the case for continuing with the planned second sales tax hike to 10 percent will be harder to make. While the Bank of Japan continues to encourage the government to go ahead with the tax promising to act (read print more money), the political and economic fallout for Abe may be more then he is willing to take at this point. The Bank has warned that if Japan’s finances are not put on a sustainable footing, investors could lose faith and start to selloff government bonds. This will be a major problem for the country, Japan has the largest debt to GDP ratio in the developed world at of over 200 percent.

The rest of the reports didn’t really brighten the picture. On Monday, the Tertiary Industry Activity for July remained flat, contrary to an expected growth of 0.3 percent. 20) On Tuesday, data showed that consumers are still reeling from the April sales tax hike. Consumer Confidence fell in August from 41.5 to 41.2. The Core Machinery Orders for July disappointed by coming in at + 3.5%, lower then the 4.1% estimate. 21) In some good news for the troubled island nation, on Wednesday the BSI Manufacturing Index printed at 12.7, beating the -10.3 median forecast.

Australian Dollar Worst Performer Last Week

The Australian Dollar was the worst performer among the majors last week. The currency lost 321 pips versus the US Dollar, 171 pips against the Kiwi and a whopping 386 pips versus the Euro. The AUD/USD is now on a five day losing streak and the EUR/AUD is on a 5 day winning streak as the island nation’s currency fell in each of the five trading session last week. But let’s start from the beginning.

On Monday, the Business Confidence report published by the National Bank of Australia printed at 8, below last month’s 10 number. 22) Some of the key points from the report are that business confidence ‘’remains resilient’’. A sharp drop in profits and sales drove the slowdown in August, according to NAB. The Home Loans for July, released at the same time as the NAB business confidence, disappointed by coming in at only +0.3%, below the 1.1% expected figure. 23) The ‘’bad’’ data from Australia continued on Tuesday with the Westpac Consumer Sentiment. Data showed that consumer sentiment declined by 4.6% this month, a departure from last month’s 3.8 percent gain.

Aussie Falls Despite an astounding gain of 121,000 jobs

The big ticked news item for the Aussie last week was of course, the Employment Change report. The item delivered a shocking gain of 121,000 jobs, but this was largely due to a change in the methodology. 24) Another weak point is that the majority of the gains happened in part time employment, where over 106,000 jobs were created last month. Gains in fulltime jobs only amounted to + 14,300. The unemployment rate came in better then expected, at 6.1% vs 6.4 percent. As can be expected, the Australian Dollar surged on the initial news print. The AUD/USD spiked from 0.9155 to 0.9201 in the first minute. The currency pair continued the move up in the next ten minutes to reach a daily high of 0.9217. However as traders started to disseminate the report, the selling started and it was relentless. By the London open the Aussie had reversed all post-jobs gains and by the end of the day, the currency pair got sold to a daily low of 0.9088. The AUD/USD closed Thursday at 0.9099. The losses continued on Friday with the pair dropping another 62 pips to close off the week at 0.9037.

The RBNZ keeps rates at 3.5 percent

The Kiwi largely followed the Aussie lower last week. The currency lost 162 pips against the US Dollar and 311 pips versus the Euro but managed to eke out a small gain against the Aussie and the Japanese Yen. The only major news event out of the small island nation last week for the RBNZ meeting.

The Reserve Bank of New Zealand decided to keep interest rates at the 3.5 percent level. 25) In the accompanying statement the RBNZ expressed some dovish comments on the currency: ‘’ The high exchange rate continues to restrain growth in the traded sectors’’ the statement reads. The Bank is of the opinion that the Kiwi’s exchange rate has yet to adjust to the lower commodity prices and at its current level ‘’remains unjustified and unsustainable’’. The RBNZ expects further significant depreciation. But the Bank countered these comments by saying later on in the statement that they ‘’expect some further policy tightening will be necessary to keep future average inflation near the 2 percent target’’.

The two-sided statement lead to volatility in the NZD/USD. After an initial selloff of around 30 pips to a low of 0.8179, the currency pair rallied above the pre-release price to hit a daily high of 0.8222. Later in the day the Kiwi’s selloff continued however and the pair closed the day at 0.8184. After a further 40 pips drop on Friday, the NZD/USD closed the week at 0.8144.

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