For
the third consecutive month, the Reserve Bank of New Zealand raised its
benchmark interest rates on Wednesday evening, this time to 3.25%. Not only is
the RBNZ the first major central bank to begin raising interest rates since the
beginning of the global financial crisis, but they offered strong indications
on Wednesday evening that further interest rate hikes are likely to follow. Following
the interest rate hike, the NZDUSD climbed to its highest valuation in over a
month. It is widely expected that this coming Wednesday's New Zealand GDP
release is set to show that the New Zealand economy is rapidly expanding at
above a 3% annualized level. 60% of economists are already predicting a further
interest rate hike in July.
Shortly
following the news that a hawkish RBNZ raised interest rates, close neighbors Australia
released employment data which sent the AUDUSD just short of a yearly high. Although
the Australian economy unexpectedly lost 5,000 jobs in May, the unemployment
rate remained at a steady 5.8%, below the expected 5.9%. After analyzing the
employment data in deeper detail, it turned out that the employment contraction
last month was enticed by a decline in part time vacancies. In reference to
full time employment, over 20,000 jobs were created in Australia last month.
In
a major market surprise, BoE Governor Mark Carney sent the GBPUSD narrowly
close to a five-year high, following remarks made at a keynote speech in
London. Carney enticed a sudden surge in demand for the GBP, after publically
announcing that a UK interest rate rise could happen sooner than the markets
expects. Previously, Carney talked down the prospects of a UK interest rate
hike, stating that the BoE was in absolutely no hurry to raise rates. This news
has again soared suspicions that the BoE may now raise rates this autumn. Also
last week, the UK employment rate fell to a 5-year low.
Moving
on to the United States, economic performances were mixed last week. The week
started positively following the news that US Small Business Optimism reached
its highest level in over 7 years last month. This prompted suggestions that
small business hiring and expenditure will increase, further elevating the
recent progress noted in the employment (initial jobless claims and non-farm
payroll) and capital expenditure (durable goods and factory orders).
Unfortunately,
Thursday's advance retail sales figure failed to extend the chances of a USD
rally. After consumer expenditure advanced to its second highest level in 5
years last month, it was hoped that this would correlate towards an impressive
advance retail sales performance. Advance retail sales increased by only 0.3%,
short of the 0.6% expectation.
Analysts
were quick to decipher why we are not yet encountering additional consumer
expenditure, despite the employment sector making substantial progress. So far,
the consensus is that average wage growth is not yet increasing to the levels
required. Average wage growth increased by 2.1% (annualized) last month, but
economists predict that this figure needs to be around 3% before we witness
appreciated consumer spending. In theory, with job growth now expanding at
pre-recession levels in the United States, this should correct itself. However,
bearing in mind that the US economy is heavily reliant on consumer expenditure
(70% GDP), patience for improved consumer expenditure releases will be
thin.
What
to Watch this Week:
Looking ahead to the coming week, we have a variety of
higher risk economic data released throughout the major economies. On Monday
morning, we are expecting confirmation that EU CPI figures expanded at an
annualised 0.5% in May and on Monday evening, the latest RBA minutes are
released.
The RBA minutes pose a potential event risk for the week because last month, the RBA encouraged AUD weakness when they announced that the Australian economy is set to enter a period of weaker than expected economic growth. Despite the previous week's GDP release impressing, it was quickly noted that 0.9% of the 1.1% quarter expansion was led by mining exports. The Australian economy is under pressure to sway towards domestic consumption and away from mining reliance. If the RBA reiterates its dovish comments from last month, or implies that there is going to be a decrease in demand for mining exports, there will be downside risks for the AUD.
Tuesday and Wednesday are the particular days of the
week where a sharp increase in volatility is probable. Over these two days, we
are expecting key data from the United Kingdom and United States economy.
Starting with the United Kingdom, on Tuesday morning the latest UK CPI figures
are released. UK inflation is a key benchmark for the BoE to consider an
interest rate increase. The BoE’s inflation target is 2%. With Carney now
seemingly softening his stance in regards to an interest rate hike, this has
the potential to be a market mover.
Last month, the UK inflation level rebounded from a
four-year low 1.6% to 1.8%. Since then, UK Services PMI’s (main contributor to
the UK GDP) have expanded beyond expectations and UK retail sales growth
reached a decade high. Any improvement on last month’s 1.8% CPI reading will
likely extend demand for the GBP. A potential rally could extend into
Wednesday’s now expectedly hawkish BoE minutes release.
Tuesday is also the start of the latest Federal
Reserve two-day meeting. Although the FOMC decision on Wednesday is expected to
be a further $10bn taper of the Federal Reserve’s Quantitative Easing program,
there will be an added significance to this month’s Federal Reserve meeting
because it is expected to be followed by an updated version of the Federal
Reserve’s latest economic projection, and a live press conference from Federal
Reserve Chair, Janet Yellen.
The media will be paying particular attention to
Yellen’s tone, specifically any particular hints towards when the Federal
Reserve may look to begin raising interest rates. Last month, Yellen confirmed
that the Federal Reserve has begun discussing how they will raise interest
rates, but added that no time frame for this has been discussed. Since the
latest FOMC meeting, US economic data has been widely positive, apart from
consumer expenditure. There is a suspicion that the Federal Reserve may pick up
on this.
Finally, the week concludes with the latest New
Zealand GDP release on Thursday morning, followed by a live press conference
from the BoJ’s Kuroda on Friday morning. In reference to the New Zealand GDP,
economists are expecting confirmation that the New Zealand economy is expanding
at a level above an annualised 3%, and this will likely validate the RBNZ’s
indications that there will be further interest rate hikes in the coming months.
Written
by Jameel Ahmad, Chief Market Analyst at FXTM.
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