China Trade Figures Impress with Retail Sales and Inflation to Drive the Dollar

Earlier in the Day:

Macroeconomic data out through the Asian session was on the lighter side this morning, with material stats limited to New Zealand’s September Business PMI and China’s trade data, while the RBA also released its financial stability review.

The NZ Business PMI softened slightly in September, but was still considered to be at a high level, providing support to the Kiwi Dollar as the markets now need to wait until next week to discover which party NZ First will form a coalition with, the Nationals or Labour.

NZ First Party leader Peters said that NZ First’s board, the members of whom have yet to be revealed, will ultimately have the final say on which side NZ First should go with and with the Thursday deadline now passed, limbo continues for the Kiwi Dollar, which has benefitted from Dollar weakness than any shift in sentiment towards the uncertainty over the elections and the more dovish RBNZ.

For the AUD, yield differentials continued to support the AUD through the Asian session, with the RBA’s financial stability review having limited impact on the direction of the AUD.

Unsurprisingly, the RBA highlighted household borrowing as the key risk to Australia’s financial system, with any shift in RBA monetary policy through rate hikes likely to weigh heavily on households and their ability to meet debt obligations, which would also impact disposable incomes and peg back spending.

The concerns were nothing new, with the RBA having raised similar concerns in during the monetary policy meetings and will certainly be one of the factors that could leave the RBA treading water for longer.

At the time of the report, the Aussie Dollar was up 0.15% at $0.7832, with the Kiwi Dollar up 0.14% at $0.7134, with direction through to the close hinged on this afternoon’s U.S retail sales and inflation figures, with China’s trade figures doing little to peg back the AUD through the Asian session, supported by an 18.7% surge in China imports, with exports up 8.1% year-on-year in Dollar terms.

The Day Ahead:

Macroeconomic data through the European session today is limited to finalized September inflation figures out of Italy and Germany, which are unlikely to have a material bearing on the direction of the EUR through the day, as the markets continue to look for clues on the ECB’s intentions vis-à-vis the asset purchasing program for next year.

Inflationary pressures continue to remain subdued, with inflation numbers out of France disappointing yesterday, which supports the ECB’s more dovish position, though with the Eurozone economy continuing to press ahead, a move towards normalization remains likely at the turn of the year.

Geo-political risk has abated to a certain degree, with the Spanish government now looking to force the Catalan’s hand on independence, with a deadline of 16th October being given by Rajoy to Catalan President Puigdemont to clarify whether independence is the direction the Catalans wish to go, not that the Spanish government has any intentions of letting independence go ahead…

Dollar weakness has certainly contributed to the EUR’s resilience this week and reports of seismic activity in North Korea, within the same area as the nuclear testing site, has added to the Dollar’s softening, with funding currencies being the victim of a shift in risk appetite.

A lighter economic calendar will leave the EUR in the hands of FOMC member speeches later today and a heavy set of stats out of the U.S, which could yet again lead to a shift in sentiment towards a FED rate hike by year-end.

For the Pound, there are no material stats scheduled for release from the UK, with the Pound having found its feet on Thursday following news that the EU’s chief negotiator Barnier may be willing to offer the UK a 2-year transition period to remain within the EU. The Pound had been under scrutiny following news that negotiations had ground to a halt.

Politics is not alone in dictating the direction of the Pound, though Brexit will remain the key driver over the medium term, with even the BoE likely to be influenced by progress on negotiations and the terms under which Britain will eventually part ways.

There’s never a dull moment, with North Korea in the mix and, with the direction of the Dollar likely to cause central banks to have to weigh the likely effects of currency appreciation during a period of Dollar weakness.

Things could change for the Dollar this afternoon, with key stats out of the U.S including September’s inflation and retail sales figures, August business inventories and prelim October consumer sentiment numbers. Forecasts are certainly Dollar positive, with inflation expected to pick and retail sales to see a bounce, though it remains to be seen whether Hurricanes Harvey and Irma will have impacted.

A pickup in inflation and jump in consumer spending will support the likely majority of the FOMC members, with the fence sitters eager to see positive stats between now and the December meeting to support a rate hike. FOMC voting members Kaplan, Evans and Powell are scheduled to speak after the release of today’s stats, which will provide further direction should there be any reference to monetary policy.

The Pound was up 0.08% at $1.3273 at the time of writing, with the EUR up $0.13% at $0.1845, while the Dollar Spot index was down 0.11% at 92.959.