The lead up to a likely rate rise by the Fed and has caused consternation in markets and last minute positioning, especially from the People’s Bank of China (PBoC). There have been some positive signs that perhaps the worst of the pre-rate rise selloff may be behind us. Even though it was a fairly poor session in Asia and Europe, the fact that the ASX managed to bounce off the 5000 mark and that the DAX managed to still close in positive territory does bode well for today’s session.
The US dollar index bounced back 0.6% overnight, however it is still below the highs of Monday. What’s most interesting is that of the G10 currencies, the Aussie and the Kiwi dollar appear to still be performing well in the wake of the employment data and the Reserve Bank of New Zealand (RBNZ) rate cut, respectively. As history has shown a consistent pattern of a US dollar selloff at the beginning of a rate hike cycle, both the Aussie and the Kiwi could possibly be looking at further 2-3% increases next week from their already elevated levels. US$0.74 or above could be well within reach for the Aussie, and US$0.69 of higher for the Kiwi.
The Bank of England (BoE) meeting overnight indicated they had little inclination to follow fast on the Fed’s heels with their own rate hike. The BoE were keen to play up their concerns over ongoing energy-driven subdued inflation and that nominal wage growth had levelled off. These dovish statements were enough to see the pound weaken a slight 0.2% against the USD. But one feels that once the Fed has hiked rates first, the path to a BoE rate rise in 1H 2016 will be cleared.
Despite the better-than-expected EIA inventories data on Wednesday, oil has continued to decline, with WTI falling to US$36.60. WTI has now racked up its longest steady decline since July – although much of these inventory declines are being attributed to refiner destocking before the end of the tax year. OPEC also released their monthly report where they forecast 380,000 barrels per day drop in non-OPEC production next year, three times more than previous. Markets were little moved by this, and the focus now turns to the Baker Hughes drill rig count that will be released this evening, with only a major decline likely to please markets.
China is likely to release a large amount of data over the weekend. The usual monthly batch of retail sales, fixed asset investment and industrial production is set to be released tomorrow, despite markets being closed. The recent monthly increase in China’s import data is portending a slight turnaround in investment figures with industrial production expected to increase 5.7% from a previous 5.6%.