Confidence in the outlook of the Chinese economy improved in the wake of the Christmas break, encouraged by the latest domestic data. Signs of resilience within the world’s second largest economy prompted a rally in commodity prices, pushing the ‘Aussie’ higher as a result. Even though the longer term outlook of the antipodean currency remains more bearish, this was not enough to keep the Australian Dollar down on Wednesday.
A strong showing from Friday’s private sector credit figures could encourage the ‘Aussie’ further, with higher levels of credit suggesting a robust Australian economy.
Signs didn’t point towards a robust UK housing market, with the latest BBA mortgage approvals figure falling short of forecast. A dip in lending activity suggests that confidence amongst lenders and consumers is more limited, suggesting that the negative fallout of the Brexit vote continues to be felt. Sterling was also weighed down by jitters over the prospect of the UK losing its privileged access to the single market, with a lack of clarity from the government stoking fears of a harder form of Brexit.
Forecasts point towards a dip in the Nationwide house price index, which could weaken Pound exchange rates further on the prospect of a greater slowdown in economic activity.
Worries over the future of Monte dei Paschi resurfaced this week, with confidence shaken by the European Central Bank’s (ECB) assessment that the lender needed more recapitalisation funds. With a liquidity shortfall of 8.8 billion rather than the 5 billion previously highlighted, nerves heightened over the Italian government’s ability to shore up the bank. Given the major political headwinds facing the Euro in 2017, this latest hiccup did not do much to improve the outlook of the single currency.
Political developments could diminish the strength of the Euro in the absence of fresh Eurozone data.
December’s US consumer confidence index unexpectedly surged higher on the month to rise from 109.4 to 113.7, underlining the positive impression of the domestic economy. With sentiment bullish, the appeal of the US Dollar remained solid, despite a general resurgence in risk appetite. Markets remain largely convinced that the Federal Reserve will continue to tighten monetary policy in 2017, a prospect that has maintained underlying support for the ‘Greenback’.
A narrowing of the advance goods trade deficit would encourage greater demand for the US Dollar, offering further incentive for the Fed to raise interest rates further.
Even though Libya raised its output capacity, this was not enough to limit the recovery of oil prices on Wednesday. Brent crude continued to trend above the US$56 per barrel mark, remaining buoyant thanks to hopes that oil producers will follow through on pledged cuts. This shored up the Canadian Dollar, even though the risk-sensitive currency remains vulnerable to downside pressure.
The strength of the ‘Loonie’ could be short-lived, though, if the latest US crude inventories data shows an increase in stockpiles.
With the appeal of commodity-correlated currencies improved, the ‘Kiwi’ returned to a stronger footing against many of its rivals. In spite of the lack of fresh New Zealand data the antipodean currency trended higher, benefitting from the weakness of the Japanese Yen and limited demand for safe-haven assets.
General market sentiment will continue to determine the direction of the New Zealand Dollar this week, with low trading volumes leaving room for substantial volatility.
December 29th 18:00 GBP Nationwide House Prices (YoY) (DEC) 3.8%
December 30th 00:30 USD Advance Goods Trade Balance (NOV) -61.5 billion
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