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    IronFX Daily Commentary | 19/10/15

    19.10.2015, 10am

    • China’s GDP just below the 7% target China’s economy expanded 6.9% yoy in Q3, a slowdown from 7% yoy in the previous quarter. Even though this was better than market forecast of 6.8% yoy, the slowdown revived expectations of further stimulus. The PBOC has cut interest rates five times in almost a year and the government boosted infrastructure spending in recent months to keep growth from sliding too far below this year’s target of about 7%. In addition to the Q3 GDP data, retail sales ticked up slightly to 10.9% yoy in September, from 10.8% yoy previously, while industrial production and fixed assets investment decelerated from the previous month.

    • The focus now shifts to a key meeting of the Chinese Communist Party leaders at the end of the month, focusing on the next five-year plan. A lowering of the 7% yoy growth projection is a possibility following the slowdown in Q3, which could raise the prospects of a Chinese fiscal package. This has the potential to trigger an AUD and NZD short covering rally, but until then, the weak Chinese data may continue to weigh on those high yielding currencies.

    • Today’s highlights: During the European trading session, we have a very light calendar. The only noteworthy release we have is the US NAHB housing market index for October.

    • As for the speakers, Fed Governor Lael Brainard, Richmond Fed President Jeffrey Lacker, and ECB Governing Council member Ewald Nowotny speak.

    • As for the rest of the week, on Tuesday, the Reserve Bank of Australia releases the minutes of its October policy meeting. At this meeting, the Bank kept rates unchanged, as expected, and maintained its neutral stance. In the Bank’s semi-annual Financial Stability Review however, the officials showed concern over the deteriorating growth outlook for China and other EM economies, and the higher risks to the country’s financial stability that continue to revolve around property markets. These concerns raised the prospect for another rate cut this year. But given the fact that the semi-annual report was released after the October meeting, if in the minutes they hint no further rate cuts this year, AUD could firm up.

    • On Wednesday, the highlight will be the Bank of Canada rate decision. The September policy meeting statement gave no hint that further accommodation was being considered. Overall, they seemed to be satisfied with the impact of their recent reduction in rates and happy to remain on hold for some time. As for the currency, they mentioned approvingly that the fall in CAD is “helping to absorb some of the impact of lower commodity prices” and “facilitating the adjustments taking place in Canada’s economy.” As such, we don’t expect any action at this meeting, but we expect the Bank to reiterate its dovish stance and keep alive the scenario for further cuts in the foreseeable future. That could leave CAD vulnerable. The Bank also releases the updated quarterly economic forecast and Gov. Poloz will hold a press conference following the decision.

    • On Thursday, all eyes will be on the ECB policy meeting. Over the past month, ECB members emphasized that the door remains open for further easing measures. They even made technical changes to the existing QE program, by increasing the limit for buying individual bonds to provide flexibility for further action if required. But on Thursday ECB member Ewald Nowotny sent the euro tumbling when he said the Bank needs to do more to lift inflation and growth, fueling expectations for further measures at this meeting. The comments differ from the recent on-hold stance from several ECB officials, including ECB President Draghi, regarding the need for more stimulus. However, ECB Nowotny’s fresh comments today in a polish newswire, showed that it’s too early to talk about extending QE beyond September 2016. He even said that fiscal policy in Eurozone are not growth-enhancing, raising the question on what has to be done if not extending the QE nor adding fiscal stimulus. In our view, at Thursday’s meeting we could see a more dovish rhetoric, even a promise of an expansion of the current program, either the size or the horizon, but no action yet. An announcement of further measures, could challenge the effectiveness of the stimulative measures taken so far. They may also want to wait to see what the Fed will do before taking further actions.

    • Friday is a PMI day! During the European trading day, we get the preliminary manufacturing and service-sector PMI data for October from several European countries and the Eurozone as a whole. Expectations are for the French, German and Eurozone PMIs to decline somewhat. This could weaken EUR a bit. From Canada, we get the CPI for September. The direction of the Canadian dollar will be mainly affected by the BoC policy meeting on Wednesday and the updated economic forecasts, but in any case, a disappointment in the CPI figure following could weigh on CAD and put it under renewed selling pressure.


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