US Fed Lockhart: June should remain an option for a rate hike

April 15, 2016

FX News Today

China’s economic growth was slowest in seven years in the first quarter. At the same time though indicators from consumer, investment and factory sectors show encouraging signs that the slowdown in Chinese economy may soon be over. Official government data on Friday showed GDP grew 6.7 percent in the Q1 2016 from the previous year, (in line with analyst forecasts). This was slight drop from 6.8 percent in the fourth quarter. Reuters reports that while this was the weakest pace of expansion since the first quarter of 2009, when growth tumbled to 6.2 percent, other activity data reinforced previous signs that the economy may be finding traction with better-than-expected growth seen in retail sales, industrial output and fixed asset investment.

PBoC Deputy Governor said the economy is “pretty robust” in late-breaking remarks that China GDP could grow by 6.5-7.0% this year given electricity consumption figures and other data. The biggest challenge was to continue to carry out reforms, he said, while he felt the message had been received that the yuan is pegged against a basket of currencies, of which the dollar still has a relatively large weight. He concurred that market forces were the primary driver of FX moves and the bank doesn’t want to see a severe overshoot from current near-equillibrium levels. He also endorsed the independence of China monetary policy. USD-JPY got a little bid with the remarks as USDCNY cruised aback over 6.48%.

US Fed Lockhart: June should remain an option for a rate hike, he told reporters. But he added that Brexit is a consideration for policymakers, though how it “will be weighed, or should it be weighed is an open question.” It could affect exchange rates and raise long-term questions on the euro area. Yet, he doesn’t think it should “stop the music” for the FOMC, however.

BoE Holds Steady Amid Brexit Risk: The BoE once again voted unanimously to keep rates on hold yesterday, as widely expected. The uncertainty ahead of the Brexit referendum on June 23 is starting to have an impact on investment and the central bank like many investors seems to be in wait and see mode, even if the implicit tightening bias was left in place. The MPC highlighted that in this climate even the interpretation of economic indicators will be more difficult and that means no major decisions either way are likely to be made ahead of the referendum.

Main Macro Events Today

US Industrial Production: The US Industrial production is expected to fall 0.4% in March, after falling 0.5% in February. Forecast risk: downward, as March mining data remained depressed. Market risk: upward, as a run of weaker data could impact rate hike timelines.

US Capacity Utilization: The US Capacity Utilization numbers are out today and are expected to come in slightly lower than in March. The consensus expectation is 75.4% in March after 76.7% level in February. This follows a descending trend in the capacity utilization in 2015 after the index peaked at 80% in December 2014.

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