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Economies of Note - 10th February 2017

Written by Howard Wilcox on February 10th, 2017.      0 comments

The RBA, as expected, left interest rates on hold at 1.50% on Tuesday. Rates have now remained unchanged since last year's August cut. The statement was more upbeat on the global economy but largely unchanged on the Australian economy with the jobless rate rising, planned construction and retail sales trends continuing to weaken and wages growth and inflation remaining at record lows. In a statement after the meeting Governor Lowe commented that economic growth was forecast to centre around 3% over the next couple of years well up from earlier predictions. Focus now shifts to the release of the MPS later today and the GDP forecasts. Inflation is expected to pick up, increasing from 1.5% to over 2%. Overall, the statement was viewed as more bullish than expected and with the odds now wider for another RBA easing, the Australian dollar tracked higher to the 0.7677 level. The Australian dollar also hit a 21 month high against the EUR at 0.7175 (1.3936)  not only helped by the more bullish RBA outlook but amid political uncertainty after French presidential candidate Marine Le Pen  commented that she would pull France out of the Eurozone if elected in the May poll. The continued strength in both gold and base metal prices is also helping underpin the Australian dollar and shore-up the underlying Australian economy.

New Zealand
In contrast to the RBA statement, The RBNZ release yesterday was unexpectedly dovish although rates were left unchanged at 1.75%. The RBNZ appeared to be more cautious and now looks to be on hold for longer than earlier anticipated, given global uncertainty, with expectation that the next rate hike may not be until 2019 or early 2020. We believe that inflation is hardly likely to stay benign for that length of time. The RBNZ said that continuing surplus capacity in the global economy and increasing geopolitical uncertainty remained major challenges. The RBNZ also continued to beat the drum of the New Zealand dollar exchange rate being too high, expressing concern that a decline was necessary….."The exchange rate remains higher than is sustainable for balanced growth and, together with low global inflation, continues to generate negative inflation in the tradables sector," Looking ahead, the Reserve Bank said: "Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain, particularly in respect of the international outlook, and policy may need to adjust accordingly." The New Zealand dollar slid lower after the release, to a two week low of 0.7215 after a high at 0.7375 earlier in the week on the back of stronger dairy prices. Overnight, as the RBNZ statement has been digested, the New Zealand dollar has shifted lower into the 0.7180/90 region however given the still solid fundamentals we still believe any dips will be seen as buying opportunities.

United States
US equity markets have remained firm over the last few days, albeit in a holding pattern as the risk-off tone continues to hold sway, given the long awaited details for the new administration's pro-growth policies remained undelivered. The “Trump bump” effect continuing to fade, as markets awaited further detail on the timing and scope of the promised pro-growth policies from the new US.  However this changed overnight with U.S. stocks rising again to record highs, the US dollar surging higher  and US Treasuries falling, after President  Trump said long-awaited details on promised tax cuts would emerge within weeks, including a “phenomenal” tax deal, revitalizing markets that had begun to show signs of cracking. Also getting a boost were airline stocks after President Trump  U.S. airlines he would help them compete with foreign carriers that are aided by their governments, a crucial signal of White House support for an industry campaign that began in 2015. Whether the USD can maintain momentum at higher levels will be dependent on further statements by President Trump or Fed Chair Yellen, who is scheduled to address Congress next week (Feb 14-15) on the Fed’s view on the state of the economic outlook.         

United Kingdom
In the UK Brexit moved a step closer, as PM May defeated attempted amendments to her Article 50 bill in the Commons and having the law passed by a 494 votes to 122 in its unamended form. It now heads to the House of Lords, clearing the way for the two year exit process to begin probably towards the end of March. After more than 50 Labour MP’s voted against the motion in direct defiance of directions by Labour leader Jeremy Corbyn, rumours are now circulating that he may resign. The British pound has tracked higher against most of its trading partners after one its top officials commented that it was time to increase interest rates. These comments came only days after the BoE kept rates on hold and provided a neutral stance in its monetary policy statement

The EUR  continues to lack clear direction and given the light amount of economic data this week focus has shifted onto the upcoming French presidential election which has seen the question of leaving the EU over-riding other domestic issues. This is especially so since Marine LePen is openly suggesting such a course. Also not helping EUR sentiment were comments from ECB head Draghi, that monetary policy will remain accommodative until at least October 2019 when his mandate expires. However overnight, Eurozone equity markets rallied as the solid results from bank Societe Generale eased concerns about the region’s banks. Also back in the news again was Greek debt, with the IMF announcing that the country’s debt, at 179% of gross domestic product at the end of 2015, was “unsustainable.” and what was required was a substantial write-off of the debt. Greece must meet strict fiscal targets to unlock more financial aid and keep the International Monetary Fund, an important creditor, involved. The IMF says the country won’t meet those targets, potentially touching off yet another global spectacle over the fate of Greece, the future of the euro area and the viability of the single currency.

The Japanese currency maintained its strength for most of the week as investor flows continued to switch into the JPY on the continuing risk-off tone. However the JPY has weakened overnight on the Trump inspired US dollar rebound. Japanese PM Abe, heads to the US today to have his first summit meeting with President Trump. It should be interesting as over the last few weeks, Abe has pushed back against Trump’s accusations of currency manipulation and criticism over the difficulty in selling U.S.-made automobiles in Japan. He has said it’s inaccurate that Japan is devaluing its currency, and that American cars don’t sell well in Japan in part because of a lack of dealerships, promotion and advertising. Abe will be keen to emphasize the positives with Trump, that Japan is already the second-largest foreign investor in the U.S., and says it provides more jobs in the US than any other foreign country. It is also understood that Abe will present an  economic plan to Trump that has potential to  generate 700,000 jobs, including by investing in high-speed rail and power generation, joint development of infrastructure overseas and buying more shale gas to reduce the Japanese trade surplus.

Canadian PMI data released earlier in the weak showed a decrease for January to 57.2 from December’s 60.8. This was lower than the expected 58.3 and this movement closer towards the 50 threshold, that distinguishes between expansion from contraction in the manufacturing sector, would appear to be consistent with forecasts for a flat growth in industrial production over 2017. Housing start data released mid-week showed a seasonally-adjusted 207,400 units in January, this figure marked a mild 0.5% increase from December’s revised 206,300 units (previously reported: +207,000 units). This was stronger than the 200,000 units expected by the market.