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Economies of Note - 12th February

Written by Ian Dobbs on February 12th, 2016.      0 comments

Pricing in the AUD, like the NZD, has been dominated by offshore market sentiment again this week. A continued sharp deterioration in this sentiment has again placed global equity markets under severe pressure during the week, this as concerns over global growth, energy market weakness and banking credit issues dominate. Despite very volatile trade the AUD has held its ground despite the flight to safely and ‘risk off’ trade flow. This has come on the back of heavy USD selling as the market continues to unwind its positioning that was predicated on many future U.S. rate hikes. The probability of these hikes eventuating in 2016/17 and beyond has again taken another hit this week after U.S. Fed chair Yellen noted the potential downside impact of the heightened financial market volatility on the U.S. economy in her speech to Congress. This issue has dominated the markets focus in recent weeks and has already led to a sharp contraction in the expectations for the likely Fed tightening calendar. Data out of Australian included a rise in the Westpac consumer sentiment series and HIA new home sales, although these understandably failed to garner much attention. Key Australian data next week includes the January employment numbers on Thursday.

New Zealand
Fear has been the dominant theme in financial markets this week and none more so than in overnight trade as global equities continued their sharp sell-off. Periods of heightened volatility and risk aversion would normally see the NZD come under heavy pressure although it has performed well in recent trade as the ‘risk-off’ selling has been counterbalanced by a severe downwards correction in the USD and hunt for yield in the face of falling key global interest rates. Global growth concerns, plunging oil prices and elevated concerns over credit issues within the banking sector (particularly in Europe) have again been the drivers of the plunging market sentiment. Comments from Fed Chair Yellen this week which recognised the strength of the U.S. economy also acknowledged the potential downside impact of this financial market volatility. She again reiterated that the rate path moving forward was fluid; this had market pundits continuing to slash the odds of Fed rate hikes in the face of the continued erosion in financial market confidence. The local data calendar has been quiet this week. Next week’s data includes NZ Q4 retail sales on Tuesday and dairy pricing on Wednesday; again offshore events will be the key driver however.

United States
The USD slide has continued in earnest this week, this has occurred on the back of a continued wholesale liquidation of the overextended positioning which had built up over recent months on expectations of a series of future Fed rate hikes in 2016 (and beyond). A speech to Congress by Fed chair Janet Yellen has dominated the event calendar this week. In this speech she noted the less supportive outlook for the U.S. economic growth in light of the declines seen in equity prices, the higher USD, and increased borrowing costs faced by riskier borrowers. The financial market turmoil and global share market declines seen in 2016 (and towards the end of 2015) have been one of the primary motivators behind the sharp reduction seen in expectations for Fed rate hikes in 2016. Data released during the week included a decline in NFIB business optimism and initial jobless claims and rise in JOLTs job openings. Retail sales data and Michigan consumer sentiment numbers feature amongst others tonight, amongst key releases next weeks are the latest inflation numbers on Friday (Sat. morning N.Z . time).

United Kingdom
The GBP like the other currencies covered has swung heavily this week on the back of USD liquidation and to a lesser extent on the back of risk and data related flow. Credit and global growth concerns continue to weigh heavily on investor sentiment this week, weak oil markets are also having a large impact on risk sentiment which has seen global equity markets fall heavily this week. The GBP has performed better than may be expected during such times largely in part due to the large USD selling that continues as investors reduce the chances of Fed rate hikes in light of high financial market uncertainty. Local data released included a smaller than expected but still significant trade deficit, and decent misses in the December industrial and manufacturing production figures. RICS house price data released overnight missed the market consensus. U.K. inflation and employment data feature next week. Financial market uncertainties will continue to play a key role for the GBP next week as markets pair central bank rate hike expectations in the face of the heightened market volatility.

As has been the case with the other major currencies we cover it has been macro issues which have dictated trade in the EUR this week. This has seen the EUR/USD continue its strong rally seen this month as the market has moved to reduce USD exposure in light of the extreme financial market volatility and equity bourse declines, which have contributed to a further reduction in the markets expectations on the likelihood of U.S. Fed rate hikes. The expectations took a further hit this week after Fed chair Janet Yellen flagged concerns over the current financial conditions and its possible impact on U.S. growth in a speech to Congress this week. Credit market concerns have remained elevated in financial markets, particularly so in the European banking sector which saw some key banking issues decline by over 9% at one point in overnight trade. Data out of Europe this week included soft German industrial production and trade numbers and contractions in the French industrial and manufacturing data. The Italian industrial production data also missed expectations. Amongst other data set for release next week will be German ZEW economic confidence numbers although once again the prevailing USD sentiment looks set to widely dominate.

The JPY has continued to rocket higher in trade this week; heavy safe haven buying has again been the reason behind the move higher. This comes about amidst the financial market turmoil that has been seen this week which has again seen global equity bourses plunge and concerns over the health of the banking sector rise sharply. Global growth, credit, and oil price concerns continue to drive the increased uncertainty and associated rise in volatility. The correlation between oil pricing and equity market returns has surged in 2016 as investors fret over the impact that weak oil pricing will have on bank loan write-offs, energy company survival rates, and the spending power of oil producer countries many of which have had to redeem large amounts of sovereign wealth investments in order to fund their large operating deficits. The rise in the Yen will frustrate the BOJ whom just recently moved to introduce negative interest rates, a move which in part was designed to help keep the JPY soft. The surging Yen has placed  Japanese stocks under huge pressure this week as the investors weigh up the likely impact of the strengthening currency on Japanese exporters. Amongst data releases this week was a less than expected rise in labour cash earnings. Next week we will look forward to GDP data, and industrial production/capacity utilization figures on Monday. Machinery orders and trade data feature later in the week, although once again expect safe haven flow to dictate.

The CAD has again been on the back foot this week on the back of heavy renewed pressure in the oil and energy markets. The oil price declines have come as the market continues to reduce the likelihood of any agreement amongst key country producers to curtail production, especially after the impasse in talks at the weekend between Saudi Arabia and Venezuela. Sentiment took a further dent this week after a report from the IEA which lowered the estimates for global oil demand in 2016. IEA data released also showed an increase in the over-supply in Q4 2015 from the prior quarter. Economic data of note included building permits numbers which improved significantly from the month prior, new house prices for December released overnight were seen rising less than expectations. Inflation and retail sales data are the key releases of note next week.