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Economies of Note - 14th August

Written by Ian Dobbs on August 14th, 2015.      0 comments

Of Note:
The real action on the week came via the surprise announcement by the People's Bank of China (PBOC) on Tuesday that they were devaluing the Yuan by 1.9%. The PBOC said at the time it was a “one-off adjustment”, then they went and devalued again by 1.6% on Wednesday and 1.1% on Thursday. It seems the devaluations were in response to very poor trade data released over the weekend. Chinese exports, a key driver of growth, plunged 8.3% year on year in July. Forecasters were expecting some sort of policy response from authorities, but a currency devaluation was not anticipated. The PBOC have lowered interest rates four times since November last year to support the economy and this Yuan devaluation is an eyebrow raising addition. The market is still trying to work out the long term impact of the move and it is a very fluid situation. If these moves were to trigger competitive devaluations by other Asian nations things could start to spiral out of control and an ‘all new’ Asian currency crisis could develop. Commodity currencies (NZD, AUD and CAD) initially got sold hard on the announcements, as they’ve raised doubts about the outlook for global growth, but they have managed to recover some of the lost ground.

So far this week from Australia we have seen readings on business confidence, consumer sentiment, the wage price index and inflation expectations. It is fair to say however, that they have all been side-lined by the developments out of China. For the record, business confidence fell from 10 to 4, consumer sentiment jumped 7.8% from -3.2% prior, wages gained 0.6% as expected, and inflation expectations strengthened a touch to 3.7%. The real action on the week came via the surprise announcement by the People's Bank of China (PBOC) on Tuesday that they were devaluing the Yuan. The knee jerk reaction in the market was to sell the Australian dollar, along with the other commodity currencies, and strengthen the USD. This saw the AUD trade to fresh cycle lows on a number of crosses. By later in the week though, the market was reassessing the wider impact of the move and deciding it reduced the chance of a US Fed interest rate hike in September. This helped the Australian dollar regain some of the lost ground. The Yuan devaluation can easily be viewed as negative for the Australian dollar as it will negatively impact commodity prices. A more positive interpretation however, would be that a weaker Yuan is a stimulus for the Chinese economy, and what’s good for China is ultimately good for Australia. We may well have to wait for things to play out before we know the real impact of this devaluation. Price action in the Australian dollar over the past few days is a good indicator that the market struggling to agree on the long term impact of the move. The focus locally next week will be on the RBA’s minutes set for release on Tuesday.

New Zealand
China has been the main focus this week with repeated Yuan devaluations sending shockwaves through markets. Initially the impact was negative on the New Zealand dollar with fresh cycle lows trading on a number of crosses. But the market then came to realise the consequence could be a much reduced chance of an interest rate hike by the US Fed in September and this help the NZD recover much of the lost ground. The true ramifications of the devaluation may not be known for some time, but the move is stimulatory for the Chinese economy and ultimately what’s good for China is good for New Zealand. The real problem would be if this was the start of a trend of devaluations by the Chinese that then spread to other Asian nations who would need to act to remain competitive. The global economy is much too fragile to withstand an all-out currency war. At the end of the day the Chinese Yuan has been pegged to a rising USD, and therefore it too has been appreciating against most other currencies, at a time when their economy is slowing. Compare that to the New Zealand dollar which has declined against the USD by more than 20% over the past year. In this context the move is more than reasonable, but it has shaken the markets. Earlier this morning we saw the latest NZ retail sales data and it didn't’ make great reading. Sales were much softer than forecast at just +0.1% and there were downward revisions to the previous result as well. Next week to draw focus we have another dairy auction, producer prices and inflation expectations data.

United States
Data from the United States this week hasn’t had a big impact. The highlight so far was last night’s retails sales figures which came in broadly in line with expectations at +0.6%. There were positive revisions to previous numbers which meant overall the report was reasonably solid and it helped support the USD to a degree. Like most currencies the US dollar has seen volatility in the back of the Chinese Yuan devaluation. The initial reaction was to strengthen the USD across the board, but that move has since been tempered by the view that Chinese action makes a September interest rate hike by the Fed a little less likely now. A weaker Yuan will be another deflationary force in the global environment at a time when there is very little inflation anywhere. It certainly doesn’t make the Fed’s decision any easier. Tonight we get producer prices data and the latest reading from University of Michigan consumer confidence. Next week attention will turn to building permits, inflation, the FOMC minutes and the Philly Fed manufacturing index.

United Kingdom
The major focus in terms of data this week from the United Kingdom was on the employment numbers. While the unemployment rate stayed steady at 5.6% the number of unemployed people in the second quarter increased by 25k from the first quarter. This is the second time in a row the ONS (Office for National Statistics) has reported fewer people in work on the quarter. Earnings growth also slowed to 2.4% from 3.2% and this will draw the attention of the Bank of England. The jobs market has been the bright spot of the UK economy throughout the GFC and the recent recovery and while it’s too early to say the employment market is levelling off, these figures do strengthen that possibility. Combined with the slowing in wage growth, it only serves to reinforce the view that an interest rate hike from the BOE may now come later than around the turn of the year. Next week we have inflation data and retail sales numbers to digest.

The Euro has been one of the stronger currencies this week. Gains were seen after the EU confirmed Greece and its creditors have agreed on terms for a third bailout package rumoured to be around 85bln over the next three years. In return, Greece will implement measures to increase the retirement age, open up the energy and pharmaceutical industries and put new taxes on shipping firms. In recent days Germany has even started to talk about Greek debt relief which, although not an actual haircut, could include measures such as extending maturities or interest payment holidays. The Euro has also seen demand on the back of the Chinese Yuan devaluation. The Euro has been the funding currency of choice for the ‘carry trade’ where large amounts of funds borrowed in Europe at low interest rates have ended up in investments in China. The unwinding of these trades involves selling Yuan and buying Euros’ and if the Yuan keeps devaluing more and more carry trades will get unwound. Tonight we have the final reading of inflation along with the latest GDP data. Then next week attention will turn to manufacturing and service sector PMI’s.

We have seen mostly second tier data from Japan this week and much of it has been softer than forecast. The current account, consumer confidence, economy watchers sentiment and core machinery orders all disappointed. Industrial production and tertiary industry activity were the only results to surprise on the positive side. The Japanese cabinet have called a special meeting today and speculation is that it’s to discuss the Chinese Yuan devaluation. Yesterday we saw comments from PM adviser Hamada that Japan could offset yuan devaluation by monetary easing if the Chinese move hits external demand too much. This is the big risk with the Chinese move. It could easily result in a ‘beggar thy neighbour’ round of competitive devaluations where nobody wins. One thing's for sure, most economists already expected the Bank of Japan to be forced to ease again in the coming months and China’s recent action will have only reinforced those opinions. Next week we have GDP data, the trade balance and the Bank of Japan interest rate meeting.

It has been a quiet week for economic data out of Canada. We have only seen housing starts, which printed below expectation at 193k, and the new house price index, which came in stronger than forecast at +0.3%. Tonight should prove more interesting with manufacturing sale data set for release. Like the other commodity currencies, the Canadian dollar has seen significant volatility on the back of the Chinese Yuan devaluation. Concerns about what the devaluations might mean for global growth have pressured oil prices and this has weighed on the CAD. Crude oil fell to a six year low this week. Next week we have wholesale sales, inflation and retail sales data to digest.