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Economies of Note - 15th May

Written by Ian Dobbs on May 15th, 2015.      0 comments

In terms of data from Australia this week we have seen business confidence hold steady coming in at the same reading as last month, stronger than expected home lending data, but a small pull back in the wage price index. The Australian budget was also released and this provided the Australian dollar with something of a boost. It was a reasonably friendly budget, with projections for unemployment to peak at 6.5% and GDP to return to above trend in 2016/17. Overall the budget won’t have had any impact on the current outlook for interest rates. Although the Reserve Bank of Australia have recently cut rates, and maintained something of an easing bias, the reality is the bank is more than likely on hold now for the near term. Next week from Australia we have the Monetary Policy Meeting Minutes to digest, along with consumer sentiment and inflation expectations data.

New Zealand
It has been a very interesting week in terms of interest rate expectations in New Zealand. Early on Monday morning ANZ produced a research note suggesting the RBNZ will cut interest rates by 0.25% in June and then again in July. This heaped pressure on the currency that was already suffering as a result of negative sentiment. The Reserve Bank then released their Financial Stability report on Wednesday and they are, rightly so, very concerned about the Auckland property market. They announced policy changes which mean property investors in Auckland will now have to front up with a 30% deposit. These will certainly have a dampening impact but they are far from a ‘magic bullet’ and they won’t come into effect until the 1st of October. The announcement of these new macro prudential tools has increased the chances of an interest rate cut in the future. However, in light of their very real concerns about the Auckland market it’s hard to see them pouring more fuel on that fire with two rate cut in the next two months. Rate cut expectations then took another hit with the release of yesterday’s retail sales data. Sales increased 2.7% against expectations for a 1.6% rise. That’s the biggest quarter on quarter increase since the series began back in 2003. All 15 retail categories were higher, which is the first time that’s happened since 2006. The RBNZ has traditionally been somewhat ‘hawkish’ and a little conservative when it comes to potentially applying too much stimulation to the NZ economy. I find it very hard to reconcile expectations for a rate cut from the central bank over the coming weeks with the current rampant property market and record setting retail sales. A rate cut may well eventually come, but it seems more likely to eventuate late this year at the earliest, or even sometime well into 2016. Next week we have inflation expectations data which the RBNZ do look closely at, another dairy auction from Fonterra and the annual budget release.

United States
Data from the United States this past week has highlighted an increasing divergence between the two key economic indicators of employment and retail sales. By all accounts the employment market remains strong. Last Friday’s non-farm payrolls data posted another positive +200k result, and last night weekly jobless claims came in better than forecast at 264k. Jobless claims have only printed lower than that a couple of times in the last 42 years. You would think if the job market is doing so well the US consumer would also be in good spirits, but there are very worrying signs in retail sales data. On Wednesday night retail sales for April came in at just +0.1%, well below the forecast of 0.4%. This marks the fifth consecutive below forecast result for the series. Where is the expected recovery from the very weak readings we saw over the winter period? Where is the expected boost to spending from the fall in gas prices seen last year? In fact, where is the US consumer? The Fed will need to see a recovery in more than just employment data before they consider raising interest rates. Producer prices data also released this week suggests we won’t be seeing a rate hike any time soon. The index fell 0.4% against expectations for a rise of 0.1%. This would indicate there are no pipeline inflationary pressures building at the moment. An interest rate hike in September is still a possibility, but it’s looking less and less likely the closer we get to it. In this environment the USD has struggled and it will continue to do so until the data starts to show a meaningful recovery from the very poor first quarter. Tonight sees the release of University of Michigan consumer sentiment, and then next week we have building permits, the Fed minutes and inflation figures to look forward to.

United Kingdom
Data from the UK this week has been reasonably positive. Industrial production and manufacturing production results were both stronger than forecast, and although the claimant count change (unemployment claims) fell by less than expected, it was countered by strong wage growth figures. The Bank of England (BOE) have been back in the spotlight after their self-imposed blackout period ahead of the UK election. They held a somewhat delayed interest rate meeting on Monday and left policy settings unchanged which was no surprise. We also got the BOE inflation report on Wednesday which gave us a much better insight into the central bank's thinking. The bank has cut its growth forecasts over the next three years and they believe a dip into deflation is still a possibility, although it should prove temporary. They believe the unemployment rate will fall faster reaching 5.2% this year and even dip below 5.0% in the coming years. Productivity growth is expected to remain below past growth rates, and this means overall living standards will also only improve very gradually. The UK Pound saw some pressure on the back of the release although it still remains significantly higher than where it was before the election outcome. Next week to draw focus we have inflation and retail sales data along with the BOE minutes.

GDP data from the Eurozone this week was only a touch softer than forecast printing at 0.4%. A disappointing German GDP reading of 0.3% was countered by a better outcome for France, 0.6%, and even Italian GDP managed to post a better than expected gain of 0.3%. In a speech last night ECB President Mario Draghi said that although the unconventional policy measures have been more potent than expected so far, the bank will continue to implement QE in full until inflation sees a sustained adjustment. The Greek situation continues to receive plenty of headlines, but we have seen little in the way of significant movement toward an agreement between the country and its creditors. With the European economy finally starting to turn the corner, the biggest bargaining chip the Greeks hold is that a Greek exit now would likely undo all this good work. Europe doesn’t want that and neither do the majority of the Greek people, but the Syriza government came into power on the promise of improving the Greek situation and they are going to push it to the absolute limit to gain some concessions. Next week we have German ZEW economic sentiment data, manufacturing PMI, the final reading of inflation and the German IFO business climate index to digest.

We have seen some positive data releases from Japan this week, although they have largely been second tier indicators and they have therefore had little market impact. The Economy Watchers Sentiment Index improved from 52.2 to 53.6 and the Current Account Balance was much stronger than forecast coming in at a surplus of 2.07t Yen. That’s the highest surplus in seven years and was driven by the fall in the Yen which has helped to inflate income earned abroad, along with weaker energy prices which have trimmed the nation’s import bill. Bank of Japan Governor Kuroda is due to speak this afternoon and then next week we get data on core machinery orders, tertiary industry activity and GDP. We also have the BOJ monetary policy statement to digest next Friday.

It has been a very quiet week for Canadian economic releases so far with only the New House Price Index on any note. It came in at flat against expectations of a 0.2% gain, but there was little market impact. Of more interest will be tonight’s release of manufacturing sales data. The market is looking for a gain of 1.2% after the prior month's -1.7% reading. Next week should prove a little more exciting with a speech from BOC Governor Poloz followed by wholesale sales, inflation, and retail sales data.