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Economies of note - 15th November

Written by Ian Dobbs on November 15th, 2013.      0 comments

To a large extent, the Australian dollar has been driven this week by offshore factors. There has been domestic data released, but none of it has significantly impacted the market. Business confidence fell from the previous month while consumer sentiment showed improvement. Motor vehicle sales came in below expectation as did the wage price index. This last factor probably influenced inflation expectations which were also very subdued. Next week is another light one with only the leading index and minutes from the last RBA monetary policy meeting set for release.

New Zealand
Wednesday saw the release of the RBNZ Financial Stability Report that caused some volatility in the currency market. The Reserve Bank says the housing market continues to be the main threat to the financial system. They say the household sector has high and rising levels of debt relative to both historical and international norms, and that both households and banks are highly exposed to the housing market. They do see NZ banks in strong shape however, and are expecting to start increasing rates next year as inflation pressures are picking up. The RBNZ says it’s also too early to assess the effectiveness of the new loan-to-value ratios (LVR) introduced recently. The NZD was sold sharply on the initial headlines, but as traders actually read the report the currency recovered. Yesterday saw the release of two other data points. The manufacturing index showed a gradual improvement over last month, and this was followed up by retail sales that were somewhat disappointing. The market was looking for a result of +0.9% but the actual figure printed at a mere +0.3%, helped in large part by motor vehicle sales. Next week is a very quiet one data wise with only producer prices drawing any real focus.
United States
For the most part, movements in the USD this week have been driven by headlines and comments from incoming Fed Chair Janet Yellen’s testimony before congress. These have combined with subdued data to see the USD weaken a touch. The trade balance, weekly unemployment claims, and nonfarm productivity data all come in on the soft side and below expectations. But the main focus was on testimony from incoming Fed Chairman Yellen, on Thursday and Friday morning. The market has been keen to get a feel for how she will conduct monetary policy, and judging from the reaction in the USD, most feel she won’t be in a hurry to exit the extraordinary measures (quantitative easing-QE) any time soon. To be fair, her comments were broadly balanced and it seems there will be no big change in the way the Fed operates when she takes over in January. Any potential tapering of QE is still very much data dependant, and at this point March seems a likely start date. One recent theme in a number of articles is worth mentioning. And that is that the Fed is allowing Washington to act irresponsibly, because money printing (QE) and asset inflation creates the impression of progress in the economy. The fact is Congress can’t agree on anything meaningful when it comes to tax, spending, or structural reform. Fed money printing is the only thing driving the economy, which is going to make it all the harder for them to stop. Growth needs to be driven from government policy and that seems very unlikely in the US at the moment. Tonight sees the release of industrial production data and next week there is plenty more to digest. The highlights will be retail sales, existing home sales, minutes from the last Fed meeting, and weekly unemployment claims.

There has been a lot of second tier data out of Europe this week, and most of it has disappointed. The highlights, if you can call them that, were industrial production on Wednesday that come in well under expectation at -0.5%, and Eurozone GDP last night which printed at +0.1% against an expectation of 0.2%. There has been good news with Ireland revealing they will exit the bailout programme without needing a credit line. Ireland’s rescue has certainly been a huge success, on the other side of the coin however, is Greece which is a total disaster. Concerns are growing about the lack of agreement on how to fund the upcoming 5bln euro hole in Greek finances. This week has also seen a lot of comment from ECB officials. The overriding theme has been that the bank still has room to act if necessary. Further rate cuts or extra ordinary measures are on the table should the bank see fit. Next week we get manufacturing data from France and Germany, along with readings on German economic sentiment and business climate.

United Kingdom
It has been an interesting week for the UK economy and as a result the GBP has had some decent moves. Tuesday’s release of inflation data surprised many coming in well below last month, and significantly below expectations. Inflation has been stubbornly high in the UK for much of the past five years. This recent result will be a relief for the Bank of England (BOE) as well as consumers who have not seen wages keep pace with the gains in inflation. The GBP, that has had a good run lately, saw some sharp losses on the back of this data. On Wednesday however, we had two key releases and they combined to help the currency recover. The first was employment data which continues to show good strength. Unemployment claims were well below expectation and this helped the unemployment rate fall from 7.7% to 7.6%. That data was followed an hour later by the BOE inflation report which had a very upbeat tone. Governor Carney says the UK’s glass is ‘definitely half-full” and that unemployment is likely to fall quicker than forecast. This is key for monetary policy as Carney has tied keeping interest rates low to a targeted unemployment rate of 7%. He was however quick to point out that hitting that level will not necessarily trigger a rate rise. That may be so, but 72% of UK households say the BOE will raise rates within 2 years. The way things are going currently a rate hike near the end of next year is a very real possibility. Retail sales data out last night did however provide a small reality check and saw the GBP lose some ground. Sales unexpectedly fell in October coming in at -0.7%. Expectations were for a flat result. Next week we have the BOE minutes, public sector net borrowing, and industrial order expectations to digest.

Much of the data from Japan this week has actually been a touch negative printing below expectation and down on the previous month. This was the case for the business activity index, consumer confidence, and core machinery orders. There has however, been one bright spot and it was the more important GDP result for the third quarter. The economy grew at a rate of 0.5% in that quarter against an expectation of 0.4%. Japan’s economy minister Amari was quickly on the wires following the release saying the economy remains on an uptrend with solid domestic demand. The Bank of Japan (BOJ) will likely be singing a similar tune when they release their monetary policy statement on Thursday next week. Ahead of that we have trade balance data to draw focus on Wednesday.

It has been a quiet week for news out of Canada. We did get some positive news from the government whose fiscal picture is now better than expected. They continue to forecast a surplus in 2015-16, but have revised it higher to 3.7bln verses the last estimate in March of 0.8bln. Trade balance data last night was better than expected but had no meaningful impact. New house prices continue to appreciate up 1.6% year on year in October. The week is rounded off with manufacturing sales data tonight. Then next week we have wholesale sales, inflation, and retails sales data to draw focus.