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Economies of Note - 17th February 2017

Written by Howard Wilcox on February 17th, 2017.      0 comments

The Australian dollar ends the week on a stronger note on the back of more solid data over the week. On Tuesday Chinese inflation data came in higher than expected at +2.5% for the year, with producer prices showing a large +6.9% jump this points to increasing growth and inflation in China which augers well for the Australian economy. Although the AUD traded higher it failed to break over the crucial 0.7700 level against the USD but continued strong prices in gold and Iron ore provided underpinning to the AUD. Price action yesterday was again one-way traffic with the AUD breaking convincingly over the 0.7700 level after January employment figures showed unemployment levels dropped to 5.7% in January from 5.8% in December, however this was tempered by a reduction in full-time jobs.  Overnight the AUD has slid back under the 0.7700 level but the improving domestic fundamentals and the more favourable external environment appear consistent with the RBA’s forecast for a return to above trend growth which should favour a stronger AUD over the next few weeks.

New Zealand
The New Zealand dollar has stabilised after several days of declines in what has been a week of light data releases. Yesterday consumer confidence data showed a small drop for the month, but still higher than average, with consumers more confident than they were a year ago. It appears that the New Zealand economy is still “in a happy place” underpinned by an expanding population, strong tourism, and a (still) buoyant property market stoking consumer spending, while the labour market has remained robust with new jobs being created for the inflow of migrants. House sales for the January period also showed a pullback, but given this is the holiday period, the next 2 months data will determine whether the housing market has turned.

United States
Equity markets have continued their bull run over the week setting new record highs as January CPI data showed a jump to 2.5% increasing at the fastest pace since 2012. This backed up comments from Fed Chair Yellen at her testimony before Congress that “a gradual rise in rates will be required” and “waiting too long to remove accommodation would be unwise”. These more bullish comments from Yellen and the inflation data have now shifted the chances for a Fed rate increase in March to 42% from the 30% level at the start of the week. With increasing evidence that inflation is taking hold on the US economy, speculation has increased that the economy can withstand higher interest rates as it waits for stimulus from the Trump administration, thus continuing to fuel a rally that is taking global equities toward records inducing a selloff in Treasuries. Overnight we have seen a pullback in US equities and the US dollar as investors, having pushed the market hard over the last two weeks, pause and wait for the promised details on the Trump administration’s “phenomenal” tax deal  and assess the timing and potential effect of the Fed’s next rate increase.
United Kingdom
The UK economy continues to perform better than expected and ahead of most of its other European partners as evidenced by more upbeat employment data. Stats out this week showed a climb in employment of 37,000 to 31.84 mio in the 3 months to December, with unemployment steady at 1.6 mio, a figure which is down by 100,000 over the last 12 months. The unemployment rate remained at 4.8%, its joint lowest rate in nearly 11 years while the employment rate was up at a new record of 74.6%. These are all pointers that the labour market is moving towards a full employment situation. Rising inflation, up by 1.6% for the year to December, is reducing workers spending power and is now giving the BoE a problem of how to respond to rising inflation allied to slowing pay growth. On the Brexit front, it has been previously reported that the EU is looking to demand GBP45.5 bio exit bill as the loss of the UK, the second largest net contributor to the EU, has shredded future EU budgets. However it now appears that the UK will attempt to offset the cost of Brexit by claiming a large share of GBP 127.5 bio worth of European assets.  An independent think tank in Brussels has already estimated that Britain's assets could be worth almost £130bn. On balance with the UK economy shrugging off the Brexit effect and fundamental data continuing to improve, we favour the GBP against both the USD and EUR, but given the potential for the upcoming US tax plan to induce market volatility the GBP strength against the EUR looks to show more promise.

The EUR continues to slide against the USD making a 1.0520 low. It has subsequently recovered back above the 1.0600 level now around 1.06717 but news from the Eurozone bloc continues to be negative. Attention continues to focus on the twin problems of the upcoming European elections for France, Germany and The Netherlands and increasing support for populist anti- EU parties and heightened concerns around the Greek debt situation. One report out earlier this week  stated that plans were being made by the Greek government to switch to US dollars as the currency unit should Greece decide to break away from the Eurozone currency bloc! It’s unlikely at this stage but if no debt relief is forthcoming this could become a more realistic possibility. With the divergence increasing between the US and Eurozone economies both in economic performance and interest rate spreads, we look for the EUR to remain under pressure with any rallies in the Euro seen as a selling opportunity.

There has been little major news out from Japan after last weekend’s US/Japan summit, with the USD gradually moving higher to a 114.95 high on Wednesday. It has slipped a little over night as the JPY strengthened on the weaker USD following the pullback in US equity markets now sits around 113.24. Overall the Japanese economy is starting to cruise along and with real growth for 2016 coming in at 1%. Japan looks to be in the best position it’s been in in 4 years. Global demand has strengthened, with exports rising in December for the first time in over a year, Q4 industrial production having the biggest gain in 3 years and the previous year's consistent fiscal stimulus by the Bank of Japan now kicking in. However, short term growth is dependent on external demand and fiscal stimulus which does tend to constrain the upside and growth horizon. This is not to say that there are not storm clouds on the horizon, risks continue that Trump/Abe talks last week on Japanese trade get overtaken by protectionist trade policies being put into practice and the effects of last year’s stimulus fading going into next year.

Main news for Canada came out late on Wednesday, that the much delayed trade treaty between Canada and the EU has finally been ratified by the European Parliament, opening the door to eliminating 98% of tariffs between countries, a journey that has taken 7 years to achieve. Mixed data releases, saw a 6.7% fall in the number of house listings for the January month, but strong December manufacturing numbers. The CAD has maintained a strengthening tone over the week climbing form 0.7601 to 0.7690 against the USD.