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Economies of Note - 18th June

Written by Ian Dobbs on June 18th, 2015.      0 comments

The main focus in Australia this week was on the minutes from the last Reserve Bank of Australia (RBA) meeting. Anyone looking for clear guidance on where interest rates will go next would have been left disappointed. The minutes showed the bank left rates on hold at their June 2nd meeting to allow time to assess the impact of previous cuts on the economy. They repeated that further falls in the Australian dollar are likely and necessary, especially given the lower commodity prices. In terms of house price inflation the bank made a distinction between what’s going on in Sydney and Melbourne compared to the rest of the country where investors are less active. Another interest rate cut from the central bank is certainly possible if economic conditions warrant it, but as Governor Stevens warned in a speech last week, were entering the zone of diminishing returns from further monetary policy stimulus. Data wise this week we’ve really only had yesterday’s leading index to draw focus. The leading index for May came in at -0.12% down from the prior +0.1%. The fall is disappointing considering the two rate cuts we’ve already had this year and could signal a loss of momentum in the economy. Next week looks very quiet with just the house price index of any note.

New Zealand
Dairy prices fell again this week at Fonterra’s latest auction with the overall index down 1.3%. The detail was a little more mixed with key whole milk powder price little changed from prior. New Zealand’s current account balance for the first quarter came in better than forecast at 662 mln. The improvement was driven by lower oil prices around the start of the year and as such it’s unlikely to be sustained. The recent rebound in oil combined with continued softening of dairy prices will see the current account quickly move back to a substantial deficit. Earlier this morning we had the release of GDP for the first quarter. And to be fair, it was a shocker. The market was expecting a gain of 0.6%, but in reality the NZ economy only grew at 0.2% in the first quarter. The primary industries (agriculture, forestry and mining) accounted for much of the disappointment seeing the largest fall since September 2010 at -2.9%. Retail trade was one positive increasing 2.4% in the March quarter and this helped to offset some of the agricultural weakness. Overall it’s a poor result and one the now makes a second interest rate cut by the RBNZ next month very likely. We could even see a third cut before the end of the year. The New Zealand dollar is going to struggle in this current environment. Next week to draw focus we have consumer sentiment, credit card spending and trade balance data.

United States
We have seen mixed data from the United States so far this week. The Empire State manufacturing index, capacity utilization and industrial production all came in softer than forecast. The NAHB housing market index and building permits both surprised on the strong side, while housing starts were also a little weak. However, the main focus was on the Fed rate meeting and FOMC statement released earlier this morning. The market was looking for a signal from the Fed that a September rate hike is on the cards, but the central bank failed to give any clear indication. They basically said while an increase this year is possible it will be dependent on how the data unfolds. Yellen said “no decision has been made by the committee about what the right timing is of an increase”. That been said, she stated they could certainly see data that would justify a hike this year. Yellen is definitely not coming across as the most decisive Fed Chairperson ever. You get the feeling she’s afraid of signalling something to the market for fear of making a mistake. We are entering one of the most important periods of US monetary policy in a very long time. Clear and timely guidance is going to be key in helping to reduce the potentially destructive volatility we could see over the coming year. At the moment, we’re not getting that from the Fed. Still to come this week we have inflation data and the Philly Fed manufacturing index set for release tonight. Next week attention will turn to existing home sales, durable goods orders and GDP.

United Kingdom
We have seen a couple of key releases from the United Kingdom so far this week. Inflation data confirmed that the dip into negative territory was short lived with May’s CPI coming in at +0.1%, bang on expectation. Core inflation came in a +0.9% which was a touch less than the forecasted +1.0%, but still an increase over the prior +0.8%. Producer prices on the other hand fell 0.9% versus expectations of +0.7% signalling little in the way of pipeline inflation pressure from manufactures. The decline was driven by soft petroleum and crude oil prices. Although none of this data would suggest any hurry for the Bank of England (BOE) to raise rates, last night’s employment data painted something of a different picture. The claimant count change (unemployment claims) was a little disappointing falling by less than forecast, but what gained the most attention was the wage data. Average weekly earnings jumped 2.7% versus 2.1% expected. The prior numbers were also revised significantly higher. This result in particular supports the BOE’s view that inflation will pick over in the second half of this year, and that will likely provide the necessary conditions for an eventual interest rate hike. The BOE minutes were also released last night with voting remaining 9-0 to leave rates unchanged. For two members however, the vote was finely balanced. The minutes also showed the bank believes the factors lowering inflation may dissipate fairly shortly and that the strength of headwinds to growth have started to ease. We can expect two members of the committee to start voting for interest rate hike in coming months, with a majority joining them either late this year or early next. Tonight from the UK we get retails sales data then next week the calendar is looking a little lighter with the inflation report hearings the only highlight.

European data so far this week has failed to have much impact on the overall economic outlook. Of note was ZEW economic sentiment which declined sharply for both the German and Euro area reading. The ongoing uncertainty around Greece may well have played a part here and this just highlights the need for some finality to negotiations. Countering that was a release from the German IFO who have raised their 2015 growth forecasts for Germany from 1.5% to 1.9%. They said the German economy is experiencing a strong upturn helped by private consumption and low unemployment. The major focus in Europe remains on the protracted negotiations between Greece and its creditors. If news headlines and articles are anything to go by the parties are as far from an agreement as ever. Defiant talk from Greek PM Tsipras won’t have done anything to lubricate negotiations and tonight’s Eurogroup finance ministers meeting might be the last real opportunity to seal a deal before time pressure results in at least some sort of technical default by Greece. Greece needs to make a half-monthly wage instalment late this week, then on June 30th a EUR1.6bn payment is due to the IMF. If an agreement isn’t reached soon there won’t be time for it to be ratified by the various parliaments it needs approval from before the end of the month. Expect Greece to remain in focus over the coming week, although we do also have manufacturing and service PMI data along with the German IFO business climate index.

The only data released so far this week from Japan has been the trade balance which had no market impact after printing very close to expectations at -0.18 trillion. We do have the Bank of Japan monetary policy statement out late tomorrow which will draw plenty of attention. Governor Kuroda was on the wires earlier this week saying that it’s desirable for forex to move in a stable manner reflecting economic fundamentals. He tried to play down last week’s comments that caused considerable market volatility, saying he didn’t mean to predict the future nominal FX rate and that he never said he didn’t want the Yen to weaken on a nominal basis. At this point I think the best thing he could do is not mention the currency at all! Next week to draw focus we have the BOJ minutes along with household spending and inflation data.

A couple of contrasting data releases this week have failed to provide any further clarity on the economic outlook for Canada. Manufacturing sales were softer than forecast at -2.1%, while wholesale sales came in stronger than expected at +1.9%. Tomorrow night’s release of inflation data will be closely watched with market looking for a 0.3% gain on the month. Retail sales are also set for release and there too a gain of 0.3% is forecast for the core number. Next week there is little to draw focus so events in the wider market will drive the Canadian dollar.