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Economies of Note - 1st August

Written by Ian Dobbs on August 1st, 2014.      0 comments

There hasn’t been a lot of key data released from Australia this week. We have seen new home sales figures that increased 1.2% in June. This was a solid improvement over the prior reading of -4.3% and comments from the Housing Industry Association suggest they expect the building sector will provide a healthy contribution to economic growth 2014 and 2015. However, yesterday’s building consents data was a little disappointing printing at -5.0% against an expectation of flat. The prior reading was +9.9%. Released at the same time yesterday was private sector credit and this did show a healthy increase of +0.7% which was significantly better than forecast. All in all, none of this data has had any meaningful impact on the currency or the current economic outlook. Later on today we get producer prices data, but again this shouldn’t have a big impact. Next week could be different story, with a number of key releases. Retail sales will be followed by the trade balance and then the RBA rate statement. On Thursday we get employment change then Friday sees the quarterly RBA monetary policy statement.

New Zealand
We have only seen a couple of releases from New Zealand this week. First up was the forecasted pay-out from Fonterra for the 2014/15 season. The dairy giant set it at $6 which was at the low end of expectations. They said strong production globally, a build-up of inventory in China, falling demand in emerging markets and a strong NZD were largely responsible. This does represent a fall of over $3 bln in farm gate revenue compared to the 2013/14 season and that could wipe as much as 0.4% of NZ’s GDP. With current sentiment not favouring the NZD at the moment, this news saw further selling. On Wednesday we saw building consents data that was stronger than forecast. The +3.5% result was above expectations for +1.0% and represents a good bounce back from the prior reading of -4.4%. The market was little changed on the back of this data. The focus next week turns to employment change, the unemployment rate and the labour cost index.

United States
We have seen a fair amount of data so far this week from the US and tonight we get what could be the most important release, that of non-farm payrolls. The market is looking for a healthy gain of +230k and anything above that should help support the USD. Earlier in the week we saw GDP data for the second quarter. The result was a very positive +4.0% which was well above expectation for +3.1%. Adding to the strength of the report were positive revisions to the first quarter result that now stands at -2.1%. Virtually all the details made good reading with core PCE prices (a measure of inflation the Fed watches closely) rising to 2.0% from 1.9% previously. The USD made good gains across the board in the wake of this release, although they were partially reversed a few hours later after the Fed rate statement hit the wires. Recent improvements in the economy had raised hope that there could be some debate within the FOMC around when to start raising rates. In the end there was little in the statement to suggest the Fed is in any hurry to start normalizing policy. A slight change to some of the wording could be read as being a little more ‘hawkish’, but the reality is the statement was largely in line with the previous one. As expected they reduced the quantitative easing programme by another $10 bln, leaving it now at $25 bln a month. There is growing talk in the market that the Fed risks slipping well ‘behind the curve’ in terms of starting to normalize monetary policy. A strong employment number tonight will only add to those calls. Keeping rates too low for too long after the dotcom crash in 2000 is widely believed to have been a major contributing factor to the housing bubble that burst in 2007. It is starting to look like the Fed are going to repeat that mistake. We are obviously not seeing a bubble in the US housing market this time, but can the same be said for the stock market or the long term interest rate market? Six years of zero rates and relentless money printing have majorly distorted prices and the longer the Fed hold off hiking the bigger the problems we are likely to face down the road. Data wise, next week will be a lot quieter with the highlights being non-manufacturing PMI and the trade balance.

United Kingdom
Data from the United Kingdom this week has had little impact on the market. We saw disappoint figures on net lending to individuals but this was countered by good mortgage approvals data. GFK consumer confidence came in a little below expectation at -2, however this is still above the long run average of -9 and is consistent with a positive outlook. We have also seen comments from the Bank of England’s (BOE) Broadbent. He said he sees a case for raising rates earlier and on a gradual path and that the first rate increase shouldn’t be massive shock. He also believes it’s quite possible the GBP is overvalued. Tonight we get the manufacturing PMI, and this will be followed next week by PMI’s for the construction and service sectors. We also have the BOE rate meeting next week and manufacturing production data to digest.

We have seen a number of releases from Europe come in above expectation this week, such as German retail sales, French consumer spending, and Eurozone unemployment which dropped a touch to 11.5% from 11.6% previously. But what was probably the most important release did not follow that trend. Headline inflation for the Eurozone fell again to just 0.4% from the already low 0.5% prior result. This will be concerning for the European Central Bank (ECB), although the effects of Junes easing are still to work their way into the economy. As a result this data won’t have impacted the outlook for the ECB to remain on hold at least until December. We have also seen worrying data on the French housing market this week. Housing starts fell 19% in the second quarter from a year earlier, and building permits have dropped 13%. Industry experts say French housing is in ‘complete meltdown’ and this dramatic drop in construction could drag French GDP close to zero. This all largely as a result of laws passed by the government to cap rents in expensive neighbourhoods, but it has completely backfired and could now weigh heavily on the French economy that was already struggling. Next week we have the ECB rate meeting along with a raft of second tier data to digest.

Data this week has only added to concerns about the Japanese economy. A number of releases have disappointed and this is only going to increase pressure on the Bank of Japan to add to its stimulus programme over the coming months. The best result was household spending that came in at -3.0% against expectations for -3.7%, but that’s hardly inspiring stuff. Retail sales were poor, unemployment ticked up, industrial production was a shocker and average cash earnings were weak. The chances of Japan achieving its 2% inflation target by the end of next year are starting to fall. Even BOJ board member Ishida conceded that he has concerns about the strength of Japan’s economic recovery and he suggested the BOJ is very cautious about growth in the months ahead. This data has started to weigh on the Yen that has lost ground recently. Next week we have the BOJ meeting, current account data and leading indicators to digest.

We have only seen two data points released from Canada this week and both of them have printed on the positive side. The Raw materials price index came in at +1.1% against expectations of +0.6%, and then GDP also beat expectations printing at +0.4% which is up from the prior result of +0.1%. As you would expect these releases have helped the Canadian dollar which is starting to regain some composure after recent losses. Next week should prove interesting with a raft of key data set to hit the wires on Thursday and Friday. The trade balance, building permits, Ivey PMI and employment change are all set for release.