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Economies of Note - 21st April 2017

Written by Ian Dobbs on April 21st, 2017.      0 comments

The main focus this week in Australia was the release of the RBA’s minutes from its last meeting. The minutes were somewhat downbeat and they weighed on the Australian dollar to a degree. The central bank is concerned about the growth in housing credit that continues to outpace growth in household incomes. They are also worried that strength in labour market forward indicators doesn’t seem to be leading to an improvement in actual labour market conditions. The Australian dollar has also seen some pressure as the broader commodity complex has weakened in the second half of this week. Oil and gold have led the declines. Yesterday’s Quarterly Business Confidence number came in unchanged at 6 and had little impact on the currency. Next week the focus shifts to Wednesday’s inflation data.

New Zealand
A couple of positive results boosted the New Zealand dollar this week. The first was the dairy auction on Tuesday night that showed prices increases 3.1%. That marks the third rise in a row. Then yesterday we saw inflation for the March quarter come in much stronger than forecast. Quarter on quarter inflation jumped 1.0%, up from 0.4% prior. The market was expecting a strong result of 0.8%, but the actual outcome was even a step higher than that. Year on year inflation is now running at 2.2% which is the strongest in five years. The Reserve Bank of NZ was forecasting yearly inflation to only be running at 1.5%, so this is a big increase over that. The potential for a stronger result was always there and this one number shouldn’t get the central bank overly concerned, but if we were to see inflation stay strong over the coming months the bank’s current neutral policy setting may get closely looked at. The New Zealand dollar jumped higher in the wake of the data, although overnight it’s given back much of those gains. Next week we have mostly second tier data in the form of building consents, the trade balance and visitor arrivals.

United States
We have seen more mixed data from the United States this week along with plenty of comments from Fed officials. Industrial production and building permits were stronger than forecast while housing starts and capacity utilization disappointed. The Fed’s Beige Book was released yesterday morning and it suggested the economy continues to grow at a moderate pace. It also said prices rose modestly and wage hikes broadened. All in all it was largely supportive the Fed’s current stance which is that of very gradual interest rate increases. The Fed’s George said the US economy was on a solid footing, while Rosengren suggested the Fed could start shrinking its balance sheet ‘relatively soon’. He is however advocating only shedding a very small amount of maturing bonds, and not simply letting all maturities roll off. Next week's highlights will be durable goods orders and advance GDP.

United Kingdom
The UK Pound has had a very strong week surging higher in the wake of PM May’s announcement of a snap election. That's not the sort of reaction we would normally see in a currency with the uncertainty of a surprise election now to deal with. But there are a couple of special reasons why the GBP has made significant ground. Firstly, it seems the market believes that PM May will gain a significant majority in the election and end up with an even stronger mandate. This is positive for PM May and her ability to negotiate with the EU in terms of their divorce. Secondly, over the past month or so we have seen a record short (sold) speculative position build up in the GBP. The move higher in the wake of May’s announcement was the trigger for a big short squeeze which will have cleaned out some of those speculative sold positions. It seems Brexit talks with the EU will now start sometime after the June 8 election. Next week we have GDP data to draw focus along with a number of second tier releases.

There hasn’t been much in the way of market moving data released from the Eurozone this week. Inflation for March came in bang on expectation at 1.5% and it therefore had little market impact. The ECB’s Hansson said inflation is jumpy and it’s too early to claim victory. He added it’s also too early to have a discussion on ECB policy. The German finance ministry seems to disagree saying Eurozone growth and inflation could encourage the ECB to start to normalise policy. The ECB has their regulate interest rate meeting late next week so we should get some further clarity on the issue. Tonight we get manufacturing and service sector PMI’s from both France and Germany to digest. The French Presidential Elections kick off on Sunday with the first round of voting. The two top candidates then go through to a second round of voting on May 7th. This looks to be one of the closest, and toughest to predict, French elections in decades. A key concern for the Euro will be how much support the far right candidate Marine Le Pen garners. If she makes it to the second round carrying some real momentum from this initial vote, the EUR will come under pressure.

Japanese trade data yesterday showed exports rose at the fastest pace since January 2015. March exports were up 12.0%, much stronger than the forecasted rise of 6.2%. Imports were also up strongly and the overall trade balance came in at 614.7bn Yen, vs expectation of 608.0bn Yen. The Japanese finance minister said improvements in the economy make a tax hike more feasible. The country had planned to raise its sale tax from 8% to 10% in October 2015, but then ended up delaying it and at this stage it’s set for 2019. Next week we have the Bank of Japan Monetary Policy Statement to digest on Thursday afternoon.

Foreign investment in Canadian securities hit a record high in February driven by cross-border acquisitions and mergers. Foreign Securities Purchases totalled 38.84bn up from just 6.35b prior and much strong than anyone had forecast. The Canadian housing market is also performing strongly with the MLS Home Price Index rising by a record 18.6% year on year. Most of those gains are driven by what’s going on in and around Toronto however, with other regions showing much slower growth. Weaker oil prices over recent days have pressured the Canadian dollar to a degree and tonight release of inflation data may well also impact. The market is looking for a month on month result of 0.4%, up from 0.2% prior. Next week we have retails sales and GDP numbers to draw focus.