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Economies of note - 21st June

Written by Ian Dobbs on June 21st, 2013.      0 comments

3:44pm (NZT)
The Australian dollar has been weighed on heavily this week from offshore factors. The only domestic release of note was the minutes from the last RBA meeting. Although it held no major surprises it did weigh on the currency as the bank continues to view the AUD as overvalued, and are obviously happy to see it lower. There have been two key offshore factors that have driven the AUD lower this week. Firstly up was the US Fed and the strong signal that a scaling back of the quantitative easing programme is just around the corner. The USD was stronger across the board, but the AUD in particular suffered badly. Hot on the heels of the Fed announcement came data on Chinese manufacturing. It showed the sector had weakened substantially and the reading was at its lowest level in nine months. This put even more pressure on an already struggling AUD. With little data out of Australia next week it seems negative sentiment is likely to remain and will continue to weigh on the currency.

New Zealand
The major data out domestically for NZ this week was the GDP figure released yesterday. It was a fair bit weaker than forecast coming in at 0.3% for the March quarter against an expectation of 0.5%. The soft result was in large part due to effects from the drought, and isn’t really a game changer for the economy. Drought effects could well linger and constrain the second quarters growth figure as well. However the broad picture for NZ is one of a solid economy underpinned by the Christchurch rebuild and strong house prices. The New Zealand dollar saw increased selling after the GDP release. However, it was already a lot lower against the USD thanks to the announcement from the US Fed that came out a few hours earlier. The NZD dropped nearly 2 cents against the USD after Ben Bernanke gave the market a strong signal that asset purchases are going to be reduced in the coming months. Next week we get data on business confidence and international trade balance.

United States
The big focus for this week was on the US Fed and the outcome of their policy meeting. Markets were jittery heading into it waiting to see if Bernanke would give any guidance on a time frame for scaling back quantitative easing. He didn’t disappoint and was probably a lot more forthcoming than many would have suggested. The key quote being “If the coming data are broadly consistent with forecasts, the Fed would moderate QE later this year.” So barring any surprises on the economic front a scaling back of the programme is just around the corner. It seems most in the market are now looking at September for the first reduction. But Bernanke went on to say that purchases may end altogether around mid-2014, with the unemployment rate around 7%. This did catch the market by surprise, and saw a material increase in US dollar buying. In fact the dollar rallied hard against most other currencies. We could well see further dollar strength over the coming days and weeks. Although the market was expecting a scaling back in the QE programme, no one was expecting him to effectively put an end date on it. Along with the currency gains, stock markets sank and long term interest rates backed up. Those broad moves could have a long way further to run.

Recent data has been supportive of the Euro. It has managed to perform somewhat better than most other currencies in the face of USD strength over the last couple of days. This has seen it perform well on most of its cross rates. This week we got readings on the service and manufacturing sectors, consumer confidence and German economic sentiment. While you couldn’t characterise any of the data as strong, it was all certainly better than expected and it helped to support the EUR. Comments from ECB president Draghi that he has an open mind on non-standard policies has reinforced what other officials have said. It certainly seems the ECB is looking at unconventional ways to get credit flowing to small and medium sized business. Next week the focus will be on mostly German data with readings on business climate, retail sales and unemployment.

United Kingdom
Key data out of the United Kingdom has all been somewhat supportive of the Pound Sterling this week. Inflation, which has been stubbornly high since 2007, data came in a little above expectation at 2.7%. That’s not great news for consumers who have consistently seen inflation growing at twice the pace of salaries for 5 years now. Still, it hasn’t seemed to stop them spending in the last month with surprisingly strong retail sales figures out last night. This help to support the GBP better than most currencies the face of continued broad USD strength. As a result the GBP is now stronger on most of it’s crosses. Minutes from the last Bank of England policy meeting were also released this week and show a now familiar split in opinion. Outgoing governor Mervyn King, and two other members, continue to vote for more quantitative easing, while the other 6 members vote for no change. The market is expecting incoming governor Mark Carney to be much like King and in favour of more stimulus. The risk must certainly be that he surprises everyone and is a lot more cautious than that. If that’s the case then the GBP could strengthen a lot more over the second half of this year.  But we are going to have to wait at least a month before we get any real indication of what impact Carney will make. Next week we get readings on the current account, consumer confidence and GDP.

Continued volatility in Japanese stocks, bonds and the currency has drawn much comment over the past couple weeks. In the last few days the Bank of Japan’s governor Kuroda has been on the wires saying that although the pain from bond yield rise is manageable, the BOJ will do it’s utmost to put downward pressure on rates. A sharp rise in long term interest rates has been a nasty and unwelcome side effect of the recent bold BOJ policy moves. The volatility hasn’t seemed to have bothered Japanese companies though, whose outlook is seen as increasingly positive despite the market swings. Readings this week from the manufacturing sector show its outlook is the most positive since March 2011. Japanese consumers seem to be spending too, and we get an update on that next week with retail sales and household spending data set for release.

So far this week the only release of note in Canada has been a speech from BOC governor Stephen Poloz. He said they need to see a rebound in business investment to drive growth in the coming years and that process will require stability and patience. He has welcomed the signal from the US Fed that they could soon start tapering asset purchases as it shows confidence in their biggest trading partners economy. A stronger US can only be good for Canada and that can be seen in the way the CAD has outperformed the NZD and AUD over the last couple of days. Tonight could see some action with Canadian CPI and retail sales set for release. While next week the only data of note is GDP.