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Economies of Note - 21st March

Written by Ian Dobbs on March 21st, 2014.      0 comments

There have been little in the way of domestic releases to drive the Australian dollar this week, with the biggest influences coming from offshore. We did get the monetary policy meeting minutes from the latest RBA meeting on Tuesday, however the overall impact was limited. The central bank strengthened its stance on maintaining a period of stability in interest rates. They believe the cash rate could remain at its current level for some time. They believe the currency remains high by historical standards, but have moved away from calling it ‘uncomfortably high’. The only release next week is the RBA’s financial stability review set for release on Wednesday.

New Zealand
There have been a few interesting releases from New Zealand this week. The first was the announcement that the NZD will now be directly convertible into CNY (Chinese Yuan). This makes all kinds of sense as they are now our biggest trading partner and it will certainly help with bilateral capital flows. We’ve also seen results of the latest Fonterra global dairy auctions and these have resulted in  a 5.2% fall in average prices. However, the fall is largely the result of a big increase in productivity, with over double the volume being sold relative to this time last year. This massive increase in dairy exports has also helped the NZ current account deficit. It came in at $837 million for the December quarter which is a whopping $1.7 billion improvement over the September quarter. Yesterday we got GDP data for the fourth quarter of last year and it was bang on expectation at +0.9%. But there was a small downward revision to the third quarter's number, and this weighed on the currency a touch. Next week is a quiet one for domestic data with only the trade balance of any note.

United States
For the most part data from the United States this week has been positive and has continued to recover from the adverse weather effects seen earlier in the year. Industrial production printed at a six month high, and this was followed by building permits that increased 7.7% to 1.02 million. This was much better than forecasts which had centred around 0.95 million units. Inflation remains subdued with the CPI printing +1.1% for February against expectations of +1.2%, and the current account deficit (the difference in value of imports and exports) fell sharply to -81.1 bn. Expectations were for a result of -88 bn. This is the smallest deficit since 1997. But the real action came after the Fed meeting yesterday morning, which was the first one with new Chair Janet Yellen at the helm. As expected the Fed continued the pace of tapering by reducing QE by another $10bn, and they also dropped the 6.5% unemployment threshold in relation to their forward guidance. What they did say was that was that it will likely be appropriate to maintain the current Fed funds rate for a ‘considerable time’ after QE asset purchases end. Yellen later clarified that a ‘considerable time’ is somewhere in the vicinity of six months. At the current pace of tapering that means we could be seeing the first interest rate hike around April or May 2015. This realization caused a big move in markets. The USD jumped strongly across the board (its biggest gain in seven months), long term interest rates moved higher, and stocks sold off. These moves could easily have further to run. There will be plenty more data to digest next week with the highlights being manufacturing PMI, consumer confidence, durable goods orders, GDP, and pending home sales.

There hasn’t been a lot of data out of Europe this week and most of what has been released has come in on the soft side. It started with Monday’s downward revision to inflation which now puts CPI at 0.7%. This was followed by German economic sentiment that fell to 46.6 from a previous reading of 55.7. As you would expect, the Euro area economic sentiment number also fell. The only positive release has been Eurozone construction output that came in at 1.5% vs expectations of 0.9%, but it’s impact was negligible. Overall the Euro currency has traded heavily this week losing a lot of ground to the USD after the Fed meeting. Next week's highlights will be manufacturing and service PMI data, German business climate and German retail sales.  

United Kingdom
The UK Pound has failed to make any real gains this week having being weighed on by comments from BOE Governor Carney. He delivered a speech on Tuesday night that projected a somewhat ‘dovish’ tone. He stressed rates will stay low for some time, and that any adjustment in interest rates will be limited and gradual. There has been plenty of focus on the UK housing market recently and Carney seemed to suggest the bank is reluctant to raise rates to rein it in. He said the central bank shouldn’t be ‘trigger happy’ in relation to property prices, and that they are well armed with macroprudential tools to deal with it which will reduce the need for rate rises. None of this rhetoric was supportive for the GBP. As is often the case these days the government’s budget release came and went with little market impact. George Osborne did ask the BOE to be vigilant on housing market risks, along with suggesting the government must substantially reduce UK public debt. The budget also assumes the economy is growing faster than previously forecast. On the data front we have seen further evidence the employment market continues to perform strongly. The monthly claimant count for unemployment benefits dropped significantly further than forecast and average earnings data jumped 1.4% from the previous 1.2%. Next week we get readings on inflation, retail sales, and the current account, along with the final revision to December quarter GDP.

The only data from Japan this week has been the trade balance which has been on a downward trajectory since it turned negative back in early 2011. Although the deficit decreased from last month, it still came in worse than expected at -800.3bn Yen. With continued massive imports of energy the situation won’t improve until they enable nuclear power generation. We have seen plenty of comments from official this week. The BOJ’s Kuichi said Japanese exports are likely to lack momentum for some time. He also suggested China is facing low manufacturing activity and there are risks and uncertainty around its shadow banking industry. Other officials have been on the wires saying they don’t expect a big negative impact from the sales tax increase, and that the BOJ doesn’t aim to manipulate the currency in its fight against deflation. BOJ Governor Kuroda is speaking on Sunday, then late next week we get household spending data, inflation, and retails figures.
The two data releases from Canada this week tended to cancel each other out. Better than expected manufacturing sales were countered by weaker than forecast wholesale sales. The Canadian dollar has struggled however, thanks to comments from BOc Governor Poloz. Earlier in the week he suggested tonight’s inflation data was likely to be soft (he’s probably already seen the release) as will data for first quarter GDP. When questioned by reporters about cutting rates he said he could not rule out lowering rates further from the current level of 1.00%. He stressed the central bank will have to rethink its policy stance if downside risks to inflation increase. I think it’s a fair assumption that tonight’s inflation release is likely to come in on the soft side. The question is just how soft will it be? We also get retail sales data tonight, while next week's economic calendar is looking very bare. This week we have also seen the surprise resignation of the Canadian finance minister. He has been replaced by Joe Oliver who has courted a certain amount of controversy in his previous role as minister of natural resources.