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Economies of Note - 23 January

Written by Ian Dobbs on January 23rd, 2015.      0 comments

Australia released consumer confidence data this week with the index rebounding from a -5.7% drop last month to print +2.4% this month. It seems falling petrol prices are helping sentiment and the positive December employment report undoubtedly impacted as well. Overall the index came in at 93.2 which is still down 9.7% from this time last year. The only other data of note from Australia was yesterday’s inflation expectations. These declined to 3.2% from 3.4%, but there was little market impact. What did impact the market, at least temporarily, was the release of better than forecast Chinese GDP data on Tuesday. Unfortunately the annual growth rate for last year of 7.4% is still the lowest rate of growth in 24 years. Next week from Australia we have business confidence, inflation, and producer prices data to digest.

New Zealand
The big release from New Zealand this week was that of inflation. The market was looking for a result around 0.0%, but in the end it printed at -0.2% quarter on quarter, with the yearly rate coming in at +0.8%. Not surprisingly the main culprit was declining oil with petrol prices down 5.7%. With annual inflation now below the bottom of the Reserve Bank’s target band, and the potential for even further declines over the coming months, most economists have push out any expectation of a rate hike from RBNZ until well into 2016. This is weighing on the New Zealand dollar to a degree. This comes after the currency had a very strong run at the end of last year thanks to the RBNZ’s slightly odd and somewhat hawkish statement on December 11th. We will hear from the RBNZ again next week on Thursday when they release their official cash rate review. The other news of note this week was a further sign that dairy prices may have bottomed. Prices rose by 1% overall at Fonterra’s latest auction, with the more important whole milk powder up 3.8%. Unfortunately these increases aren't enough to materially affect the forecasted pay-out. In fact it is estimated that if current prices were achieved through the whole season is would equate to a pay-out of only $4.35/kg.

United States
It has been a quiet week for data from the United States, thanks in part to a bank holiday on Monday. Weaker than expected building permits data was countered by a stronger result from housing starts. Weekly unemployment claims rose by more than expected, but the four week running average is still consistent with solid payrolls growth. The US dollar has had a positive week making broad based gains against most other currencies. We get manufacturing PMI and existing home sales data tonight. Then next week we have durable goods orders, consumer confidence, new home sales, the FOMC statement and GDP data to digest.

United Kingdom
The two key releases from the UK so far this week have been the employment data and the Bank of England minutes. It was the BOE minutes that stole the show, with the revelation that the vote to keep rates unchanged was unanimous i.e. 9-0. For a number of months previously the voting pattern had been 7-2, with two members of the MPC voting for rate hikes. Those two members have now changed their tune because they believe a rate rise would increase the risk of prolonged low inflation. There is now very little chance of a rate hike this year by the BOE and as such the UK Pound came under some pressure. The labour market data that came out around the same time as the minutes was reasonably positive. The claimant count (unemployment claims) fell by 29.7k which is better than the -24.2k expected, while the unemployment rate fell to 5.8% from 6.0% previously. Even more encouraging was the average weekly earnings figures which rose 1.7% year on year from 1.4% previously. Increased wage growth is indicative of declining slack in the economy. The BOE did note the pickup in wages, but suggested that wages would have to accelerate much faster to affect its monetary policy decisions. Tonight we get the latest reading from retails sales, and next week we have GDP data to draw focus.

There has been only one focus so far this week in Europe and that was on last night’s European Central Bank meeting. It was widely expected that the ECB would finally announce a programme of quantitative easing (QE) and they did just that, despite German opposition. The size of the programme is massive and at the larger end of any expectation. The central bank will purchase EUR 60bn of assets each month until September 2016. The Euro weakened on the back of the announcement and the size of the programme should see the currency stay under pressure in the near term at least. The big question is whether this action can save the Eurozone and pull them out of deflation. The short answer, and taking into account the experience of Japan, is no. QE will help limit deflation, at least in the short term, but Europe’s broader problems are structural and the central bank can’t fix those. That’s the job of governments. QE can only help in three ways. It can lower long term interest rates, it can provide large amounts of easy cash for banks to lend, and it can weaken the exchange rate. Long term interest rates in Europe are already extremely low, so its impact here will be minimal. Bank lending growth is weak because there is no demand, more supply won’t change that. QE will help with a weaker exchange rate and it will boost asset prices, notably stocks. But these factors alone are unlikely to be enough to spark broad based growth throughout Europe. The central bank had to do something and this is their last throw of the dice. There ECB has no ‘ammo’ left. What they have done is buy Europe more time, time politicians can’t afford to waste. Attention now switches to the Greek elections this weekend and the likely win by the anti-austerity Syriza party. You can’t really blame the Greek people for voting in a fringe party. Five years of austerity has seen the economy shrink by 25%, and unemployment is now running at 26%. Government Debt to GDP has exploded from 130% in 2010 to 170% now. In short, it’s been a disaster and the Greek people are looking for change.

The only release from Japan this week came from the Bank of Japan (BOJ) who released their monetary policy statement on Wednesday. The bank made no change to monetary policy settings, although they did announce an extension of one year to loan programmes that are aimed at encouraging banks to boost lending. The bank has also lowered its inflation forecast for the year to March 2016 to 1% from 1.7% previously. Back in April 2013 when the bank announced its massive programme of quantitative easing it set an inflation goal of 2% in two years. These latest projections suggest that target still won’t be achieved after three full years. There is a growing risk that the market, and the public in general, lose faith in the bank’s ability to achieve the 2% inflation target. Back in March 2013 Governor Kuroda told parliament that “monetary policy alone can achieve the 2 percent price target.” But perhaps that just not the case with Japan’s toxic mix of demographic, fiscal, and cultural issues?

It seems the theme of 2015 so far is one of Central Bank surprises. Firstly the Swiss National Bank blindsided markets and then on Wednesday night it was the turn of the Bank of Canada (BOC). No economists or forecasters were expecting any action from the BOC at their meeting so it was somewhat surprising when they decided to cut rates by 0.25%. This move took the overnight rate to 0.75% from 1.00% previously. This is the first rate move in more than four years and the bank took the action in response to the recent sharp drop in oil prices. The BOC believe the oil shock will be negative for Canadian growth and lead to an increase in unemployment. The bank called the cut “insurance” against the threat posed by the oil price shock and they believe it will help to protect against the downside inflation risks. The Canadian dollar, which was already under pressure after poor manufacturing sales data earlier in the week, took a hammering. The only hint we got as to where rates will go from here was when Governor Poloz said the bank has the ability to take out more “insurance” if the world changes. Tonight we get the latest readings on inflation and retail sales, both of which will be closely watched.