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Economies of Note - 24th February 2017

Written by Howard Wilcox on February 24th, 2017.      0 comments

Capital expenditure data released yesterday was not as strong as expected, but nevertheless it did show that plant and equipment spending is likely to contribute to a rise in Q4 GDP due next week. Expectations are for around 0.7% Q4 GDP result. This data will be closely watched next week, but we also have the current account, building approvals and the trade balance to digest.  The AUD has had a tough week, where it has tried to push through and hold above the 0.7700 level against the USD. Continued firmness in commodity prices and the more upbeat RBA economic forecasts have also helped in underpinning the Aussie advance.

New Zealand
Little data of note this week, although the Global Dairy auction result on Wednesday showing a slight softening in prices had only a minor effect on the market.
The New Zealand dollar has been trading sideways for most of the week in a consolidation phase, but overnight on the back of the weaker USD, has moved back over the 0.7200 level, making a high of 0.7245. It is back around 0.7225 but if the USD weakness perseveres next stop is 0.7260 resistances. A break of this level would target the 0.7330 level but given the view for US interest rates NZD moves will remain USD subservient.

United States
US equity markets traded at record levels overnight, with the Dow having its 10th straight day of making new highs. However the USD sagged against most of its major counterparties after comments from the new US Treasury Secretary Mnuchin that any gains to GDP growth from the administration's new policies were likely to come over a number of years, hosing down (unreasonable..?) expectations that effects would be felt much sooner. The USD has had a mixed week, firming initially on release of the Fed Reserve minutes which showed that there was potential to raise rates “fairly soon”. The USD then adopted a weaker tone after comments that scope to raise rates would only need to be gradual as there was little perceived threat of near term inflation. We look for the USD to extend losses to end the week. US data releases continue to show an economy moving ahead, with housing data showing continued strength along with solid jobless claims figures. With economic data continuing to be positive and given comments from Yellen last week regarding not wanting to “get behind the curve” we now believe that a March rate hike is now around a 50% probability (market expectations are currently at 34%).

United Kingdom
Mixed news for the UK over the last few days.  The GBP has strengthened as concerns over the outcome of the April/May French elections increase, but Q4 GDP data was revised down. Yesterday’s data showed 2016 GDP was up 1.8% for the year, below the initial estimations of 2%. This meant that Germany not the UK was the fastest growing G7 economy last year.  However with the lower GBP helping export figures, continued low interest rates and upbeat consumer confidence most forecasts show UK economic growth rates should remain positive throughout the year with growth estimates ranging from 1.4%-1.8%.This  more positive outlook was also helped by data showing an increase in consumer spending of 1.2% and a rise in manufacturing output also of 1.2% for Q4 2016. The GBP continues to gain against the EUR currently around 1.1796, having been to 1.1903 2 days ago, as concerns mount over a victory for National Front leader Le Pen , in the first round of the  French election and the improvement in her chances in the second round. She made statements earlier this week that if in government, would seek to take France out of the EU.

The news from Europe continues to centre around the increasing political risk, although economic data from Germany this week has been positive. The EUR continues to struggle, spending its second day below the 1.06 level against the USD even after the weaker USD overnight. In the immediate term the EUR faces the twin risks of rising US interest rate expectations and growing political risks in the euro zone which will continue to pressure the unit. Now there appears to be a possibility of early new elections in Italy to match the mid-March Netherlands poll and April/May presidential elections for France. With the continued strong polling results for the anti-EU nationalist movements the EUR is attracting selling interest on any rally and we look for support at 1.0520 to give way next week.  

The JPY has strengthened against the USD over the last few days as the USD has weakened on the Fed minutes release and disappointment of US tax relief details. The USD has fallen to its lowest level against the JPY in 2 weeks at 112.54….currently at 112.70 next support is at 112.10 with immediate resistance up at 113.70 unlikely to be seen over the next few days. Not much in the way of data releases for the JPY this week, and with low volatility, the JPY strength has been in spite of the lack of risk flows. Next level for support is around 111.72 and we expect this to be tested over the early days of next week.

Retail sales data for Canada this week showed a drop of 0.5% for December, month-on-month the 5th consecutive yearly drop for that month. Although not positive for the economy, the seasonal pattern of sales and that it comes after a very strong run in retail sales doesn’t change the underlying story that that the economy is performing better than expected only a few months ago. Also on another positive note is the news that Canada may expect only “tweaks” of its NAFTA agreement with the US rather than wholesale changes, according to the Canadian trade minister.  The Canadian dollar continued to strengthen against the USD over the week, is now at 0.7630 with immediate resistance at 0.7645.