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Economies of Note - 29nd May

Written by Ian Dobbs on May 29th, 2015.      0 comments

A couple of second tier data releases earlier this week had little market impact and largely cancelled each other out. The leading index for April increased by +0.11%, which was reasonably positive, but it was offset by construction work done data that printed at -2.4%. Construction work done is now 8.8% lower than at the same time last year. The real impact on the Australian dollar however came in the wake of yesterday’s private capital expenditure data. Capex has been soft for a while now as investment in the mining industry has collapsed. Australian policy makers have been hoping to see other parts of the economy take up the slack with recent interest rate cuts designed to encourage non-mining investment. Yesterday’s data suggests they have a long way to go. Private capital expenditure for the first quarter fell 4.4% versus expectations for a 2.2% decline. The only thing you can deduct from that data is that business investment plummeted in Q1. This casts real doubts on the economy’s ‘transition’ away from mining. Declining business investment may well lead to a softer outlook for jobs, and lower economic activity in general. To make matters worse, expectations for capital expenditure for 2015/16 also fell from 109.8bln to 104.0bln, so we are unlikely to see a quick turnaround over the coming quarters. The cold hard reality is that this sort of data only increases the chance of another rate cut from the Reserve Bank, and that prospect will keep the Australian dollar on the back foot. Next week to draw focus we have building approvals, GDP, trade balance data, and an RBA rate meeting.
New Zealand
Fonterra released milk pay-out forecasts for the new season yesterday and they were at the lower end of expectation. The company expects the milk pay-out for 2015/16 to be $5.25/kg. Somewhat surprisingly Fonterra also announced another cut to the current season's pay-out of 10 cents, taking it to $4.40/kg. The market was certainly positioned for some bad news and although the New Zealand was initially market lower, it quickly bounced as short term sold positions got squeezed out and the currency ended the day higher across the board. Overnight however the sellers have returned and the NZD is likely to remain under pressure in the near term. The bigger picture for farmers is that next season may well prove to be another tough one. A quick turnaround in prices seems unlikely with world markets oversupplied thanks to the record prices seen just over a year ago. The NZIER this week said the Reserve Bank of New Zealand may well hold rates steady until 2017. They expect solid growth of around 3% out to 2017, with inflation expected to stay below the midpoint of the banks targeted range. They said the RBNZ can’t cut rates without throwing fuel on the fire of the Auckland property market and this leaves them “in a bind”. Next week from NZ the calendar is looking pretty light. The overseas trade index and another Fonterra dairy auction are the only highlights.

United States
The US dollar has had a very positive week buoyed by data that suggests the economy may finally be bouncing back from the poor first quarter. The key release was durable goods orders and while the headline number was solid, the core reading which excludes aircraft and defence orders, was much better than forecast. There were also big positive revisions to prior numbers. This data set the tone for the USD which continued to make gains throughout the week. The housing market also looks to be bouncing back with new home sales and pending home sales both recording better than forecast readings. CB consumer confidence saw gains to 95.4 from 94.3 prior, and while weekly jobless claims did disappoint coming in at 282k versus 271k expected, that level is still consistent with solid jobs growth overall. If this is in fact the start of a much broader recovery in economic data from the United States, then a rate hike in September will start looking like a much more realistic proposition, and US dollar gains could have a way to go yet. Tonight we get GDP data from the first quarter and the market is expecting a result of around -0.8%. The data is obviously very backward looking, and we all know it was a poor start to the year, so unless there is a major surprise the USD should be largely unfazed. Next week could prove to be a big one with PMI data from the manufacturing and nonmanufacturing sectors, along with the non-farm payrolls report.

United Kingdom
While last night’s GDP data from the UK did disappoint a touch, coming in unrevised at 0.3% against expectations of 0.4%, a couple of second tier data releases have supported the positive outlook for the economy going forward. CBI realized sales jumped to 51 from a prior reading of 12. The index is based on a survey of retailers and any result above 0 indicates higher sales volumes. It’s a good lead indicator of consumer spending and this outcome suggests retails sales over the coming month may well put in another very strong showing. Mortgage approvals also put in a solid jump to 42.1k from 39.2k prior, underpinning a strong UK housing market. Next week is a big one data wise with a trifecta of PMI’s from the manufacturing, construction and services sectors, along with the Bank of England rate meeting.

There hasn’t been a lot of key data from the Eurozone this week, but what we have seen has generally been positive. Confidence indicators continue to show gradual improvement and there has also been a notable pick up of inflation expectations. That will make very pleasant reading for the European Central Bank. There has been a lot of focus on the Greek situation this week with conflicting headlines creating some real volatility. The net result seems to be that we are still some way away from a deal been reached. Last night an EU official said there will be no deal with Greece by Sunday. There are still disagreements around the areas of pensions, sales tax and the budget surplus. The IMF’s Lagarde said after positive signals from Athens ten days ago, “we’ve been sobered in the past week”. Time is rapidly running out for Greece and it’s now looking like a matter of days, not weeks, before the country's finances hit a brick wall. Tonight we have German retail sales and French consumer spending data to digest. Then next week we get manufacturing and services sector PMI’s, inflation, Eurozone retail sales and the ECB rate statement.

The past couple of days have seen a rash of data released from Japan. Yesterday we got retails sales figures that were a little disappointing. Sales in April increased 0.4% compared to March. The market was expecting a bigger increase of 1.1%. Earlier today we saw unemployment improve a touch to 3.3%, inflation edge up to 0.3% and industrial production increase by 1.0%. Household spending was however a little disappointing coming in down 1.3% versus expectations of +3.0%. The Bank of Japan’s Kuroda was on the wires this week suggesting we will see ‘fairly significant wage increases’ in spring. The government has been encouraging companies, who are seeing strong profits thanks to the weak Yen, to boost pay packs in the hope it will spur consumption and help create a ‘virtuous cycle’ of growth. To that end, next week's average cash earning data will be closely watched.

The main focus in Canada this week was on the Bank of Canada’s interest rate meeting and accompanying statement. As widely expected the bank left rates unchanged at 0.75%, saying the “current degree of monetary stimulus remains appropriate”. They said inflation risks have not materially changed and that financial conditions remain highly simulative. They believe the US will return to solid growth in the second quarter and this will help boost Canadian exports and business investment. Their overall economic outlook was largely in line with April’s monetary policy statement. For now the BOC remain neutral and interest rates are likely on hold for an extended period. But Governor Poloz has proven he is willing to act abruptly if conditions change significantly. Tonight we get GDP data and then next week we have the trade balance, Ivey PMI and employment change.