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Economies of Note - 2nd April

Written by Ian Dobbs on April 2nd, 2015.      0 comments

The Australian dollar has remained on the back foot this week. It has failed to gain much in the way of support after better than expected readings from building approvals and Chinese manufacturing PMI. To be fair, the building approvals number was only a little better than forecast and it is a very volatile series. The Chinese manufacturing number, although encouraging, doesn’t change the current subdued outlook for the Chinese economy. What is weighing on the AUD is soft iron ore prices and the expectation that the Reserve Bank of Australia (RBA) will cut interest rates again next week. They meet on Tuesday and are widely expected to decrease the cash rate from 2.25% to 2.00%. It remains to be seen just how much of a negative impact this will have on the currency as it must largely be priced in. The kneejerk reaction to such a cut will be down, but I would be careful about expecting too much further downside after the immediate reaction. If the market goes into the announcement very short (sold AUD) a sharp bounce could easily follow. A few hours ahead of that central bank decision have get retail sales numbers to digest.

New Zealand
Data on building consents and business confidence out earlier in the week came and went with little in the way of market impact. Funnily enough the same can also be said for last night’s dairy auction. This is somewhat surprising as dairy prices took another very big fall, down 10.8%, and Fonterra’s $4.70 per kg forecasted pay-out for the current season is now looking unachievable. The market was expecting further weakness in dairy prices and this is probably why the currency has held up so well overnight, but it’s hardly a positive result. With prices for our biggest export looking very soggy, this will eventually undermine support for the New Zealand dollar. In the meantime markets have bigger things to focus on in the very near term, such as US employment numbers tomorrow, and a potential rate cut from the Reserve Bank of Australia early next week.

United States
We have seen some mixed results from the United States so far this week, but the biggest release, that of non-farm payrolls, is still to come. CB consumer confidence and pending home sales were both better than forecast, but countering these were soft results for ISM manufacturing PMI and ADP employment change. The manufacturing sector may well be starting to feel the impact of a stronger US dollar with the PMI reading falling to its lowest level since May 2013. The employment component of the PMI was also soft which may raise some alarm bells for Friday’s payrolls number. Reinforcing this risk was ADP employment change data, which although not highly correlated to payrolls outcomes, does still paint a picture of softening employment gains. Friday night’s non-farm payrolls data should be very interesting for a couple of reasons. For one, the Fed is now ‘data dependant’ in terms of when they might look to hike interest rates, and Yellen has suggested that the employment market is key. But it may well be that the headline employment number takes a back seat to the rate of wage growth. Without steady wage growth the U.S. recovery could eventually falter and although the Fed say they don’t need to actually see inflation before they hike, they will want to see wage growth. Next week we have ISM non-manufacturing PMI and the Fed minutes to digest.

United Kingdom
The UK Pound has a better week this week, although it does seem uncertainty around the upcoming elections is holding the currency back. The final reading of fourth quarter GDP came in a touch better than forecast at 0.6% and last night’s manufacturing PMI was also encouraging. It printed at its best level since August last year and largely confirms other indicators that say the UK economy is in relatively good shape. Inflation may be extremely low due to the effects of oil prices, but the consumer is in good spirits and this is translating into healthy spending and good overall domestic demand. Tonight we get construction PMI and next week starts off with the PMI from the service sector. Later in the week we have the Bank of England (BOE) rate meeting and manufacturing production data to digest.

The past week has very much been a case of ‘Groundhog Day’ for the Euro. Improving fundamentals have been side-lined / overshadowed by a lack of progress on the Greek issue. Greece desperately needs funds to be able to make a payment due to the IMF on April 9th, but so far there is little agreement between Greece and the EU on the proposed reforms needed to enable the release of the next tranche of bailout funds. The Greek government is caught between a rock (Germany) and a hard place (the Greek voters). The Syriza party were voted in on a mandate to end austerity and regain some control over their finances from Troika. But the reality is they have no leverage. Most Greeks want to stay in the Euro and a Greek exit is the only threat they can use in negotiations with the EU. The Greek population is yet to appreciate what the new government has quickly come to realize. Either you submit to all EU demands, no matter how devastating for your economy, or you leave the Euro. While Greece’s future hangs in the balance, capital is fleeing the Greek banking system, making the situation even worse and giving the government even less room to negotiate. Next week’s data in the form of services PMI, German factory orders, and retails sales, will likely also take a back seat to Greek developments.