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Economies of Note - 3rd March 2017

Written by Howard Wilcox on March 3rd, 2017.      0 comments

The Australian dollar after continuing to trade below the 0.7700 level for most of the week, dropped to a 0.7635 low on a stronger USD on increased speculation of a March rate hike, in spite of better than expected Australian GDP data on Wednesday. The GDP data was encouraging, showing that Australia avoided a second consecutive quarter of negative growth, with GDP for Q4 rising by 1.1%, exceeding market expectations of 0.7-0.8%. On an annualised basis the Australian economy grew by 2.4% in the 12 mths to December 2016. This result allied with the ongoing recovery in commodity prices boosts chances that the recovery will accelerate over the next 6 months and may attain the RBA’s growth target of 3% GDP growth later in the year. However, there may still be some issues around consumer spending as the data also showed wages growth was very subdued, falling 0.5% for Q4 which gave an annualised increase of just 1.5% for the 2016 year. Overnight amongst more comments from Fed Officials saw the market reset the chance of a Fed rate hike to around 90% probability which saw a surge in the USD knocking the Australian dollar hard down to the 0.7570 level. After such a big overnight move expect some consolidation around current levels, with next support level back at 0.7510. Expect a continuation of the negative tone. Next week will also see the RBA interest rate decision meeting on Tuesday and subsequent statement. No change is expected, but as always, interest will be around the accompanying statement.                                   

New Zealand
After holding well in the face of the stronger USD the New Zealand dollar succumbed to selling pressure overnight as the USD surged higher against all major currencies. The New Zealand dollar opens today around the 0.7063 level sharply lower from the 0.7150 region  where it spent most of yesterday….now at a 7 week low , next immediate support level is around the 0.6950/60 level . Fundamentally little has changed, the economy remains solid and ongoing economic figures should to some extent underpin the New Zealand dollar, but as usual the USD remains the main driver for both the NZD & AUD and the trend for higher US interest rates was  always going to make life difficult for the antipodean pair.

United States
US equity markets continued the massive bull-run, the Dow jumped to an all-time high of 21,166 on Wednesday after President Trumps address to Congress, that although light on detail struck the note most wanted to hear to reactivate the “Trump trade” of the past month. Extraordinary gains really, when the Fed is signalling rate rises (multiple) ahead and any tax cuts (“phenomenal” or otherwise) look to at least be several months away before implementation. Mid-week the ISM manufacturing index came in at a 2 ½ year high for February , with the surge in orders over the month suggesting activity is likely to remain solid over the next 6 months. Price pressures are continuing to rise which further reinforces action is overdue from the Fed. However overnight a dose of reality set in, as market expectations rose to around 90% for a Fed rate increase at the March meeting in 2 weeks, underpinned by further speeches by Fed governors this week commenting that inflation was now an increasing concern. The bullish tone evaporated on equity markets overnight, as investors reassessed the torrid run that has seen stocks making nearly daily all-time highs. The S&P 500 had the biggest drop for a month down 0.6%, the Dow was also lower but still managed to close above the 21,000 level. Next week will also give more data on the state of the US economy with the non-farm payroll data on Friday (this is released a week later this month) and Wednesday will see the ADP payrolls data which normally gives a “heads-up” on the Friday figure.  

United Kingdom
The GBP suffered at the hands of the surging USD overnight dropping to 1.2264 from the 1.2403 highs seen yesterday. UK data continues to be solid. A report out yesterday showed construction sector activity in the UK economy increased its pace of expansion and unexpectedly rose in the month of February, despite cost pressures hovering at an eight-month high. Also earlier this week a report showed that the UK’s manufacturing sector maintained a "solid" start to the year in February amid a sharp uptick in new export orders as the weaker GBP helped boost overseas orders for the 9th month in a row. Sales were led by markets in Europe, Asia and the US as the overall pace of growth slowed. An amendment to the Breixt bill in the House of Lords, affording protection to EU nationals living in Britain, is not expected to derail the process, the amended Bill is expected to return to the House of Commons on 13th/14th march for further debate. We expect the GBP to remain under pressure as the USD strengthens and although the GBP has been trading lower against the EUR, given the fragile political landscape in France, Italy  and The Netherlands with upcoming elections, look for the GBP to reassert control on the EUR/GBP cross.

Political news continues to dominate, although economic data has started to show some more positive signs. For the first time in over 4 years the Eurozone’s inflation rate has pushed above the ECB’s target of “below but close to 2%” with inflation in February hitting 2% after a jump in food and energy costs. This rise from 1.8% seen in January will increase debate as to when the ECB should exit from its stimulatory bond buying programme. It is already planned to reduce the pace of quantitative easing from EUR80 to EUR60 bio a month from April. German inflation data would also have been a contributory factor increasing from 1.9% to 2.2% in February. Solid manufacturing data earlier this week suggest that the Eurozone economy is starting to grow at a more robust place for Q1 this year, however unemployment across the region remains unchanged at 9.6%. Given the stronger USD overnight the EUR remains under pressure, now at 1.0505 with a negative tone, a break of 1.0490 would signal a deeper decline to the 1.0400 level then potential to retest the multi-year low at 1.0340 seen last January.

The Japanese Yen took a tumble as the USD driven higher by interest rate hike speculation broke through resistance at the 114.00 level. It is now trading at 114.40 with a push onto 114.60 looking likely. A break of this level would threaten 114.95 then target 115.50, although not likely until next week, if US employment data is good. Some better data this week, showing an increase in capital spending of 3.8% year-on-year for the October to December period, a turnaround as company output was boosted. Business investment by all non-financial sectors for purposes such as building plants and introducing new equipment was up over 3% at ¥10.94 trillion ($97 billion). Pre-tax business profits across a wide range of sectors were also higher, up 16.9% from the previous year according to figures produced by Japan’s Finance Ministry. These results are encouraging for the economy going forward, and support the view that a moderate recovery is now underway, as capital spending has been a weak spot, as companies were reluctant to invest amid uncertainty around the economic

There was, as expected, no change in rates after the Bank of Canada meeting on Wednesday. The Canadian GDP data was released showing a 0.3% growth in the economy for December quarter, in line with expectations. On an annualised basis this gives a 2.6% growth rate for the economy in the October-December period. The Canadian dollar has been hit by the stronger USD, falling below the support level at 0.7500 to now trade at 0.7469. Look for further weakness heading into next week if US jobs data continues to be strong.