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Economies of Note - 4th July

Written by Ian Dobbs on July 4th, 2014.      0 comments

There has been plenty to digest from Australia this week. On Tuesday afternoon the Reserve Bank of Australia left interest rates unchanged at 2.5% as widely expected. They believe the currency is still high by historical standards and overvalued given the continued declines in commodity prices. These themes were echoed by Governor Stevens on Thursday when he delivered a speech in Hobart. The bank does see encouraging signs that the economy is slowly, but surely, shifting away from an over-reliance on the mining sector. However, they also feel the most recent GDP figures probably overstate the true pace of growth in the economy. Wednesday’s release of trade balance data was a surprise with the figure for May massively undershooting expectations. The negative headline figure was even worse when taken in conjunction with the significant negative revisions to previous results. The driving force has been falling commodity prices with export volumes actually up a small amount. Yesterday we also saw retail sales data for May that disappointed at -0.5% vs 0.0% expected and building consents which printed at +9.9% vs +3.1% expected. The overall effect of these releases has seen the Australian dollar under some pressure as the week wore on. Next week we have business confidence, consumer sentiment, and employment change to draw focus.

New Zealand
The two key releases this week from New Zealand, being business confidence and dairy prices, both registered declines. The two indicators however, are only heading back to more normal levels after an exceptionally strong period which saw them peak early this year. The business confidence index is now at 42.8, after printing over 70 in February. Rising interest rates and declining commodity prices are a big factor in this moderation, however any result over 20 is still a decent reading. Dairy prices fell another 4.9% on the back of a big increase in supply and are now down 31% from this time last year. They have now fallen in nine out of the last ten auctions. We may well see further downward pressure on Fonterra’s $7 per kg forecast pay-out for the 2014/15 season. These declines should eventually weight on the NZD, but for the time being the currency seems to be focusing on the increasingly positive interest rate differential between New Zealand and the rest of the developed world.

United States
The key piece of data from the US this week was released last night and it came in the form of non-farm payrolls for June. This data is usually released on a Friday but was brought forward due to the US holiday there today. The market was looking for a solid gain in payrolls of 212k, but the actual number was a very respectable 288k. Along with that the unemployment rate fell from 6.3% to 6.1%, which is the lowest level in nearly six years. This was an all-round strong report and it helped the USD regain some composure after continuing to come under pressure earlier in the week. Other data this week has also been supportive of the economic recovery, although it didn’t seem to have the desired impact. Pending home sales on Monday was much stronger than forecast and Tuesday’s release of manufacturing PMI was only just below expectation at 55.3. That level is consistent with decent expansion in the sector, as was last night’s other release of non-manufacturing PMI which came in at 56.0. That’s the second highest reading since September last year. Overall this week there has been nothing released to raise any alarm bells for the economy, but it wasn’t until last night’s payrolls data that the pressure came off the USD. Interest rates also moved a touch higher as did stocks, with the DOW trading above 17,000 for the first time. Next week is looking a little light for key economic data. The highlight will be the release of the Fed meeting minutes on Thursday morning, but there is little else to really draw attention.

United Kingdom
Universally strong data this week has continued to underpin gains in the UK Pound. Manufacturing and construction PMI’s printed above expectation and increased from the previous readings. While the services PMI dropped a touch to 57.7. This is still a very healthy reading and indicative of solid expansion in the sector. We’ve also seen house price data that showed a gain of 1% last month alone. That marks the fourteenth successive monthly increase with the annual price gain running at 11.8%. The UK housing market took off at the start of 2013 and has hardly looked back since. Interestingly, the gains started around five months after the Bank of England (BOE) introduced it’s Funding for Lending Scheme (FLS) and it seems most of the boost in lending from that scheme has just flowed straight into the housing market. This is also highlighted in the net lending to individuals data released on Monday. It came in above expectation at +2.7 bln and it too has seen a steady increase since the start of 2013. This was not the aim of the FLS, which was really set up to try and boost lending to small and medium sized enterprises (SME’s). In this respect the scheme has failed with the twelve month growth rate of SME lending running at -2.8%. This is an issue in many parts of the world. Banks are all too eager to grow mortgage lending while starving the real engine of any economy, SME’s, of funding. Overall the Bank of England will be very happy with the way the UK economy is performing, but they are mindful of the risks in the property market. The recent lending restrictions they have imposed on banks are one way they are dealing with the situation and we could well see further use of “macroprudential tools” to cool the real estate market. Next week the highlights are manufacturing data and the BOE rate meeting.

The recovery in the Eurozone remains very fragile and this was evidenced by a number of releases over the past week. German retail sales and employment disappointed along with Eurozone manufacturing and inflation. Analysts are scaling back inflation estimates for 2014 with many now suggesting 0.5% is a good as it will get this year. Two years ago the average estimate was 2.5%! Eurozone unemployment showed a small improvement, but remains very high at 11.6%, and you don’t even want to look at the youth unemployment statistics which are running closer to 25.0%. The long term social consequences of this could be dramatic. Despite all the ECB’s action the Euro has so far failed to weaken substantially and this must be frustrating for the central bank. It certainly is for the French Prime Minister who voiced his concerns on Wednesday. He stated the overvalued Euro is bad for growth and industry and said the financial stability pact must be applied with more flexibility and intelligence. The ECB held their rate meeting last night and to be honest there were no ground breaking announcements. President Draghi said rates will stay at their current levels for an “extended period” and he has kept the door open for QE later this year if persistently low inflation requires it. He also said they are looking at the Euro with “great attention” and that the EUR/USD rate is very important for price stability.

This week saw the release of the Japanese Tankan report, which is a quarterly survey of more than 1,200 large manufacturers and is considered a good lead indicator of economic health. It proved to be a mixed bag with a sharp deterioration in sentiment, following the recent sales tax increase, offset by firms intentions to ratchet up capital spending. Data over the past month has shown that domestic demand took a bigger than expected hit from the sales tax increase, but forward looking indicators are a little more positive and the central bank remains positive that the effects will be temporary. Next week we get readings on the current account, core machinery orders, and tertiary industry activity.

It has been a very quiet week for Canadian data with a bank holiday there on Wednesday. Key GDP data on Monday came in at +0.1% vs expectation for +0.2%, although the result failed to have a big impact on the Canadian dollar that has continued its strong resurgence of late. Last night we got trade balance data which supported the currency with a slightly better than expected result. . Next week should prove more interesting with a number of key releases scheduled. Building permits, Ivey PMI, housing starts, and employment change are all set to hit the wires.