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Economies of note - 5th July

Written by Sam Coxhead on July 5th, 2013.      0 comments

2:45pm (NZT)

The Reserve Bank of Australia (RBA) had their policy meeting on Tuesday and as widely expected they left rates unchanged. There were also no surprises in the statement accompanying the decision, with the RBA maintaining an easing bias. The Australian dollar weakened in the hours following the release as the RBA continued with their view that the currency was overvalued. This weakness was exasperated the following day when an RBA official was quoted as saying ‘the board deliberated for a very long time at the meeting’. The market took that to mean it was a very close call between cutting rates or not. The official later clarified his remark saying it was a lighthearted comment referring to the fact the board were enjoying being in Brisbane where the meeting was held. The AUD didn’t find it funny as it made fresh cycle lows. Other data this week has been patchy at best. Retail sales and building approvals came in on the soft side, while the trade balance was better than expected. There has certainly been nothing so far this week to change the trend in the AUD, which continues to look heavy. That been said, the US employment figures out tonight could easily be the determining factor for direction over the coming days. Next week’s key releases for Australia are consumer confidence and employment data.

New Zealand
It’s been a very quiet week for economic news on the domestic front in New Zealand. Results from the latest global dairy trade auction have been the only releases of note. It was certainly another positive result for farmers with the price index increasing 0.7%, and the volume sold making a noticeable jump. With a lack of domestic news the New Zealand dollar has been driven by offshore forces. The heavy Australian dollar has weighed although unlike the AUD, the NZD hasn’t made fresh cycle lows this week preferring instead to trade in a 1 cent range just above last week's low. US employment data tonight certainly has the potential to dictate direction into next week when we get readings on the NZ manufacturing sector and business confidence.

United States
The key event for the US this week is the release of the monthly employment report later tonight. Trading has been very light ahead of this, thanks in part to the 4th of July US holiday. Somewhat weaker readings on trade data and the non-manufacturing sector have had little impact as they were countered by improving expectations for tonight's jobs data. The USD has remained relatively strong this week and the market is expecting a solid employment report tonight which would continue to support the currency. The risks must lie in a surprisingly weak result getting a big reaction in the currency. Especially in light of all the calls from Fed officials last week that markets overreacted to the Bernanke’s announcement on the tapering of the quantitative easing (QE) program. Those comments got little reaction from the USD at the time, but soft data tonight could bring them back into focus. However, if we get a solid employment number tonight, it will merely validate the markets current position and likely only see modest gains for the USD. Key releases next week include wholesale inventories, the FED monetary policy meeting minutes, and producer prices.

Although data out of Europe this week has for the most part been ok the currency has been weighed on by concerns over Portugal and Greece. In light of extremely unpopular austerity measures, the Portuguese finance minister has quit, and this has added a level of uncertainty to the government. Greece also looks like it is going to fail to deliver on some of its bailout pledges and there has been some tough talk this week about withholding payments to the struggling state. With this as a backdrop, last night we had the ECB rate decision and accompanying statement. President Draghi made it abundantly clear the ECB does not welcome the increase in interest rates seen in the market since the Fed's announcement on tapering. Resorting to what is known as “forward guidance”, he said the governing council expects the key ECB interest rates to remain at present or lower levels for and extend period of time. Draghi also said there was extensive discussion on cutting rates, and hinted that rates could go negative. The reaction in the EUR was swift as demand evaporated and strong selling interest emerged. It seems very likely the currency will continue to remain soft on the back of this ‘guidance’ from the ECB, in the near future at least.

United Kingdom
Upbeat data out the UK had continued to support the Pound Sterling this week heading into last nights Bank of England (BOE) rate decision. A stellar reading on the service sector released on Wednesday evening saw the GBP make gains across the board. The service sector is the biggest sector of the UK economy, and the result was well above expectation. Last night we had the BOE rate decision and the first one with new governor Mark Carney. He has certainly made an impact straight away as the bank released a statement along with the decision not to change rates, or the level of quantitative easing. This is a break from the norm in itself with the bank usually only releasing a statement if there is a change in rates or QE. In the statement the bank has actively tried to talk interest rates down, and hinted that there will be more specific forward guidance on rates at the August meeting. The market has reacted exactly how the bank would have wanted. Interest rates have fallen, and so has the GBP. The big question now is just what type of forward guidance will the bank will deliver at its next meeting. Will they promise to hold interest rates low for a set time period, or maybe make it conditional on another economic indicator like unemployment, as the US has done? Interest rates staying lower for longer will reduce demand for the currency and it seems reasonable to expect the GBP to struggle in the near term as the market adjusts to the new landscape.

The beginning of this week saw positive readings for both the manufacturing and non-manufacturing sectors of the Japanese economy. The improving outlook was backed up by an optimistic tone from Bank of Japan’s (BOJ) governor Kuroda in a speech released yesterday. He said Japan’s economy is picking up and inflation is likely to gradually turn positive. He also reaffirmed that the BOJ will continue easing until they reach a stable 2% growth in inflation. Next week sees plenty of economic news scheduled for release. The key events being current account on Monday, and the BOJ monetary policy meeting on Thursday. In between, we get minutes from the previous BOJ meeting and consumer confidence data.

The only data out of Canada so far this week has been the trade balance figures that on the surface looked encouraging. The trade deficit came in much narrower than forecast which is usually a good thing. However in this case it’s hard to find positives. Exports declined, pointing to a decrease in foreign demand for Canadian goods, while imports declined by twice as much, hence the narrowing deficit. When you have shrinking demand for exports and shrinking demand for imports, you’re starting to run out of places to look for growth! More data like this will see economists again revising down growth forecasts. We get more key data tonight in the form of employment numbers from Canada, closely followed by those from the US. Next week's data includes building permits, housing starts, and a quarterly business outlook survey.