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Economies of Note - 6th December

Written by Ian Dobbs on December 6th, 2013.      0 comments

3:00pm (NZT)
There hasn’t been a lot of good news for the Australian economy this week. The best result came from retail sales data on Tuesday that was a touch stronger than expected, but since then there has been little to get excited about. The RBA left rates unchanged and released a statement that was very much in line with what the market was expecting. They did say the Australian dollar was ‘uncomfortably high’ and that a lower level of the exchange rate was needed to achieve balanced growth in the economy. The caused the AUD to come under some renewed pressure initially. But overall the statement was balanced, with the RBA noting some improvement in indicators relating to household and business sentiment. On Wednesday we got a reading on the service sector with the release of the service PMI index. The reading of 48.9 was a small improvement over the previous month, but the index is still in contraction territory. This was followed a couple of hours later by GDP which disappointed at 2.3% against an expectation of 2.6%. The AUD came under further pressure in the wake of this release. I think the Australian Treasurer Joe Hockey summed the situation up best when he said ‘the Australian economy is stuck in second gear.’ Data to watch out for next week will be business confidence, consumer sentiment, and employment change.

New Zealand
The news from New Zealand continues to be positive. Monday’s terms of trade data was incredibly strong and this was reinforced on Tuesday night with the latest Global Dairy Trade (GDT) auction. Prices increased 3.9% from the previous auction and are not far from the record highs set back in October. NZ Finance minister Bill English stated the obvious when he said NZ firms are anticipating interest rate rises in 2014. That has been widely signaled by the RBNZ and the only question is around the timing of hikes. A key factor in this will be how the housing market behaves over the coming months. A recent report from Barfoot and Thompson made interesting reading. Although both the Reserve Bank and the managing director of Barfoot and Thompson have stated it is too early to say what impact the lending restrictions are having, the report seemed to suggest the effects are starting to show. Sales were down in November 7.1% on the previous month, although Oct sales were boosted by the incoming restrictions. Fewer Auckland houses are selling at auction, and houses worth less than 500,000 are selling more slowly. These are positive developments, but not yet enough to affect expectations for a rate in the first quarter of 2014. We have the RBNZ monetary policy statement on Thursday next week and the market will be keenly focused to see if they give any further clues as to the timing of the first rate hike.
United States
We have seen a mixed bag of data out of the US so far this week. Manufacturing PMI came in strong early in the week, but Wednesday nights non-manufacturing PMI was below expectation and down in last month. The employment component also pulled back sharply, contradicting other indicators that have been pointing to a better employment result. We will get a proper reading on the situation when tonight’s employment report is released. The market is looking for gains in excess of 180k. An hour or so after the employment numbers we get a reading on consumer sentiment which will also be closely watched. The other key piece of data this week was the second reading of third quarter GDP which hit the wires last night. This came in a lot stronger than the market was expecting getting revised up to 3.6%. This would indicate that the recovery in the US is gaining momentum and if this is backed up with good employment numbers tonight then the chance of tapering by the Fed in the next month or two is a real risk. Next week the calendar is a little lighter with the focus being retail sales and producer prices data.

Data out of Europe this week has done little to change the current outlook. Producer prices declined more than expected as did retail sales. Eurozone services PMI came in a touch stronger than expectation, but it’s impact was very muted. The big focus for the week was the ECB rate decision last night. After last month's surprise cut there was little expectation for further action at this meeting, however the market was somewhat surprised by Draghi’s very ‘neutral’ tone. This saw the Euro gain ground sharply across the board. There were some interesting points to take away from the meeting though, and one was to do with potential for another long term refinancing operation (LTRO). President Draghi seemed to suggest any further stimulus via this channel would have to be targeted better at stimulating lending to the real economy. The previous LTRO’s were successful in strengthening the banks by providing them cheap funding which they largely used to buy government debt. But evidence of flow through to the real economy has been lacking. The ECB may be looking to do something similar to what the Bank of England did with their funding for lending scheme, by tying further cheap funding to actual lending. The recovery in Europe is still very very fragile and Draghi made a point of saying he has broad array of tools at his disposal should further stimulus be needed. Despite his seemingly relaxed tone at last night’s meeting, he is very likely to dip into his ‘toolbox’ next year in an effort to try and underwrite more growth. Next week sees a lot of second tier data out with the highlights being German trade balance and Eurozone industrial production.

United Kingdom
For the most part, data out of the UK this week has continued to show the economy is performing very well. The Bank of England (BOE) themselves, said earlier in the week that the recovery has strengthened. Both manufacturing and construction PMI’s gained ground, with the latter printing at its best level since August 2007. Services PMI however, surprised to the downside by falling from 62.5 to 60.0, although its overall level is still very healthy.  Apart from catching the market off guard, this below forecast result has done little to alter the current outlook. As widely expected, the BOE left rates unchanged at their meeting last night and Mark Carney has made it clear that they won’t even consider raising rates until unemployment falls below 7.0%. So rates will be staying low for some time yet. Next week’s highlight will be manufacturing production data out on Monday. The market will also pay close attention to a speech by governor Carney scheduled for the same day, although it’s hard to see him creating any surprises.

It has been a quiet week in terms of economic data from Japan, with only capital spending figures on Monday and average cash earnings on Tuesday. Neither of which had a material impact. We are waiting for the release of details around the government's stimulus package. This is being prepared to counter the negative impact of the sales tax hike which is going to kick in come April. Early reports are that the package will total around 5.5 trillion Yen, and this is being viewed as a little disappointing. There has been much debate around whether the Bank of Japan (BOJ) will ease further to help counter the sales tax increase, but board member Sato seemed to pour cold water on that idea this week. He said ‘there is no need to ease preemptively if economic impact of sales tax hike is temporary’. Next week the focus moves to the current account, GDP, manufacturing index, and core machinery orders.

Canada has seen a couple of data points print stronger than expected this week, with both the trade balance and building permits surprising to the upside. The latter is however extremely volatile and so one month’s number has little overall impact. However, on the downside, the Ivey PMI survey showed a dramatic drop. This index is derived from a broad cross section of the economy and is viewed as a leading indicator of economic health. The fall from 62.8 to 53.7 was very surprising and it does highlight uncertain outlook for the Canadian economy. The Bank of Canada (BOC) themselves this week struck a very cautious tone in their statement after leaving rates unchanged at their policy meeting. They made a point of highlighting the downside risks to inflation, sighting excess supply and heightened competition in the retail sector. They expect both these factor to persist for the foreseeable future. Although the BOC maintained its ‘neutral’ stance, they are clearly worried about the future path of the economy. There isn’t a lot out next week with only housing data, capacity utilization, and a speech by governor Poloz to draw focus.