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Economies of note : 22 Feb

Written by Sam Coxhead on February 22nd, 2013.      0 comments

5:15 PM (NZT)
This week’s focus for the Australian economy has been the release of the RBA's monetary policy meeting minutes. The minutes were most unsurprising. The option of further easing of the official cash rate remains open, if the economy needs further stimulation. However, further easing is not as foregone conclusion, and the expectations of a lower cash rate in the interest rate market has been pared back a little since the release. It seems logical the RBA take a wait and see approach for the next few meetings at least. Their meetings are monthly. If the global economy comes up against further hurdles, a lower cash rate will be accommodated. The Australian dollar remains vulnerable, as it has looked over the last few months, with a material drop not forth coming as yet, with the exception of it's under performance against the New Zealand dollar. Interestingly, this afternoons comments from RBA Governor Stevens, have seen increased demand for AUD as the scramble plays out to buy AUD. His comments should not have surprised too much. But they have seemed to have caught the market with uncomfortable “sold” positions, looking for indications of further easing, which were not forth coming. Next week sees the latest private capital expenditure numbers the focus. These are important as they are very closely watched by the RBA.
New Zealand
It has been a quiet week for New Zealand economic data releases. Of interest was the latest Global Dairy Trade auction from Fonterra. The results show a 5th straight month of increases with prices up 3.1% on average at the auction. Also of material interest was a speech by new RBNZ Governor Wheeler on Wednesday. His candid comments about the elevated level of the NZD, saw it sold sharply, and the weakness continued through trade in overnight markets. This "verbal intervention" mused that the RBNZ would intervene when circumstances were right. He also stated they would use the OCR (cash rate) and other lending tools (increasing home equity ratios) to help address increasing challenges to financial instability, such as the high NZ dollar. Next week sees the release of the RBNZ quarterly survey of inflation expectations (should be limited impact), the trade balance and ANZ Business Confidence numbers.
United States
So far this week we have seen building permits and producer prices come in close to the markets expectations. The latest inflation numbers show continuing benign inflationary pressure and the manufacturing numbers were weaker than market expectations, albeit not as weak as the headline number suggested. Of most interest were the FED's minutes from their latest monetary policy meeting. Whilst discussion has moved from the timing of the end of the quantitative easing program (late 2013 most likely), the topic of how to faze out the asset buying has caught the most attention. The concept of tapering off of the stimulus is something the market was surprised about, and the US dollar rallied across the board following the release. Longer term US interest rates remain at elevated levels, even with the equity market weakness. This factor is definitely US dollar supportive. Next week sees a host of economic data in the US, but of primary focus will be US Fed Chairman Bernanke's semi-annual monetary policy testimony, and the preliminary 4th quarter GDP numbers on Thursday.
The news remains moribund for the most part in Europe. With the exception of a jump in the latest German economic sentiment survey, economic data this week has disappointed. Overnight saw Euro-zone manufacturing numbers led lower by weakness in France, and to a lesser extent Germany. The EURO has continued to see periods of sustained pressure this week, as focus on this weekend's Italian general elections increases. Next week sees the release of European retail sale, inflation and employment numbers. Of course all of these will be closely watched, but the developments in Italian politics will certainly provide a lead in the shorter term. 
United Kingdom
This week started poorly for the pressured GBP as rumours emerged of an imminent credit downgrade from ratings agency S&P. As yet these rumours have proven unfounded, but the Pound Sterling's vulnerability was again exposed. The BOE monetary policy meeting minutes were the next hurdle for the market to digest and they provided a surprise move with the bias of the voting panel towards further quantitative easing. This voter change pushed the GBP lower and certainly backs up the recent rhetoric from BOE members. The GBP remains under pressure across the board, and mildly better than expected employment numbers did little to ease concerns. Next week further 4th quarter GDP numbers come along side the latest manufacturing data and these will provide the primary focus in the UK.
The Canadian economy has been off the radar so far this week. The CAD has seen pressure and capital flows continue from CAD into US dollars and this has effected CAD demand on other pairings such as the AUD and NZD. Later today we get the latest monthly inflation and retail sales data in Canada. For the time being we can discount the inflation numbers, so retail sales will offer the primary focus to finish the week. Next week sees a speech from outgoing BOC governor Carney on Monday, and monthly GDP numbers on Friday provide the focus.
The wider financial markets have seen risk aversion increase towards the end of this week and this has finally offered some support to the recently weak YEN. There has been little in the way of economic news of note in Japan this week. The BOJ monetary policy meeting minutes offered little in the way of fresh insight. However, political posturing from various Japanese leaders has offered plenty of fodder for the market. The sooner the next BOJ Governor is announced the better. Then the new frame work to re-inflate the pressured economy can be instigated. Next week sees retail sales, industrial production and inflation numbers become the focus.
Of Note:
Given the RBNZ this week raised the topic of currency intervention, its worth noting the criteria they state must apply, for them to do so. Their stated criteria is this:
  1. the NZD must be at exceptional levels
  2. the NZD level is unjustified by fundamentals
  3. intervention is consistent with monetary policy objectives
  4. intervention is likely to be successful
Even if the first three held true, the last objective is something that many central banks globally have failed to accomplish. Arguably the RBNZ has absolutely no ability to guarantee a successfully intervention. NZ Finance Minister Bill English last week highlighted this when he stated our attempts to intervene would be like being "in the war zone with a peashooter". This is because we are a tiny country, with tiny foreign currency reserves we could use. Whilst our reserves of approx NZD 18 billion sound big, they are tiny compared to the likes of Switzerland 460 billion, who set about intervening in the CHF in 2012. Also in the past global investment funds and the market in general have attacked a currency, when a central bank has attempted to manipulate its value. They simply bet their weight, will be greater than the central bank. The best example of this was when the George Soros fund took on the BOE  in 1992. With the market also behind him, he won, and was dubbed "the man who broke the Bank of England". The BOE took an estimated loss on that one day of 6.3 billion NZD. Given these factors, anyone hoping to see the NZD fall due to any actual intervention in the currency market by the RBNZ, could be waiting a very very long time. The risks are simply too big. The best they can do, is what they did this week, in simply attempting to talk the NZD lower. This worked well for them this week, but is a strategy which needs to be used very sparingly to have impact.
Topics: Economic news