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Economies of note - 17th May

Written by Ian Dobbs on May 17th, 2013.      0 comments


This week saw only second tier data out in Australia.While not market moving in itself, these numbers have reinforced the softer outlook. This was backed up by the Australian budget that downgraded growth forecasts. The 19.4billion budget deficit forecast, the result of a mix of tax hikes and spending cuts over the coming four years, and these will also weigh on the economy. Next week sees the release the minutes of the RBA policy meeting, and the latest consumer confidence numbers. A continuing theme has been that the AUD has remained under pressure from a strong US dollar, with many commentators calling for further weakness over the long term. Softer commodities, and continued concerns over the outlook the Chinese economy have continued to weigh on sentiment.

New Zealand
There has been little this week to materially change the solid outlook for the NZ economy going forward. Retail sales numbers came in below expectation, but are still performing well overall. These was backed up by manufacturing data that showed solid gains. The IMF released a report during the week that said NZ house prices are 25% overvalued, and this presented a risk to the bank sector. They see the current accommodative stance in monetary policy is appropriate, but suggest the RBNZ might have to raise rates later this year if prices keep going up. That would be a tough decision to make with the currency also 10-15% overvalued by their estimates. Thursday’s budget was a no surprise affair, with the government on track to reach a surplus by 2014/2015. That certainly helps to underscore a robust outlook for the economy going forward. The NZD found a little bit of support from the budget, but the overriding theme of recent USD strength continues to dominate the market.

United States
The USD has reigned supreme lately on the back of improving data and a better economic outlook. However, the last few days have seen some patchy and disappointing data which does put a question mark on the strength of the recovery in the US. Retail sales data early in the week was better than forecast, but since then we have seen weaker than expected numbers for industrial production, inflation, housing and employment. This should have seen the USD give back some of the recent gains. It was heading that way until comments by a Fed official last night saw renewed demand for the USD. Those comments related to the quantitative easing (QE) programme. The suggestion was that the Fed could start tapering off its QE program in the next few months, and maybe stop all together by the end of the year. That seems somewhat optimistic in light of the data out late this week. But as talk of reduced quantitative easing gains traction in the market, it will continue to support a stronger USD.

Data out of Europe this week will have done nothing to change the view that they have a long hard road ahead. The recent cut by the ECB is a signal that even though they may be years into this crisis, they have a lot of work to do. With low inflation, disappointing GDP figures for Germany, France and the Euro-zone as a whole, the pressure will be coming on the ECB for more action. That may come in the form of ‘non standard measures’ such as negative deposit rates for banks (banks charged for not lending excess cash reserves). ECB president Draghi mentioned this at their last meeting. Previous experience tells that Draghi is prepared to think outside the box, and do whatever it takes to try and rescue Europe from it’s mess. The EUR will continue to struggle in this environment against the likes of the USD and GBP. Next week sees the release of consumer confidence, producer prices and manufacturing data which will all be closely watched.

United Kingdom
The slightly improved economic outlook for the UK was highlighted this week with the release of the Bank of England’s (BOE) quarterly inflation report. It was somewhat more upbeat on the economy, with the BOE saying they see growth a little stronger and inflation a little weaker than three months ago.  BOE Governor King called it “a welcome change to the economic outlook”. This is helping demand for the GBP that has spent the last few weeks regaining some composure after the battering it took in the early part of the year. Although it has lost ground recently against the stronger USD, it has performed well on other pairings. Next week will be a big week for the currency with plenty for the market to digest. GDP, retail sales, house price and inflation data are all set for release along with minutes from the BOE’s last monetary policy meeting. A good week next week in terms of data could really set the tone for a much bigger recovery in the GBP.

The highlight of the Japanese economic calendar this week was the release of GDP. Coming in at 3.5%, it was well above the 2.7% expected. The increase was driven by much improved domestic consumption. The Japanese consumer is feeling pretty good about life at the moment, aided in no small part by the surging stock market. The stock market gains are largely as a result of Bank of Japan’s (BOJ) money printing policies, which have also help to dramatically weaken the yen. After breaking above 100.00 last week, the USDJPY has continued to head higher currently consolidating gains about 102.00. That weaker yen will help business confidence improve, as exporters see improved profits. This is all good stuff, but the big question is whether this initial positive reaction to recent policies can morph into sustained economic growth. Next week's focus will be on the Bank of Japan’s rate decision, policy statement, and monthly economic report.

It’s been a quiet week for economic news in Canada. The only releases so far have been in the housing sector and they have come in weaker than forecast. The housing market has been a point of concern for the BOC, and they have been trying to avoid a potential market crash similar to the one in the US in 2008. Aside from lackluster global growth, this is probably the biggest risk facing the Canadian economy. This is mitigated somewhat by a better outlook for the US, which obviously plays a big part in how the Canadian economy performs. Tonight sees the release of more important inflation data, which should hold no surprises in the current environment.