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FX Update - Commodities feel the pain again

Written by Ian Dobbs on July 21st, 2015.      0 comments

5:30pm (NZT)
Market Overview:
Commodities have been under pressure again recently and this has pressured the commodity currencies of New Zealand, Australia and Canada. Oil has traded back below $50 a barrel for the first time since April. Iron ore has fallen from $62 a tonne in mid-June to just over $51 currently. Yesterday we saw gold make multi year lows in a very sharp move, and dairy prices have continued their relentless decline. Commodity indexes are close to levels not seen since 2002. A broadly stronger US dollar, and the prospect of higher US interest rates, is partially to blame, but excess supply combined with a slowdown in demand from emerging markets, and China in particular, is playing a big part. These influences are likely to remain prevalent over the coming months and the second half of this year could well prove to be another tough one for commodities.

Data from Australia last week didn’t have much impact on the Australian dollar with a mixed bag of results from business confidence, consumer sentiment and inflation expectations. This week to draw focus we have the Reserve Bank of Australia (RBA) minutes set for release in the next couple of hours. These should give us a bit more insight into the current thinking with the RBA. We expect the minutes to confirm the bank’s soft easing bias. The central bank will no doubt be happy to see the current weakness in the Australian dollar, but the cold hard reality is it’s yet to boost other segments of the economy. Business investment remains disappointing and economic growth is largely reliant on continued gains in the housing market. Tomorrow we have inflation data to digest, followed by a speech from RBA Governor Stevens.

New Zealand
This is only one focus in NZ at the moment and that is on the result Thursday mornings RBNZ interest rate meeting. Economists and forecasters are unanimously calling for an interest rate cut from the central bank, with one going as far suggesting we could see a 0.5% reduction. That should be a step too far for the RBNZ, but with a 0.25% cut this week well priced into the market, attention will turn to the rate statement and the signals that it sends out in regard to potential further cuts this year. It is expected the bank will suggest further readings may be appropriate, with many in the market already expecting another two cuts after this one. That outlook, assuming it’s backed up by the RBNZ, should broadly keep the NZD under pressure in the near term. However, the currency is much more realistically priced now than it was only a month or so ago. The easy work on the downside has therefore been done. The weaker currency will also have done some of the easing work for the RBNZ and as the Prime Minister said yesterday, the economic outlook is not completely gloomy. The NZ economy is still growing at a good rate and some sectors will really start to benefit from the lower NZD. We can expect a greater demand for NZD’s on any further weakness, than we have seen in recent weeks, if only from profit takers who sold the currency higher. But overlaying this is broad based weakness in commodity prices in general, which is weighing on all commodity currencies at the moment.

United States
Data from the United States in the second half of last week was largely positive. All indications are that the housing market remains strong with positive readings from both building permits and housing starts. Permits are actually running at the highest level since 2007. Inflation data came in bang on expectation at 0.3% month on month, but consumer sentiment did dip to 93.3 from 96.1 prior. Concerns about Greece and China may well have weighed on consumer sentiment, but even so the current level is still consistent with solid economic growth. The Fed’s Bullard was on the wires last night suggesting there is a 50% chance of an interest rate hike in September. He said “the economy as a whole - you can complain about this or that being sluggish - but it’s not in emergency mode. We’ve got unemployment very close to the natural rate. Inflation is a little low, but will probably return to target.” If the Fed firmly believes inflation is going to pick up, then a September hike may well be on the cards. If they are not that confident of a pick-up they may choose to wait for further confirmation, in which case December would be more likely. Data wise this week we have only have the second tier indicators of existing home sales, manufacturing PMI and new home sales set for release along with weekly unemployment claims.

United Kingdom
Although data from the United Kingdom last week was a little softer than forecast, it wasn’t soft enough to impact the current economic outlook, or dent the UK Pound to any real degree. The GBP actually had a reasonably positive week thanks in large part to comments from Bank of England (BOE) Governor Carney. He said the point at which interest rates will begin to rise is coming closer.  Those comments were echoed in a weekend article in which he was also quoted. The article points toward a rate hike around the turn of this year, with a slow path to a “level about half as high as historical averages” to quote Carny himself. This week from the UK we have the BOE minutes to digest along with retails sales data. The minutes should show a continuation of a 9-0 vote in favor of keeping interest rates steady, with a couple members suggesting they are close to voting for a hike. In terms of retail sales, the market is forecasting a gain of 0.4%, up from the prior +0.2%.

Things are slowly starting to return to normal in Greece, or as normal as they can be with a completely unsustainable debt load, crushing austerity and almost no sovereignty. The banks are re-opening and the country made a EUR 6.8bln payment to creditors last night. Germany’s Merkel was interviewed over the weekend and she again repeated that there will be no haircut for Greek debt. She said they can talk about changing maturities and lowering interest rates, but a classic haircut within the currency union is not possible. How Greece is ever supposed to manage its current debt load is beyond the realms of economic and even simple maths. Greece, and the Eurozone as a whole, would have to grow at fantasy levels for the debt pile to become sustainable. Germany is making a big mistake and is increasingly been seen as vindictive county abusing its position of power. The first Greek bail out back in 2010 was all about saving the European banking system, which at the time couldn't have withstood a Greek default. That not the case now as banks are better capitalised and their exposure to Greece dramatically reduced. If you're not going to dramatically reduce Greece’s debt load, why pump more European taxpayers money into a third bailout programme of a country that is ultimately going to default? It makes no economic sense. For the time being however, the markets can start to focus back on data from the wider Eurozone. This week we have manufacturing and service sector PMI’s to digest. Both are forecast to improve slightly from the prior levels. Spanish unemployment is also set to hit the wires and it should come in around 23%.

There has been nothing of significance released from Japan since last Wednesday’s central bank monetary policy statement. The Yen has weakened somewhat since that release in which the bank cut its growth and inflation forecasts. This week we have the BOJ minutes to digest (unfortunately they are from the meeting prior to last Wednesday’s), along with the trade balance and manufacturing PMI.

Canadian inflation came in a touch stronger than forecast on Friday. Headline inflation increased 0.2% on the month in June, while the core reading remained flat. The market was expecting core inflation would decline by -0.1%. The result will have little bearing on monetary policy going forward. Last week’s decision by the Bank of Canada (BOC) to cut interest rates by 0.25% was driven by disappointing growth figures that suggest the economy has failed to recover from the very poor first quarter. This weighed heavily on the currency and with oil prices dipping back below $50 a barrel on Monday for the first time since April, it seems the Canadian dollar is likely to remain on the back foot in the near term. Last night we saw wholesale sales data for May and this only confirmed the soft economic picture. Wholesale sales fell 1.0% against expectations for a reading of flat. At the end of this week we get the latest reading from retail sales. The market is expecting a gain of 0.4%, with the ex autos number forecast to increase 0.7%. It seems the risks to those forecasts are on the downside.

Major Announcements last week:
  • US Retail Sales -0.3% vs +0.2% expected
  • Australian Consumer Sentiment -3.2%
  • Bank of Japan leaves rates unchanged
  • UK Claimant Count +7.0k vs -8.9k expected
  • UK Average Earnings 3.2% vs 3.3% expected
  • Canadian Manufacturing Sales 0.1% vs 0.3% expected
  • Bank of Canada cuts interest rate by 0.25%
  • NZ Inflation 0.4% vs 0.5% expected
  • ECB leaves policy settings unchanged
  • Canadian Inflation 0.2% vs 0.2% expected
  • US Inflation 0.3% vs 0.3% expected
  • US Consumer Sentiment 93.3 vs 96.0 expected
  • Canadian Wholesale Sales -1.0% vs +0.1% expected