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FX Update - Fear and volatility drives currencies

Written by Ian Dobbs on July 28th, 2015.      0 comments

Market Overview:
The current environment is a tough one for the New Zealand and Australian dollars with commodity prices remaining under pressure recently. On top of this, it seems the Chinese authority’s attempts to stabilize the stock market have failed with the Shanghai Composite Index falling 8.5% yesterday. That’s the biggest one day decline since 2007 and it is very surprising considering the government did it’s best to basically outlaw selling. The market got jittery at the sight of further falls in Chinese stocks and ‘risk off’ was the theme in trading last night. Somewhat counterintuitively, this saw the NZD and AUD make some gains, albeit temporarily, as the market is positioned long USD and short both the Australian duo. The unwinding of those positions is providing some short term support for the NZD and AUD, but longer term, the soft commodity picture and Chinese growth concerns are a negative. Against this back drop we also have the US Federal reserve interest rate meeting to digest this week. No change is expected but it’s possible they could signal a hike is coming in September. Most in the market believe they will wait until December to initiate the tightening cycle, and this does seem more likely, but if they wait too long the global environment could be very different and potentially provide a significant hurdle.  The commodity slump isn’t saying anything positive about the prospects for inflation or global growth, and neither are indicators of world trade with volumes slumping over 2% in the past five months. That may not sound like much but it’s the steepest and longest decline in world trade since the financial crisis. The Fed could find it very difficult to hike rates if global growth hits a soft patch.

There has been very little in the way of market moving data from Australia over the past week. However, the Australian dollar has been under pressure on the back of soft commodity prices and disappointing releases from China. Chinese manufacturing PMI for July was well under expectations, and further in contractionary territory, at 48.2. Chinese industrial profits fell by 0.3% year on year and it seems the Chinese stock market is far from being stabilized with yesterday’s 8.5% decline the biggest one day move in eight years. These factors are seeing the Australian press, along with a number of economic forecasters, lining up to suggest the local currency could trade below 0.7000 to the USD. We have a speech from Governor Stevens on Thursday to draw focus and this will be followed by building approvals data and the producer prices index.

New Zealand
The only data released from NZ since last week’s RBNZ interest rate cut has been the trade balance. NZ actually printed the first trade deficit for June in six years with an outcome of -$60m. The market was looking for a result of +$100m. Increasing imports did the damage to the overall figure, but looking into the detail showed exports to China actually rose for the first time since August, and exports rose on an annual basis for the first time in nearly a year. Further steep declines in Chinese stock markets in recent days are worrying signs for Chinese growth, and therefore commodity prices, going forward. RBNZ Governor Wheeler will likely touch on this when he delivers a speech tomorrow entitled “Outlook for the New Zealand Economy, Inflation and Interest Rates in 2015”. The market will be very keen to get further insight into thinking within the central bank, particularly in respect to how much lower the cash rate is likely to go. The rate statement that accompanied the 0.25% cut last week was not a ‘dovish’ (negative) as some had expected and this helped to trigger a significant short squeeze in the currency. If the tone of Wheeler's speech tomorrow is in line with that statement it may provide further short terms support for the New Zealand dollar. The week will be rounded out with the release of ANZ Business Confidence on Friday.

United States
Recent data from the United States has generally been supportive of the economic outlook and will be encouraging for the Federal Reserve who meet this week. Most housing market indicators have been positive, although we did see a weaker than expected reading from new home sales on Friday. The longer term trend in new home sales is more encouraging and sales of existing homes are running at their strongest pace since 2007. Jobless claims fell to a 42 year low last week and last night we saw a better than forecast reading from durable goods orders. There were some negative revisions to prior durable goods data, and in general it has been a very soft series over the past year, but the latest figures offer some hope of stabilization in capital expenditure. The focus this week is all on just what, if any, signal the Fed will give in relation to the timing of a potential interest rate hike. The other release to watch out for is GDP, set to hit the wires on Thursday night. The market is expecting it to show annualised growth of around 2.5% in the second quarter which would be a solid, if unspectacular result.

United Kingdom
UK retail sales unexpectedly fell by 0.2% in June on the back of consumers buying less household goods, food and petrol. The market had forecast a gain of 0.4%, so the surprise decline weighed on the UK Pound somewhat. The rate of annual growth in retail sales slowed to 4.0% in June from 4.7% in May. Although the June figures were a little disappointing, the annual rate of growth is still very healthy and it suggests consumer spending will contribute significantly to GDP growth. We get the latest reading of GDP tonight and the market is expecting a gain of 0.7% for the second quarter following a 0.4% gain in the first three months of the year. Although an increase in GDP of 0.7% would be a nice improvement in growth over the first quarter it’s unlikely to push the Bank of England into making an early move on interest rates. At this stage the best guidance we have on the timing of a potential rate hike came from Governor Carney himself last week when he said that decision “will likely come into sharper relief around the turn of this year.” Other data to watch out for this week includes net lending to individuals, mortgage approvals and consumer confidence.

At the end of last week we saw PMI data from France, Germany and the Eurozone as a whole hit the wires. Although in general the results were softer than forecast and down on the previous month, they weren’t all that bad considering the recent tensions we have seen around Greece’s brush with bankruptcy. Eurozone manufacturing PMI came in at 52.2, down from 52.5 last month, while the services PMI came in at 53.8, down from 54.4 prior. On a slightly more positive note, last night we get the latest reading of the German IFO business climate index and this improved by more than forecast to 108.00 in July. The Euro, which was already benefiting from some ‘risk off’ sentiment in the market surged further in the wake of the release. Still to come this week we have data on inflation, unemployment and German retail sales, along with the ECB’s economic bulletin.

There has been little to get excited about in terms of economic data from Japan over the past week. The trade balance came in bang on expectation at -0.25T while manufacturing PMI picked up a touch to 51.4 from 50.1 prior. Yesterday we saw producer prices data come in below forecast at 0.4% year on year. It’s certainly not a market moving piece of data, but what it does suggest is there is little in the way of pipeline inflation pressure in the economy. The Bank of Japan’s (BOJ) deputy governor Nakaso was on the wires saying inflation is likely to hover around zero per cent until summer, then pick up pace rather quickly. He expects the CPI to reach 2 per cent around the first half of fiscal 2016. The current route in oil, and commodities in general, may make that forecast exceptionally hard to achieve. Still to come this week we have retails sales data, along with household spending and inflation figures.

Like the commodity currencies of New Zealand and Australia, the Canadian dollar has been under pressure recently, weighed on by renewed declines in oil prices. The Canadian economies failure to recovery from the poor first quarter triggered the recent interest rate cut from the Bank of Canada (BOC) and this has only added to the currencies woes. However, there was a little piece of good news late last week with retail sales increasing by more than forecast at +1.0%. That data will go a small way to easing growth concerns with GDP data from May set for release on Friday. Canada’s gross domestic product contracted in each of the first four month this year and the market is looking for a somewhat improved reading of flat, for May. Ahead of that release we have the raw materials price index to digest tonight. Forecasts are for a gain of 1.1%.

Major Announcements last week:
  • Australian Inflation YoY 1.5% vs 1.7% expected
  • RBNZ cuts cash rate to 3.00% as expected
  • Australian NAB Business Confidence 4 vs 0 previously
  • European manufacturing PMI 52.2 vs 52.5 expected
  • US Durable Goods Sales 3.4% vs 3.0% expected
  • Canadian retail Sales 1.0% vs .5% expected