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FX Update - Have commodity declines run their course?

Written by Ian Dobbs on December 2nd, 2014.      0 comments

Market Overview:
The past week has been dominated by continued declines in commodity prices which have weighed on the commodity bloc currencies of Australia, New Zealand and Canada. A sharp recovery in the price of oil and gold in the past 24 hours has given some hope that the recent weakness may have run its course, although it is still too early to make that call. The only thing that is certain is the volatility is likely to remain high especially with a number of key releases scheduled this week. We have central bank meetings from the RBA, ECB, BOE and BOC to digest this week along with the all-important US non-farm payrolls employment report. Overall the recent theme of increasing volatility within a contained range should continue. It appears to be prudent not to expect much to happen in the way of paradigm shifts in market trends ahead of the second quarter of 2015, much to the exasperation of most committed market observers.

Some better than expected data out of Australia last week failed to halt the slide in the Australian dollar. Thursday’s private capital expenditure figures were somewhat encouraging, with the headline figure printing at +0.2% vs -1.9% expected. Capital spending estimates for 2014/15 were also revised higher and are now 7.5% higher than a year ago. Friday saw the release of private sector credit which was also a touch stronger than forecast +0.6%. The driving force of the increase was investor housing credit which was up +9.9% year on year.  This only serves to highlight the RBA’s concerns about investor lending and increases the chance of macro prudential tools been implemented at some stage to counter the growing imbalance in lending. The manufacturing sector in Australia looks to expanded very so slightly in November, with the AIG manufacturing index improving to 50.1 from 49.4 previously. Unfortunately, commodity prices have continued to remain under pressure recently and these have weighed on the AUD seeing the currency make fresh cycle lows to the USD. Still to come this afternoon we have building consents data and the RBA rate statement. Later in the week we have GDP, retail sales and the trade balance to draw focus.

New Zealand
Data from New Zealand last week didn’t have much impact on the level of the local currency. We saw a the trade balance come in worse than expected, largely on the back of weaker dairy exports, building consents jumped 8.8% reversing a large portion of the previous decline, and business confidence recovered a touch further to 31.5 from 26.5 last. Consumer debt rose at its fastest pace in almost nine years during October, according to the latest monthly Reserve Bank credit figures. Consumers are obviously feeling confident with debt up 7.2% in the year to October, the biggest jump since December 2005. RBNZ Governor Wheeler released a speech yesterday morning in which he said inflation targeting has worked for NZ delivering stable prices, without damaging the long term growth rate. He said the LVR loan restrictions will be eased when housing pressure eases and that they have eliminated the need for between 25 and 50 basis points of rate hikes. He also repeated the call that the level of the New Zealand dollar remains unjustified and unsustainable, although he admitted there is little the central bank can do to sustainably alleviate an overvalued real exchange rate.

United States
Ahead of the US thanksgiving holiday late last week there was a rash of data released that suggests the US economy is coming “off the boil” so to speak, after very strong third quarter. GDP for quarter three came in at +3.9% which was significantly stronger than expected. It seems likely however, that growth will moderate somewhat in the fourth quarter and this was backed up by slightly softer than expected releases for new home sales, Chicago PMI, personal income, core durable goods orders, consumer sentiment and weekly jobless claims. Last night we got the latest manufacturing PMI data which printed slightly stronger than expected and at relatively healthy levels. None of these releases have impacted current market expectations for the first hike from the Fed to come around the middle of next year. Still to come this week we have non-manufacturing PMI, the Fed’s Beige Book, and the all-important non-farm payrolls employment data.

United Kingdom
During last week’s inflation report hearings BOE Governor Carney all but confirmed market expectation that the start of rate hikes has been pushed back into late 2015. This revised expectation has been a major factor weighing on the UK Pound over the past couple of months. We have also seen some political uncertainty start to creep into the market with the rise of the anti-euro UKIP party. With a general election not too far away (May 2015) any further ground made by the UKIP will only add to that uncertainty and weigh on the GBP further. Data last week was generally supportive of the economy going forward, albeit at a more moderate pace than earlier in the year. GDP for the third quarter came in on expectation at +0.7% quarter on quarter, while CBI realized sales were a touch softer than forecast at 27, and down from the prior reading of 31. House price appreciation has moderated a touch, although it’s still running the decent pace of +8.5% year on year. Last night we got the latest reading from the manufacturing sector with the manufacturing PMI coming in better than forecast at 53.5. Expectations were for a result around 53.00. The prices component of the report showed the slowest pace of gains in 17 months which is in line with other indicators suggesting inflation will remain subdued in the near term. We get the construction and service sector PMI’s over the next couple of days ahead of the BOE rate meeting on Thursday.

Last week provided a mixed bag of data from the Eurozone, which is an improvement over the universally poor readings we were getting just a few weeks ago. On the positive side a number of German releases have managed to show some improvement recently. These numbers include the IFO business climate index, unemployment change, retail sales. But data from the Eurozone as a whole is still struggling, and on Friday we saw inflation come in at just 0.3% year on year, and the unemployment rate remain unchanged at 11.5%. Both those results were bang on expectation. We also heard from ECB board member Sabine Lautenschlaeger over the weekend who said she sees no further room for monetary policy easing despite the very low inflation rate. She said at the current time, the costs and benefit analysis of a government bond purchase programme just doesn’t stack up, and the hurdles for such a programme are very high. This only serves to highlight the struggle ECB President Draghi will have in trying to implement a sovereign QE programme. We will hear from Draghi himself on Thursday night in the wake of the latest ECB rate meeting. Other data to watch out for this week includes Eurozone retail sales, German factory orders and Spanish and Italian PMI’s.

Japan released a rash of data on Friday afternoon, although none of it had much impact on the level of the Yen. Household spending fell by less than expected at -4.0%, retail sales were close to expectation at +1.4%, and industrial production was a touch stronger than forecast at +0.2%. The key release was that of inflation and if you strip out the effects of April's sales tax hike, along with volatile food and energy, you get the core rate which came in at just 0.9%. This is the first time in over a year is has fallen below 1%, and it’s now a long way from the Bank of Japan’s (BOJ) 2% target. Declining consumption and the steep fall in oil prices are dragging inflation lower and it’s hard to see a quick turnaround in either of those metrics. Last night Moody’s rating service downgraded Japan’s sovereign rating one notch to A1 from AA3 due to concerns about the fiscal deficit and PM Abe’s policy measures. Abe in is a very tight spot trying to stimulate the economy on the one hand, and reign in the fiscal deficit on the other. Confidence in the country’s ability to manage is massive mountain of debt is at the heart of Abe planned sales tax hike, which has recently been delayed. Moody’s have sighted the risk of rising bond yields making the debt mountain sustainable, hence the downgrade.

Canada has seen a decent run of healthy data recently, although falling oil prices have limited the Canadian dollar’s ability to make gains as a result. Last week saw strong retail sales numbers released which were followed by better than expected GDP data on Friday. Canada’s economy grew at an annualized rate of 2.8% in the third quarter, beating expectations for a 2.1% expansion. The growth was mainly the result of exports and household spending. Also on Friday we saw the raw material price index which fell by -4.3% against expectations of a -2.5% decline. The decline was largely driven by softer crude oil prices. This week should prove very interesting with some key releases scheduled over the coming days. The Bank of Canada (BOC) hold their rate meeting on Wednesday night, this will be followed by Ivey PMI on Thursday, and employment data on Friday.

Major Announcements last week:
  • German IFO Business Climate Index 104.7 vs 103.0 expected
  • Canadian Retail Sales (core) 0.0 vs +.4% expected
  • US prelim. GDP 3.9% vs 3.3% expected
  • US core Durable Goods -.9% vs +.5% expected
  • Australian Private Capex +.2% vs -1.7% expected
  • European Inflation +.3% as expected
  • Canadian GDP +.4% as expected
  • UK Manufacturing 53.5 vs 53.1 expected
  • US Manufacturing 58.7 vs 57.9