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FX Update - Markets the weigh timing of first US rate hike

Written by Ian Dobbs on May 26th, 2015.      0 comments

Market Overview:
The Federal Reserve is determined to raise interest rates in the US this year, but the timing of the move is very uncertain. Recent data, employment results aside, hasn’t been strong enough to justify a lift off in June, and the market is now focusing on September or December as likely dates for the first hike. In China the focus is on trying to manage the downturn. The People's Bank of China has acted a number of times since late last year to try and soften the impact of the massive over-investment seen in recent years. Housing is a big concern with a vast inventory of unsold properties. China produced more cement between 2011 and 2013 than the US did during the entire 20th Century. Premier Li Keqiang recently said China will achieve 7% growth this year, and while ‘official’ figures may come close to that, there are signs things are a lot worse. Electricity usage has turned negative and rail freight has been falling at near double digit rates. Hardly conducive with 7% growth. The impact of this downturn is being felt around the world. Japan’s exports to China are down 15% on a year ago. Last month alone car exports to China fell 50%. From New Zealand the volume of whole milk powder exported to China in April 2015 was a third of what it was in April 2014. Chinese stimulus measures have boosted their stock market which recently hit a seven year high. Somewhat concerning however is the explosion of unsophisticated investors using margin trading accounts to invest in stocks. A record 3.3 million new trading accounts were opened in one week alone recently. This has all the markings of a bubble in the making.

Last week from Australia we saw consumer sentiment data increase 6.4%, thanks in large part to the recent interest rate cut from the RBA and a well-received Federal Budget. We also saw inflation expectations increase by 0.2% to 3.6% from 3.4% prior. There have been a number of reports released recently that suggest the bounce we have seen in commodity prices recently is unlikely to be sustained. The underlying fundamentals for commodities remain negative with world growth expectations looking pretty sluggish over the remainder of this year. The outlook for China isn’t much better with many researchers suggesting China’s economic downturn may be much deeper than ‘official’ numbers suggest. If this bounce in commodity prices does turn out to be temporary then we can expect that to once again weigh on the Australian dollar over the coming months. Still to come this week we have private capital expenditure and construction work done data, along with a speech from RBA deputy governor Lowe.

New Zealand
Data from New Zealand late last week was supportive of the economic outlook going forward. Migration hit another record high and credit card spending was also strong increasing 7.1%. ANZ consumer confidence for May came in at -3.8% with the index falling to 123.9 from 128.8. Although that’s the lowest reading in six months, the index is coming off a very high peak and overall it’s still a strong reading. Earlier this morning we saw the latest trade balance data for April and this came in better than forecast at +123m. Expectations were for a result of +98m. Still to come this week we have building consents and business confidence data to digest.

United States
The US dollar finished last week on a relatively firm footing thanks to a couple of releases. The first was inflation, and while the headline reading remains pretty tame, the core rate, which strips out volatile food and energy, rose by 0.3% in April. That was higher than the 0.2% expected. In a signal of the underlying appetite for US dollars, this data caused a significant increase in demand as the USD made solid gains across the board. Fed Chair Yellen also released a speech on Friday evening in which she said she expects the bank to begin raising rates ‘at some point this year’. She added that the economy still shows some room for improvement with the current 5.5% unemployment rate not factoring in some of the joblessness. She believes the soft start to 2015 is the result of transitory factors and some ‘statistical noise’ and that we should see moderate growth over the remainder of the year. Still to come this week we have durable goods orders, CB consumer confidence, weekly unemployment claims and GDP data to digest.

United Kingdom
The past week has been a reasonably positive one for the United Kingdom. Although we have seen inflation turn negative for the first time in more than 50 years, it’s no major surprise and should prove temporary. The UK consumer seems to be making the most of the extra money in their pockets with booming retail sales figures. UK public sector net borrowing in the year ended March 2015 was 11% less than it was the year before. This comes even as GDP in the first quarter fell to just 0.3%, which is the slowest pace since late 2012. The UK government seems to have mix of austerity and growth policies just right and this is helping to reduce their deficit. At just under 5% it’s still one of the highest in the developed world and so they still have a long way to go. The recent election outcome was a big vote of confidence in the government and this will not only keep the economy on the right track, but should result in improved readings from consumer and business confidence indicators. The main focus in terms of data this week will be on the second reading of first quarter GDP. There are some reports that suggest it could be revised higher to 0.4%.

PMI readings from Europe last week were somewhat mixed. Manufacturing saw a small improvement, but the service sector reading declined. Data later in the week was a little more encouraging with French business confidence coming as forecast at 97.0 and the German IFO business climate index improving a touch to 108.5. German GDP for the first quarter also printed right on expectation at +0.3%. The Euro has seen some pressure recently amid ongoing reports of tough talk from both sides of the Greek negotiations. The IMF looks to be taking a strong stance and as they are one of the three main creditors any deal must win their approval. Reports are that the IMF are unhappy as they believe Greece is going back on reforms and they want assurances that the country will pay what it owes over the next 12 months. An article from Greece’s Interior Minister over the weekend blamed creditors for the impasse and threatened not to fulfil an upcoming payment to the IMF on June 5th. A holiday in much of Europe yesterday meant a quiet start to this week, but we do have data in the form of German consumer climate, German retail sales, French consumer spending and Spanish CPI to look forward to over the coming days.

Last week Japan released a better than expected result for GDP in the first quarter. The 0.6% outcome was significantly higher than forecasts which were for GDP of 0.4%. The positive sentiment continued on Friday with the Bank of Japan’s monetary policy statement. The bank made no changes to policy settings but they did revise up their assessment of the Japanese economy. They have improved their outlook on private consumption and on housing investment and say the economy continues to recover moderately. Inflation however is likely to remain around zero percent for the time being due to energy price falls. Japanese trade balance released yesterday came in better than forecast at -53.4bn Yen. Exports continue to grow, while the value of imports has fallen significantly thanks to softer energy prices. Still to come this week we have the BOJ minutes, retail sales, household spending and inflation data.

Canadian inflation came in a touch lower than forecast late last week. The annual pace of price gains eased to 0.8% in April, which is the smallest increase since late 2013. Forecasts were for a reading of 1.0% year on year. The big driver of the decrease continues to be energy prices. Canadian consumers however seem to be enjoying the windfall and increasing spending on cars, food and alcohol. Retail sales jumped +0.7% in March which is much higher than the +0.3% expected. Core retail sales, which strip out autos, rose a more modest +0.5% which was below the forecast of +0.7%. This week to draw focus we have the Bank of Canada rate statement, the raw material price index and monthly GDP data.

Major Announcements last week:
  • NZ Global Dairy Trade Price Index -2.2%
  • Japanese GDP 0.6% vs 0.4% expected
  • Bank of England leave rates unchanged
  • Canadian Wholesale Sales 0.8% vs 0.9% expected
  • UK Retail Sales 1.2% vs 0.4% expected
  • Philly Fed Manufacturing Index 6.7 vs 8.1 expected
  • German IFO Business Climate 108.5 vs 108.3 expected
  • Canadian Core Inflation 0.1% as expected
  • US Core Inflation 0.3% vs 0.2% expected