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FX Update - A big week ahead for the United States and the USD

Written by Ian Dobbs on July 29th, 2014.      0 comments

Market Overview:
It has been an interesting past week in the wider financial markets. A medley of geopolitical risks, central bank influences and cyclical market turning points offered market watchers plenty of colour. Expect the geo-political concerns to continue this week and the central bank focus turns to the all-important US Federal Reserve (FED). The Federal Reserve’s statement accompanying its monetary policy announcement is of particular importance as the prospect of increasing short end interest rates in the US approaches. Debate over the speed and extent of hikes from the FED in particular will be of note as the labour market continues to improve, albeit with a lag in earnings growth. The Reserve Bank of New Zealand (RBNZ) certainly took the wind out of the NZ dollars sails last week with confirmation of a pause in its hiking cycle. The NZ dollar vulnerability remains in place, albeit the interest rate differentials will offer some support once the apparent “bought NZD position” cleanout plays out. The neutral stance from the Reserve Bank of Australia, coupled with the latest inflation numbers has seen the AUD reasonably well supported over the last week, helped along by better headline news from China.

The Australian dollar had a positive week last week helped in large part by solid inflation data. The headline result was right on expectation, but the trimmed mean figure which the RBA like to focus on, came in a bit stronger than expected. This give the currency a boost and it traded as high as 0.9470 to the USD on the week. This data will have done nothing to alter the central banks current ‘neutral’ stance and it is likely they will stay that way into early next year. We also saw some encouraging Chinese manufacturing data last week. Recent targeted stimulus measures are obviously having an impact, at least for the time being. These stimulus measures are really only plastering over the deeper economic issues associated with massive credit expansion and a housing market that is starting to suffer from elevated prices and oversupply. This week in Australia the focus turns to building approvals and producer prices data, along with figures on new home sales and import prices.

New Zealand
Last week was dominated by the RBNZ rate announcement and subsequent New Zealand dollar sell off. Although the central bank hiked rates again to 3.50%, they also signalled a pause in the tightening cycle and had some stern words with regards to the level of currency. They would have been happy with the reaction as the NZD closed the week near its lows to the USD around 0.8550. Adding to the downside pressure on the currency on Friday was business confidence data that showed confidence continues to moderate from the extreme levels seen earlier in the year. This week should prove to be a lot quieter with only building consents data our on Wednesday.

United States
Last week provided some interesting data from the United States. The headline inflation figure was in line with expectations, but the core number was a touch weaker. Good existing home sales numbers were countered by a soft reading on new home sales, and weekly unemployment claims fell again to 284k. This bodes well for the key non-farm payrolls figure set for release on Friday. At the very end of last week we also saw durable goods orders and although the headline numbers were strong, there were big negative revisions to previous results and as such any positive impact was negated. As a result of the negative revisions we have even seen some forecasters revise down their GDP estimates. GDP data is set for release on Wednesday and it will be closely watched to see just how strong the economic bounce back was from the shocking poor first quarter. Expectations are for around 3.1%, which would completely recover the first quarters -2.9%, although still leave only very modest growth for the first half of 2014. This data will be followed a few hours later by the FOMC statement. No major change in policy is expected, although we could easily see the start of debate within the committee around the timing of future rate hikes. This combined with an expected strong payrolls figure on Friday could easily see the USD start to make some real gains. Dare I say, it could even be the start of a broad USD uptrend, something many expected to see months ago. Either way this looks to be a big week for the United States.

United Kingdom
The UK Pound struggled to find buyers for much of last week. Although there was nothing overtly negative in any of the economic releases there was also nothing in there to spark fresh buying and as such the GBP traded a little heavily. The BOE minutes showed a unanimous 9-0 vote to keep rates on hold. We can’t be too far away from one or two of the more ‘hawkish’ members of the committee voting for a hike, but we’re obviously not there yet. Concerns about negatively impacting the recovery seem to be the reason for the unanimous vote, but one has to ask just how appropriate 0.5% rates are for an economy like the UK’s at the moment? Declining unemployment, solid growth and a booming housing market would suggest rates should head higher sooner rather than later. Also last week we saw retail sales data that was a touch weaker than forecast and GDP data came in bang on expectation for the quarter at +0.8%. Year on year it came in at a very healthy 3.1%. This week we get data on net lending to individuals along with the Nationwide house price index, although the focus will be on Friday’s manufacturing PMI release.

The Euro continued its gradual decline last week helped by less than inspiring data. A gain in German manufacturing PMI was countered by another decline from the French reading. Service PMI’s were a little better from both countries and this helped to lift the Euro wide result. But the German IFO business climate index on Friday came in below expectation and below the prior reading. This kept the Euro under some pressure and it traded to 2014 lows against the USD heading into the weekend. ECB vice president Constancio has been on the wires reaffirming that any additional measures are unlikely in the near term. He said the aggressive easing measures undertaken by the European Central Bank last month should address the problem of low inflation and that the impact from the targeted loans, which have maturities of four years, are still to come. This week we get German and Eurozone inflation, French consumer spending, and unemployment data to digest.

The main focus from Japan last week was on inflation data for June release Friday. Core consumer prices, that strip out volatile fresh food prices, rose 3.3% y/y which is a touch slower than the previous reading of 3.4%. If you strip out the impact of the sales tax hike however, core inflation came in at just 1.3%, down from 1.4% in May and 1.5% in April. This will be concerning for the government and Bank of Japan (BOJ) who have set a target level 2.0%. A good chunk of the current rise has also come from energy with gasoline prices up 11% and significantly higher electricity bills due to Japan’s need to import expensive fossil fuels after the Fukushima crisis saw nuclear power plants shut down across the country. Japan is looking to turn back on some nuclear generation over the coming months and although this will help with the trade balance, it will put further downward pressure on inflation. The impact of the massive stimulus implemented by the BOJ will start to dwindle if Prime Minister Abe’s ‘third arrow’, that of reform, is not implemented soon. Data to watch out for this week includes household spending, unemployment, retail sales, industrial production and average cash earnings.

There was only one data release from Canada last week and that was retail sales. The headline figure was stronger than expected at +0.7%, but stripping out autos left the core sales somewhat softer at just +0.1%. The market was looking for a core reading of +0.3%. This data weighed on the Canadian dollar in the latter pair of the week along with soft oil prices and a general lack of risk appetite. This week we have two releases to draw focus. The Raw Materials Price Index and GDP both hit the wires toward the end of the week.

Major Announcements last week:
  • US core Inflation 0.1% vs 0.2% expected
  • Australian Inflation 0.5% vs 0.5% expected
  • BOE vote 9-0 to keep policy unchanged
  • Canadian core Retail Sales +.1% vs +.3% expected
  • RBNZ hike cash rate to 3.50% as expected
  • HSBC China Manufacturing 52.0 vs 51.2 expected
  • European Manufacturing 51.9 vs 52.0 expected
  • UK retail Sales +.1% vs +.2% expected
  • UK preliminary GDP +.8% as expected
  • US Durable Goods Sales +.8* vs +.6% expected
  • Japanese Retail Sales +.6% vs -.4% expected