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FX Update - A busy week for central banks

Written by Ian Dobbs on December 3rd, 2013.      0 comments

2:00pm (NZT)
Market Overview:
The last week in the financial markets has been marked by somewhat incoherent themes. Some materially better than expected global economic news has been mixed with a number of softer releases. Last week saw significant increases in demand for both the Great British Pound (GBP) and the Euro, while curiously the Australian and New Zealand dollars were matched in their weakness by the Japanese YEN. The start of this week has seen further strength in economic news around the globe, most notably in manufacturing numbers from the major economies. The focus on central banks remains the primary driver of sentiment, with stock markets looking vulnerable following the strong US data. The US Federal Reserve (Fed) now hold one third of all US government debt thanks to their quantitative easing initiatives. The proposition of the Fed reducing these holdings, or even slowing their accumulation, will have far reaching implications throughout the upcoming year.

The big focus for Australia is the RBA rate statement out later this afternoon. The central bank is very unlikely to cut rates at this meeting, but future cuts have certainly not been ruled out. At the moment the bank is in a ‘wait and see’ mode, happy to see the effects of previous cuts continue to flow into the economy. They will be happy with recent weakness in the AUD and are likely to try and talk the currency down some more. Capital expenditure data last Thursday would have been a pleasant surprise for the RBA, coming in much stronger than expected. Yesterday’s release of building approvals was also better than expected although this is a very volatile number, and its impact is therefore somewhat limited. We also had the release of manufacturing PMI yesterday and this result wasn’t so good. The fall to 47.7 in November from 53.2 in October, takes the index back in contraction after two months of expansion. There is still a lot of work to be done in ‘transitioning’ the Australian economy away from mining investment to other sectors. Overall sentiment was helped by better Chinese manufacturing data out over the weekend and in the last hour we have seen retail sales data that came in a touch above expectation.
There will be more to digest tomorrow with GDP data set for release and Thursday sees trade balance figures hit the wires.

New Zealand
The New Zealand economy continues to improve and is well positioned to perform strongly next year. Recent data has all been positive. Last week we got very strong trade balance and business confidence data, and yesterday saw the release of the NZ terms of trade index for the third quarter. This index showed a substantial gain and is now at its highest level since 1973. An increase in dairy export prices was a major contributor to the positive result. The RBNZ have signalled a cash rate hike is coming next year and with data like this the risk is that the hike comes in the first few months, with meetings scheduled for January and March. Comments from the New Zealand Treasury that they see “pricing pressures starting to emerge” have only reinforced this view. They also said that growth in jobs is a sign the economy’s growth is becoming more sustainable. There is very little on the economic calendar for the rest of the week so the focus will turn to offshore and in particular key US employment data on Friday.
United States
There is a lot of key data out of the United States this week, which has the potential to dramatically affect sentiment and expectations around potential Fed tapering. We got the first of it last night in the form of the ISM manufacturing index. The reading of 57.3 was a good result and well above the expectation of 55.2. The index is now at its highest level since 2011. Looking deeper into the report showed the employment component was particularly strong. Combining this with the decent fall we saw in weekly jobless claims last Thursday will only serve to increase expectation of a solid payrolls figure when the monthly employment report is released on Friday. Ahead of that we have the trade balance, non-manufacturing ISM, and GDP to digest. The USD has performed well over the last week and should continue to be supported by the data this week.

There has been little to get excited about in terms of economic data from Europe recently. The Euro struggled onto the weekend weighed on by weak readings from German retail sales and French consumer spending. These overshadowed the small improvement seen in Euro area inflation and the small drop in unemployment from 12.2% to 12.1%. Last night’s Eurozone manufacturing index also showed a small increase to 51.6, but again it has had little effect on the currency. The focus for the week will be the ECB rate decision on Thursday. No change is expected although the bank is likely to reiterate that they still have room to act and a move to negative interest rates is possible. Ahead of that we have service sector PMI and retail sales data to digest.

United Kingdom
The UK Pound has been a solid performer recently, underpinned by positive sentiment and generally supportive economic data. Last night saw two interesting releases that have reinforced the positive growth outlook going forward. The first was manufacturing PMI which jumped to 58.4 against an expectation of 56.0. This is its strongest reading in almost three years, and looking into the detail showed new orders rocketing to a 19 year high. That is a very positive signal for the sector that suggest it can maintain this momentum going forward. The Bank of England (BOE) also released data last night on their Funding For Lending Scheme (FLS) which showed a big increase credit flow in the third quarter. Lending through the scheme has now reached its highest total since the programme was introduced 18 months ago. Most of that lending however, has been going to mortgages with credit to small business actually declining. This is part of the reason the BOE announced last week that mortgage lending under the scheme would be scrapped in February next year. The BOE desperately wants to get credit flowing to small business who have been starved of cash since the financial crisis began. For the UK economy to kick into the next gear the central bank needs to achieve this as well as see wages growth accelerate. There is a lot more key data to come this week with readings on the construction and service sectors, as well as the BOE rate decision and statement on Thursday.

Late last week saw a raft of Japanese data hit the wires. Much of it was a little disappointing with household spending, industrial production, and unemployment all coming in under expectation. There were a couple of bright spots however, with inflation ticking higher to 0.6% and housing starts showing some strength. Yesterday saw the release of capital spending data which was also somewhat below forecast. BOJ Governor Kuroda was also on the wires saying he wouldn’t hesitate to adjust monetary policy as needed if risks to the economy and prices materialize. Inside sources have apparently said the bank is working on contingency plans for further stimulus, although there is no sense that its implementation is imminent. Governor Kuroda is confident the economy is on course to hit 2% inflation in two years, although many other officials are less optimistic. We should hear plenty more from the BOJ Governor this week with a couple of speeches set for release. Data wise the focus will be on average cash earnings out this afternoon and leading indicators on Friday.  

After some less than impressive current account data on Thursday last week, the Canadian economy received some good news with Friday’s release of GDP. Expectations were for a a 0.1% result for September but the actual figure came in at 0.3%. This helped to support the CAD heading into the weekend. There will be plenty more to digest this week with the trade balance, the BOC rate statement, building permits, Ivey PMI and unemployment all set for release.

Major Announcements last week:
  • US Consumer Confidence 70.4 vs 72.9 expected
  • UK GDP 1.5% as expected
  • US Durable Goods Sales -2.0% vs -1.9% expected
  • Japanese Inflation +1.1% as previous
  • European Inflation 1.0% vs .9% expected
  • NZ ANZ Business Confidence Index 60.5% vs 53.2% previous
  • Australian Private CAPEX +3.6% vs +1.6% expected
  • Canadian GDP 2.7% vs 2.5% expected
  • Chinese HSBC Manufacturing 50.8 vs 50.5 expected
  • NZ Terms of Trade +7.5% vs 3.1% expected
  • UK Manufacturing 58.4 vs 56.0 expected
  • US Manufacturing 57.3 vs 55.0 expected