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FX Update - A general lack of volatility

Written by Ian Dobbs on May 13th, 2014.      0 comments

Market Overview:
Volatility in the foreign exchange market remains very subdued at the moment and that has been particularly true since late last week. Tight ranges have developed in many currency pairs and it remains to be seen if data this week can liven things up. One mover has been the Euro that has been under pressure since ECB President Draghi signalled the likelihood of further action at next month’s meeting. With the majority of central banks expected to remain with monetary policy on hold into 2015, the ECB is standing out from the crowd with its easing bias. The only other central bank adjusting rates at the moment is the Reserve Bank of New Zealand, although with a very elevated currency, they could well pause their tightening cycle at one of their next two meetings. The US dollar remains very subdued as do long term US interest rates, yet economic data has been generally supportive of the outlook going forward.

Last week’s better than expected employment data certainly helped the Australian dollar finish the week on a firmer footing. The Reserve Bank of Australia (RBA) released their monetary policy statement on Friday and the central message was essentially unchanged. Rates are on hold for the foreseeable future. They have cut growth forecasts for 2015 a touch, largely as a result of the stronger AUD. They did however, add that they expect to see the exchange rate move lower over time. One thing that may not be factored into their current forecasts is the Governments budget set for release later today. There are wide ranging views with some suggesting harsh spending cuts could dampen the economy and end up pushing back rate hike expectations until well into 2015. While others believe the government is unlikely to deliver a budget that undermines the economic recovery. Yesterday we saw the latest reading on business confidence which improved to a reading of 6 from 4 previously. The only other data out this week are the second tier releases of home loans and motor vehicle sales.

New Zealand
Last week’s talk of intervention in the currency market by RBNZ Governor Wheeler certainly had the desired effect weighing on the New Zealand dollar into the weekend. That being said the currency is still at what many would call elevated levels and if sustained this could well see the central bank take a pause in the tightening cycle over the coming months. The only hard data released last week were the employment numbers and these confirm the economy is performing nicely. This week we hear from Governor Wheeler again on Wednesday after the release of the RBNZ stability report. This will be followed by retail sales a couple of hours later and then the government budget on Thursday.

United States
This week should prove an interesting one for the US with retail sales, producer prices, and inflation data all set for release. At the end of the week we also get building permits and consumer sentiment data to digest. Although growth in the first quarter was close to flat, and may even end up have been negative, there are plenty of reasons to be more optimistic about the outlook going forward. The employment market seems to be strengthening nicely, surveys from the manufacturing and nonmanufacturing sectors are consistent with solid growth, as are durable goods orders, and consumer sentiment is at healthy levels. It’s not all rosy however, with some real concerns around the strength of the housing market and lack of general wage growth. The Fed’s Fisher was on the wires late last week saying he sees ‘a lot of mixed signals in the housing market’ and this will continue to be a focus over the coming months. However, the financial markets don’t seem to be reflecting too much positivity with the USD still broadly weak across the board, and long term interest rates not far off recent lows.

There was a lot of second tier data out of Europe last week and none of it was particularly inspiring. The big event was the European Central Banks (ECB’s) rate meeting and the revelation from President Draghi that the bank is likely to take action at their next meeting in June. The bank wants to see its new forecasts before making a decision and they will have those by June’s meeting. In the current environment it’s hard to see them projecting a meaningful recovery in inflation and as such this will justify some sort of further easing. This will also help to weaken the currency which Draghi mentioned was a ‘serious concern’. His comments have already seen the Euro lose substantial ground, and it is likely to remain on the back foot over the coming weeks. Data wise this week we have German economic sentiment figures tonight, industrial production on Wednesday, while Thursday provides GDP from both France and Germany, the ECB monthly bulletin and inflation.

United Kingdom
At the end of last week we got further evidence of the strength in the UK economy. Manufacturing production data showed a gain of +0.5% which was better than the forecast of +0.3%. The National Institute of Economic and Social Research (NIESR) released their estimate of GDP for April which they saw improving to +1.0% from +0.9% previously. They said economic output at the end of April was just 0.17% below its pre-recession peak. They have also upgraded growth forecasts for 2014 to +2.9% from the earlier estimate of +2.5%. The Confederation of British Industry (CBI) say they have brought forward their expectation for a rate hike from the BOE to the first quarter of next year. We have a couple of key releases on Wednesday with employment data followed by the BOE inflation report. The central bank is expected to raise its own growth forecasts and to confirm market expectation for a rate hike before next year’s general election. A recent Reuters poll showed more than half of economists polled expect some sort of policy action by the bank in June to help cool house price gains. What form that will take is anyone’s guess, although concerning reports that banks are increasing loan-to-value ratios could see some restrictions on those put in place.

There has been little to report from Japan since last week’s BOJ minutes. Yesterday we did get current account data that showed the surplus narrowed more than forecast in March. This was as a direct result however of a surge in imports ahead of last month’s sales tax increase. This week the focus will be on preliminary GDP data for the quarter, the tertiary industry activity index, and a speech by BOJ Governor Kuroda.

Data from Canada last week was largely disappointing. We did get a better than expected result for housing starts, but this was completely outweighed by soft results for the trade balance, Ivey PMI, building permits, and most importantly employment change which was released on Friday. The market was looking for an increase in employment or around 12.8k but the actual figure showed a decrease of -28.9k. The unemployment rate was unchanged at 6.9%. This was the worst jobs report since December and as such the Canadian dollar immediately came under some pressure.

Major Announcements last week:
  • Chinese HSBC Manufacturing 48.1 vs 48.4 expected
  • US Services PMI 55.0 vs 54.2 expected
  • RBA leave monetary policy unchanged as expected
  • European Services PMI 53.1 as expected
  • European Retail Sales .3% vs -.2% expected
  • NZ Employment change +.9% vs +.7% expected
  • Australian Retail Sales +.1% vs +.4% expected
  • Australian Employment change +14.2k vs +6.7k expected
  • BOE leave monetary policy unchanged as expected
  • ECB leave monetary policy unchanged as expected
  • Chinese inflation 1.8% vs 2.0% expected
  • UK Manufacturing +.5% vs +.3% expected
  • Canadian Employment change -28.9k vs +12k expected