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FX Update - A lack of direction seen in most markets

Written by Ian Dobbs on July 15th, 2014.      0 comments

Market Overview:
There has been a distinct lack of direction seen across most markets throughout the last week. Not even the threat of financial stability issues in Europe, or ongoing geopolitical risks in Eastern Europe and the Middle East were enough to provide direction. The core focus for the foreign exchange markets remains the US Federal Reserve, and the timing of their exit from the current emergency cash rate settings. Whilst no move is expected for a calendar year at least from now, the repercussions will be widely felt before then. Last week’s mixed messages from the regional Fed members make the testimony from Fed Chair Janet Yellen later on today, all the more interesting. From an Australasian perspective, an early start to the hiking cycle would finally provide some solid pressure on the Australian and New Zealand dollars, albeit this has been a long time coming. Nothing is clear on the exit of this unprecedented policy settling. However, it seems we are likely to see further periods of sideways price action ahead of volatility that will surely come at some point. As the months pass, the detail of the economic data will become more important. In the meantime, the Australasian duo remain in demand, with the Christchurch rebuild continuing to provide an additional ongoing boost to the New Zealand dollar.

The two key releases last week from Australia were business confidence and employment. The business confidence number was positive improving from last month's reading, but the employment data wasn’t so flash. A big drop in full time and a big rise in part time work meant the report wasn’t as promising as the +15.9k headline suggested. The unemployment rate also ticked up to 6.0% from 5.9% previously. RBA Governor Stevens has suggested a number of times over recent weeks that some investors are underestimating the risks of a material fall in the Australian dollar at some stage and he was on the wires again late last week make the same point. The RBA release the minutes from their latest meeting this afternoon although they shouldn’t contain any real surprises. The central bank is firmly ‘on hold’ and will most likely stay that way into next year.

New Zealand
Last week’s Quarterly Survey of Business Opinion (QSBO) saw the index pull back from the very high levels registered earlier in the year. This pullback is in line with other business confidence indicators and also commodity prices, the most important of which is dairy. Tonight we have another Global Dairy Trade auction and it will draw a lot of attention as prices have already pulled back around 30% from their peak. This has resulted in many forecasters revising down their expected pay-out for the 2014/2015 season, and another decline could see a further moderation of expectations. The one thing that hasn’t been affected by the falling dairy prices is the level of the New Zealand dollar. How long the currency can continue to ignore such a significant pullback in the price of NZ’s major export remains to be seen. Also this week we get the latest reading on inflation and this could be a significant release with the RBNZ meeting coming up next week. The majority of forecasters expect another hike by the central bank and that is certainly the most likely scenario at this stage. But there are plenty of reasons to suggest a pause in the tightening cycle may not be far away, and a soft inflation figure tomorrow would certainly add to those. The RBNZ will have been happy to see yesterday’s real estate data that showed median prices falling in Auckland and volumes sagging across the country. The combination of LVR’s and higher interest rates are certainly having the desired impact on the property market.

United States
Last week’s release of the Fed meeting minutes provided little new insight into the thinking at the central bank and if anything were a little less ‘hawkish’ than the market had hoped for. Readings from the employment market continue to signal strength with JOLTS job opening data and weekly unemployment claims both beating expectations last week. However, the US dollar remains firmly on the back foot and with little to show for the improving data. Long-time Fed watcher / reporter Jon Hilsenrath suggested in a weekend article that debate is intensifying among the Fed’s regional presidents about whether to push rates up from zero sooner than planned. This was backed up by comments from the Fed Plosser who said the Fed is closer to a rate increase than many think and waiting too long could cause a ‘bumpy ride’. On the other side of the coin however, both the Fed’s Lockhart and Evans were quoted over the weekend say they would be comfortable letting inflation overshoot the 2% target before hiking. It is extremely unlikely Janet Yellen will even acknowledge that debate when she testifies in front of the Senate Banking Committee on Wednesday. Along with her testimony this week we have retail sales data, producer prices, building permits and consumer sentiment figures.

United Kingdom
For the most part data from the UK last week had no material impact on the current economic outlook, or the value of the GBP. The market took weaker readings from manufacturing and industrial production in its stride as they haven’t affected the broader picture at all. The Bank of England (BOE) held their rate meeting and as widely expected made no policy adjustments. The GBP eventually saw a small amount of weakness after Friday’s construction output data also disappointed coming in at -1.1% vs expectations of +0.8%. This week should prove more interesting with the key readings of inflation and employment set for release. The inflation data is out tonight and the market is expecting a small uptick from 1.5% to 1.6%. Thursday’s employment figures are also forecast to be decent with a fall in unemployment claims of -27.1k and the unemployment rate ticking down to 6.5%.

Last week saw mostly soft data from the Eurozone. Industrial production data from Germany, France and Italy all disappointed with negative readings and this was reflected in the broader Eurozone figure released last night which came in at -1.1%. This is a significant fall from the prior month's reading of +0.7%. The only bright spot last week was German trade balance which did much better than forecast. The +18.8bln surplus was well above expectations for +15.7bln and is the highest reading since last October. This was a pleasing result considering German retail sales, manufacturing and employment all weakened in May raising concerns about the ability of the Eurozone to generate growth going forward. The fragile nature of the region’s economic recovery was highlighted by the, albeit short lived, turmoil in financial markets on the back of a Portuguese banking scare. Germany's Andrea Merkel summed it up nicely over the weekend when she said “The example of a Portuguese bank showed us in the last few days how quickly the so called markets are roiled, how quickly uncertainty returns and how fragile the whole euro construction still is”. ECB President Draghi is set to speak tonight and we also get a reading on German economic sentiment. Later in the week Eurozone trade balance and inflation data will draw focus.

Recent data from Japan is starting to raise questions about the economy's ability to recover from the impact of April's sales tax hike. Core machinery orders data last week was shocking coming in at -19.5% vs +0.9% expected. That’s the largest decline on record and it was followed up by a disappointing reading from the Tertiary Industry Activity index. Economic sentiment is also struggling to recover and recent report stated that a new tax free savings plan introduced in January has been poorly received by the Japanese. Clearly there is plenty of work still to be done on the economic front and the BOJ will likely reiterate their commitment to maintain current policy settings until the 2% inflation target is reached at their meeting today.

The Canadian dollar came under some pressure last week on the back of some disappointing data. We did see better than expected readings from building permits and housing starts, but these were completely outweighed by soft results from the Ivey PMI and employment change. The Ivey Purchasing Managers Index fell to 46.9 from a previous reading of 48.2. Expectations had been for an improvement to 51.3. This was followed on Friday by employment change which printed at -9.4k vs forecasts for +20.7k. The unemployment rate also ticked up to 7.1%. Looking into the detail of the report provided some relief with gain in full-time employment of +33.5k offset by a fall in part-time employment of 43k, but the damage had already been done to the CAD which ended up being one of the worst performers on the week. There is plenty of data to digest over the coming days with manufacturing sales, inflation, wholesales sales, and the Bank of Canada rate meeting all set for release.

Major Announcements last week:
  • Canadian Ivey PMI 46.9 vs 51.3
  • NZIER Business Confidence Survey 323 vs 52 previous
  • Australian NAB Business Confidence 8 vs 7 previous
  • UK Manufacturing -1.3% vs .4% expected
  • Chinese Inflation 2.3% vs 2.4% expected
  • Australian Unemployment 6.0% vs 5.9% previous
  • Chinese Trade Balance 31.6B vs 37.3B expected
  • BOE leave monetary policy unchanged
  • Canadian Unemployment rate 7.1% vs 7.0% expected