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FX Update - A volatile start to the New Year

Written by Ian Dobbs on January 7th, 2014.      0 comments

2:30pm (NZT)
Market Overview:
It has been a reasonably quiet holiday period for the financial markets in general. For much of the past two weeks the New Zealand and Australian dollars slowly lost ground to the USD. At the end of last week however, after continued positive US data failed to see the USD make further gains we saw a classic ‘short squeeze’ with the NZD and AUD gaining strongly in thin market conditions. This saw both currencies end last week at their highest levels since mid-December. Some of those gains have been partially reversed in the last two days, but the NZD and AUD are both still well off the lows seen on New Year’s Eve. Variable price action was seen across almost all markets with equities and bonds struggling for direction amid the illiquid holiday conditions.

There has been very little data released from Australia over the holiday period. Private sector credit released last week held no real surprises and the same can be said for the AIG manufacturing index which came in largely unchanged from last month at 47.6. Yesterday saw the release of the services index which has declined from the previous month to print at 46.1. With little domestically to drive the currency the AUD has been at the mercy of offshore factors and reduced market liquidity. Today’s trade deficit was smaller than expected and this saw a temporary jump in demand for the AUD. Later this week we get the latest building approvals, and retails sales data which could all influence the currency.

New Zealand
There have been no key economic data releases from New Zealand over the Christmas / New Year period. The economy performed well last year and the outlook for 2014 is for another good year growth wise. We did get figures released by the eftpos operator which showed shopping on Christmas Eve broke records with NZD 238.4 million processed through the system. That is 18.5% higher than the same day last year. It seems Boxing Day may well have produced similar results with retailers very happy with the volume of shoppers. People are certainly feeling positive enough to spend and that is a good sign for the economy going forward. The only data out this week is building consents on Thursday, so the currency will continue to be driven by offshore factors in the near term.
United States
The last week saw some mixed economic news released in the United States. Consumer confidence and construction spending numbers were higher, but these were balanced by lower services sector data released overnight. Holiday market conditions were a feature with mixed results in both equity and bond markets that were highlighted by a distinct lack of direction. The outlook for the remainder of the week will be guided by the release of the minutes of the Federal Reserve’s December monetary policy meeting, and the latest employment numbers when released on Friday. Both will be closely watched, with the unemployment rate expected to be stable at 7%. The coming months will see an increased focus on the Fed as Janet Yellen takes over leadership from Ben Bernanke. Whilst it is unlikely Yellen with stray far from current policy expectations, changing style can indirectly market expectations with far reaching repercussions. The tapering of the massive quantitative easing (QE) program should see the US dollar strengthen throughout 2014.

There has been some encouraging data out of Spain over past two weeks. The PMI indices for both services and manufacturing printed above expectation and well into the area signalling expansion in the sectors. These were very positive numbers with the gains driven by an increase in demand. Both new orders and business activity were sharply up from the previous month. These results were backed up by data showing Spanish unemployment fell significantly in December. The drop of -107.6k was much better than the expectation of a small increase in unemployment of 24.3k. This is the biggest ever contraction for the month of December and the second biggest intra month decrease on record. Other data from the likes of France and Italy has continued to be lacklustre at best. Standard and Poor’s downgraded the EU’s credit rating one notch to AA+ saying “We consider that the EU’s financial arrangements have deteriorated, and that cohesion among members has lessened”. There have also been a number of articles recently suggesting that Japanese style deflation may be taking root in the Eurozone. Certainly inflation at or below 1%, as it currently is in the EU, is a big concern for the ECB who meet again this week. Ahead of that meeting on Thursday we get the latest inflation reading, along with retail sales and unemployment data.

United Kingdom
The United Kingdom has had a number of data releases over the past two weeks that have mostly signalled a consistent theme. That theme is that the economy is consolidating the gains seen over the past few months, and the outlook for 2014 remains very positive. The PMI indices for manufacturing, services, and construction all came in a touch down on the previous months, but are still at very healthy levels overall. The one piece of data that continues to raise eyebrows is the house price index. The latest reading of +8.4% year on year is the biggest rise since June 2010. There was much debate late last year around a housing bubble and data like this is only adding fuel to that argument. There are now tensions within the UK coalition government around house price appreciation and the Bank of England (BOE) have already signalled they are uncomfortable with the rate of increase. This week we have the BOE rate decision and although no change is expected at their meeting on Thursday, there is talk we could get a statement from the bank regarding forward guidance or the timing of potential future rate hikes.

There has been some mixed data from Japan over holiday period, but overall the outlook for the economy remains tentatively positive. Inflation continues to inch higher, retail sales were strong, and even average cash earnings beat expectation. On the downside household spending figures were weak, as was the industrial production number, and unemployment remains unchanged at 4%. Minutes from the Bank of Japan meeting were released just before Christmas and they showed there are a range of views within the central bank. In fact the divergence of views seems to be growing. While many members said they see positive movement in economic activity, a number have raised doubts about near term growth and the economies’ ability to withstand the sales tax hike planned for April. There is little out this week for the market to get excited about, with only leading indicators on Friday of any note.

There has been very little in the way of material economic news released in Canada over the last week. This week sees the latest Purchasing Managers Index (PMI) results released on later on today, and we get employment numbers late on Friday. Of note also were comments from Prime Minister Harper on the news wires yesterday. He stated that Canada was on track to balance its budget, and that was the US and Europe see improving economic conditions, the outlook for Canada becomes more positive.

Major Announcements last week:
  • Chinese Manufacturing PMI 51.0 vs 51.3 expected
  • European Manufacturing PMI 52.7 vs 52.7 expected
  • UK Manufacturing PMI 57.3 vs 58.0 expected
  • US ISM Manufacturing PMI 57.0 as expected
  • US Construction Spending 1.0% vs .6% expected
  • UK Services PMI 58.8 vs 60.0 expected
  • HSBC Services PMI 50.9 vs 52.5 previous
  • US ISM Non-Manufacturing PMI 53.0 vs 54.6 expected