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FX Update - All eyes on the US Fed

Written by Ian Dobbs on June 18th, 2013.      0 comments

3:30pm (NZT)
Market Overview:
All eyes this week will be on the US Federal Reserve policy meeting. Financial markets in general have been dominated lately by talk, and expectation around, just when the Fed will start to taper its quantitative easing programme. Although no one expects a move at this meeting, the entire market will be looking for a signal that it is likely to come sometime between September and December. That is the expectation currently priced into markets. There are all sorts of risks around this and the markets are very jittery. Last night for example, the US dollar made sharp gains across the board as a newspaper article hit the wires saying the Fed will signal the start of tapering is just around the corner. It caused such a stir in currencies, equities and bonds, that the reporter had to take to twitter to state he has no inside knowledge of what the Fed might do and that everyone should calm down. That promptly saw the dollar give back some of the gains.

The only economic release of note this week in Australia was the RBA policy meeting minutes released today. There was little in them for the market to focus on. Consensus is for another rate cut by the RBA this year, but the timing of any cut is open for debate. There was however an interesting article published yesterday by ratings agency Fitch on China. They warn that the Chinese credit bubble is unprecedented in modern world history. And we all know how credit bubbles end don’t we! They also say when the Fed starts tapering asset purchases in the second half of this year it will cause a flood of capital to leave China. So the story of a soft Chinese outlook undermining support for Australia continues. There have also been a number of reports recently that have highlighted the increased risks of an upcoming recession in Australia. That’s still a pretty big call at this point, but the outlook is far from rosy and as a result the Australian dollar has remained subdued.

New Zealand
Offshore forces have been driving the New Zealand dollar recently and with all eyes on the US Fed meeting this week, we can expect more of the same. Domestically we have seen stronger readings for consumer confidence and a positive report from the NZ Institute for Economic Research. They have maintained their growth forecasts for 2013/14 at 2.7%, but increased their forecast for 2014/15 growth to 3.1%. Later on in the week we get current account data and more importantly, GDP figures for the first quarter.

United States
Friday in the US saw some slightly disappointing data released. Consumer confidence came in below expectation as did industrial production. Current account data was also out and that came in a little better than forecast. Overall the US dollar was a little softer after the releases. The big focus, not only for the US but for markets as a whole, this week is on the Federal Reserve policy meeting on Wednesday. Everyone will be analysing the release for clues as to the expected timing of any scaling back of quantitative easing. With the market having priced that in for somewhere between September and December, any signal that will change that expectation could have a decent reaction. Although the Fed meeting is likely to be the dominant force driving markets this week, we will also be on the lookout for any headlines from the G8 meeting currently underway.

The EUR has been well support recently thanks in no small part to trade balance data. Although last night's reading was a little below expectation, it still shows the Euro-zone has been running a healthy trade surplus. A trend that has been going on for some time now. What’s not so great is the employment picture. Friday saw figures released that show the number of employed in the Euro-zone is at it’s lowest level in more than seven years. The ECB has done a great job of pulling the region back from teetering over the edge of a cliff, but it’s up to governments now to try to get growth and employment heading in the right direction. The reforms needed are going to prove a lot harder to achieve now their collective backs aren't against a wall, and with elections on the horizon in key countries. This week’s upcoming data includes readings on the German and French manufacturing sectors, as well as Euro-zone economic sentiment and consumer confidence.

United Kingdom
The UK’s improving economic outlook was backed up by house price data out last night. It showed further gains in prices which is a trend that has been on-going for some time now. Like the Euro, the United Kingdom pound has found good demand lately and is holding on to recent gains. There could be all sorts of volatility this week with the US Fed meeting taking centre stage, however some key releases out of the UK will also warrant attention. Tonight sees inflation numbers released that could easily surprise, while on Wednesday we get the minutes from the last Bank of England meeting, and Thursday sees retails sales data.

The bank of Japan released the minutes from their last meeting on Friday. At that meeting no action was taken with relation to bond market volatility and this disappointed the market somewhat. The minutes show there was certainly a discussion about the issue with a number of views aired, and one member suggesting limiting quantitative easing to two years. Although they haven’t taken action on the issue yet, they may have to soon. The bond market volatility has spilled over in equities, and the currency, with big moves last week in all the Japanese markets. Aside from a speech from the Bank of Japan governor this coming Friday, there is little in the way of economic data out. All eyes will be on the Fed meeting and any potential headlines from the G8.

The Canadian economy remains on a firm footing with no economic releases last week to change the stable outlook. This has meant the Canadian dollar has been one of the more stable currencies amongst all the volatility we have been having lately. Later this week the new BOC governor Stephen Poloz is speaking and we get figures on inflation. Both will be closely watched. Ahead of that however is the all-important US Fed meeting and that has the most potential to have the biggest impact on the currency market.

Major Announcements last week:
  • RBNZ rate decision   Unchanged
  • US Retail Sales  0.3% vs 0.3% expected
  • US Consumer Sentiment 82.7 vs 84.9 expected
  • Australian Employment change 1.1k vs -9.8k expected