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FX Update - Australasian currencies drift lower

Written by Ian Dobbs on May 20th, 2014.      0 comments

Market Overview:
The foreign exchange markets have seen very limited ranges throughout the course of the last week. Prolonged periods of moribund price action were intermittently broken up with a quick move, albeit no new ground is being made on almost all pairings. The increasingly familiar ranges have established themselves as the USD dollar remains under pressure. Whilst the pressure has not increased, it is taking some time to ease. Supporting the pressure on the USD have been the longer end US interest rates. Until they start to correct a little higher, it seems likely the pressure will remain on the big dollar. In the absence of any market moving news, the Australasian duo have continued to trade at elevated levels, although down from recent peaks. Halting further progress higher will be the increasing focus on the vulnerability of the property market in the closely linked Chinese economy. Thus far the concerns have failed to materialise into a chaotic correction in values, but there are ongoing signs of stress. This vulnerability is the most significant risk for both the Australian and New Zealand economies in the current environment.

There has been almost no economic data released from Australia since last Tuesday’s government budget. We did get new motor vehicle sales which came in flat from the previous months -0.3%, but it had zero impact on the market. A leading analyst from Standard and Poor’s rating agency has been quoted as saying Australia’s AAA credit rating could be reviewed unless substantial budget cuts are made in coming years. There is obviously no threat of a near term cut, but it does show how prudent the government is going to need to be to maintain its AAA rating. We get the minutes from the last RBA meeting this afternoon although we shouldn’t expect any surprises. We got a good insight into what the central bank is thinking after their Monetary Policy Statement that was released on May 9th. Tomorrow we get consumer sentiment and wage price data, which will be followed on Thursday by inflation expectations.

New Zealand
Last week’s RBNZ financial stability report and government budget provided the main focus for the market, however there was little overall impact on the level of the currency from either release. As expected the government projected a modest surplus for 2014/15, while the central bank sighted risks to the economy from the housing market and a potential downturn in China. Yesterday we saw producer prices data which came in significantly higher than expected. The strong result was however largely due to higher prices for electricity generation in the last quarter. This supported the New Zealand dollar on the day, but it has reversed those gains overnight to now trade largely unchanged. Tonight we have another of Fonterra’s global dairy trade (GDT) auctions and it will be interesting to see if prices continue their slide that began back in February. The only other data of interest this week will be inflation expectations set for release on Thursday.

United States
On the whole data from the US last week was supportive of the economic recovery. Although the headline retails sales figure was disappointing coming in at only +0.1% vs expectation of 0.5%, when taken in context of last month’s very strong reading the overall trend still encouraging. Producer prices data was stronger than expected with actual inflation figures coming in bang on expectation. The regional manufacturing surveys are pointing to solid growth and on Friday we had some welcome data on the housing sector. This has been the one sector that has been showing some worrying signs recently, but at the end of last week building permits and housing starts data both come in significantly better than forecast. Housing starts jumped 13.2% in April which may well be a result of delayed construction from the previous extreme winter weather, while building permits came in at 1.08m vs 1.01m expected. These results were countered to a degree by consumer confidence which dropped from 84.1 to 81.8. The Fed’s Bullard was quoted as saying economic forecasts are strong for the remainder of 2014, and that he expects rates to rise near the end of the first quarter in 2015. While the Fed’s Williams said it won’t be appropriate to raise rates until the second half of 2015. Both men said inflation is not a concern. We have more speakers scheduled over the coming days along with minutes from the latest Fed meeting, manufacturing PMI, existing homes sales, and new home sales.

Data released from Europe last week has only served to reinforce the view that the central bank will take action at next month’s meeting. Since ECB President Darghi signalled the likelihood of further easing’s at the previous press conference back on May 8th, the Euro has fallen significantly across the board. It should remain under pressure in the lead up to Junes meeting, although a good chunk of any action undertaken by the ECB is now priced into the market, so further losses from here may be limited. We have seen many comments from other officials over the past week, and none of them have contradicted Draghi’s hint at further rate cuts. The real debate over the coming weeks will be around exactly what measures, or combination of measures, the central bank is likely to undertake. It seems outright quantitative easing is probably a step too far for the bank at this point, but negative interest rates and further liquidity measures are certainly on the table. Manufacturing and service PMI’s this week will provide the main focus along with the German business climate index.

United Kingdom
There have been no economic releases of significance since last Wednesday’s employment numbers and BOE inflation report. Both those releases saw the GBP come under some pressure with unemployment claims a little disappointing and BOE Governor Carney striking a very ‘dovish’ tone throughout the inflation report. Over the weekend an interview released with Carney gave further insight as he suggested the UK housing market has ‘deep structural problems.’ He said one thing the BOE can influence is whether banks are strong enough, i.e. do they have enough capital against risk in the housing market. He also said they would be concerned if there was a rapid increase in high loan-to-value lending across the banks. He added they have seen it creeping up and it’s something they are watching closely. The takeaway from all of this is that Governor Carney is much more likely to try and cool the housing market using tools other than rate rises, at least initially. The market is currently expecting a rate hike around the end of the first quarter next year and there is little chance of that being brought forward if the BOE use alternative measures to rein in housing. This may keep a cap on any GBP strength in the near term.

Data from Japan over the past week will have pleased officials at the Bank of Japan. The highlights have been GDP which came in at +1.5% vs +1.0% expected, and core machinery orders which jumped +19.1% against forecasts for +6.1%. Both these releases probably overstate the actual strength of the economy, but they will certainly help to convince the government and the BOJ that things are headed in the right direction. At the end of last week we also saw revised industrial production data which came in at +0.7% vs expectation of +0.3%. Tomorrow we get trade balance data ahead of the BOJ’s monetary policy statement, which will be closely watched.

Last week from Canada we saw better than expected results from manufacturing sales and the house price index, but that was about it in terms of data releases from the country. With a bank holiday there yesterday it has been a very quiet start to this week. We do get wholesale sales data tonight, but the main focus will be on retail sales figures due out on Thursday and inflation data due Friday.

Major Announcements last week:
  • Bank of Canada leaves monetary policy unchanged
  • NZ Q1 Retail Sales +.8% vs +.9 expected
  • US Retail Sales +.1% vs +.4% expected
  • European Inflation +.7% vs +.7% expected
  • UK Unemployment rate 6.8% as expected
  • BOE Inflation Report more dovish than expected
  • Japanese  (preliminary) GDP 5.9% vs 4.2% expected
  • European (preliminary) GDP 0.0% vs +.2% expected
  • US Inflation 2.0% vs 2.0% expected