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FX Update - Australasian duo remain vulnerable

Written by Ian Dobbs on June 4th, 2014.      0 comments

Market Overview:
It has paid to be a little weary of the market conditions over the last week. The US dollar has finally shown renewed signs of life against the Australasian pair, and in particular against the NZ dollar. Increasing concerns over the property and credit sectors in China has seen the corrective shift in demand for the closely China aligned NZ and Australian dollars. Our view is that will be an increasingly relevant issue of market focus. The NZ dollar has seen lower demand as a combination of factors appear to be taking pressure of the RBNZ’s projections for the cash rate hikes. Of primary focus this week will be on the European Central Bank (ECB) at their monetary policy announcement on Thursday. With wide ranging expectations for further policy accommodation, exactly what steps will be taken remains the moot point.

Data from Australia last week was supportive of the economic outlook going forward. Figures on construction work done came in above expectation and the estimate of private capital expenditure for 2014/15 contained strong detail. Both these results helped to support the AUD heading into the weekend. However, a lot of that good work was undone yesterday after the release of building approvals data which printed at -5.6% vs expectations of +2.1%. The driver was a sharp pullback in apartment approvals with that segment off nearly 30% in the last three months. Private sector house approvals showed a more modest decline of -0.3%. These results pressured the currency and raise some questions about the strength of the ‘rebalancing’ in the economy. In the last few hours we have also seen the latest retail sales data and this came in close to expectation at +0.2%. Later this afternoon we have the RBA rate statement to digest, although the market isn’t expecting any big surprises from the central bank. Tomorrow sees GDP data hit the wires and this is followed by the trade balance on Thursday.

New Zealand
There has been little in the way of fresh data since last week’s business confidence numbers that saw the New Zealand come under some pressure. We did get better than expected building consents data on Friday but the impact on the market was very limited. The outlook for the NZ economy remains very upbeat, however the New Zealand dollar has now pulled back significantly from what were very elevated levels a few weeks ago. The currency is certainly much more fairly priced around current levels, although that doesn’t discount further weakness in the near term. Pressure on the NZD has come from weaker dairy prices, the expectation of a pause from the RBNZ after hiking next week, and a down grading of growth prospects in China as its housing market finally looks to be unravelling. These are developing themes that will likely play out over the coming months.

United States
Last week provided a mixed bag of data from the US. Strong results from durable goods orders, services PMI, and unemployment claims, were countered by the downward revision to first quarter GDP and softer than expected result for pending home sales and personal expenditure. Last night release of the ISM manufacturing index proved to be a debacle with the result having to be released three times before they got it right. In the end the result was close to expectation at 55.4, which is an increase over the prior reading of 54.9. Comments from officials have been reasonably consistent and suggest the Fed is not worried about the weakness in the first quarter. They believe growth will snap back in quarter two. The Fed’s Evans said any interest rate increase in 2015-16 depends on the economy. There is plenty of top tier data still to come this week with the trade balance, non-manufacturing PMI, and non-farm payrolls drawing focus.

It’s hard to isolate any bright spot in data from Europe over the past week. The best result came in the form of private loans that only declined -1.8% vs expectation of a -2.1% fall. Every other data point has come in on the soft side. Most notable was last night’s release of German inflation that fell -0.1% vs expectation of a +0.1% rise. This will be especially concerning for the ECB who meet on Thursday evening to decide on what further easing action, or combination of actions, to undertake. For months ECB officials have denied deflation is a threat in the Eurozone, then last night the ECB’s Nowotny all but admitted to deflationary pressures when he said the key difference is whether deflation is a one off or a trend. It’s hard to know exactly what the ECB will do on Thursday, but one thing is for sure, half measures are not going to achieve much. If there was ever a time for outright quantitative easing this is it, but that is a much more difficult proposition to undertake for the ECB than for other countries. Whatever they do they will want to see the Euro weaker as a result. Whether they get that or not is completely up to them. We do have other data ahead of the ECB decision on Thursday, including Eurozone inflation tonight, but to be honest, this week is all about the central bank.

United Kingdom
Last week was a relatively quiet one for data from the UK with mortgage approvals and CBI realized sales both coming in a touch below expectation. These were countered to a degree by consumer confidence on Friday that was a little better than forecast. Last night we saw the release of manufacturing PMI that came in bang on expectation at 57.0, and this will be followed by construction and services PMI’s later in the week. The Bank of England (BOE) meet on Thursday night although the market isn’t expecting any change in policy settings. What will prove interesting over the coming months are the BOE minutes with the expectation for divisions to develop within the MPC (monetary policy committee) around the timing of future rate hikes.

Japan released a raft of data at the end of last week that made for interesting reading. The effects of the April sales tax hike are now very evident in the figures with retail sales collapsing -4.4%, household spending falling -4.6%, and even industrial production printing at -2.5%. Although these falls have been bigger than expected, their impact has been muted as the market knows this was going to be a touch period for the economy. On a more positive note, Friday also saw the release of inflation data that jumped to a 23 year high at +3.2%. This was also largely expected and a good chunk of it is as a result of the sales tax increase, but even if you account for that, the underlying trend seems to suggest the BOJ are on target to achieve their long term inflation target of 2.0%. It is starting to look very unlikely that the central bank will undertake any further easing measures in the near term, as some in the market had expected. Yesterday we saw capital spending figures that were certainly encouraging. The +7.4% gain was well above expectation for a +5.7% increase, and a significant jump from the previous reading of +4.0%. In the last few hours we have also seen average cash earnings data which beat expectation coming in at +0.9%. This will make pleasant reading for the government and Bank of Japan (BOJ).

The only release of note from Canada last week came on Friday when their GDP data hit the wires. The March result came in on expectation at +0.1% but there were negative revisions to January and February data and this weighed on the currency do a degree. We are in for a much more interesting week this week with a number of key releases on Thursday and Friday. The trade balance, Bank of Canada (BOC) rate meeting, building permits, Ivey PMI, and employment change are all set for release.

Major Announcements last week:
  • US Durable Goods +.8% vs -.5% expected
  • US Consumer Confidence 83.0 vs 83.2 expected
  • NZ ANZ Business Confidence 53.5 vs 64.0 previous
  • NZ Fonterra GDT Auction results -1.8% on previous
  • AU Private CapEx -4.2% vs +3.2% expected (detail strong)
  • US preliminary GDP Q1 -1.0% vs -.6% expected
  • Canadian GDP m/m +.1% as expected
  • Australian Building Approvals -5.6% vs +2.1%
  • US ISM manufacturing 55.4 vs 55.7 expected