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FX Update - Australiasian currencies recover.

Written by Ian Dobbs on February 11th, 2014.      0 comments

Market Overview:
The wider financial markets saw conflicting pressures reaffirm the contained nature of the price action in the current environment. The distinct lack of trends in the foreign exchange markets were driven late in the week by the disappointment at the US employment data. This number saw the US dollar again come under some pressure, as it was the second weaker than expected jobs growth number in a row. The Australasian currencies were buoyed by a move back to a neutral monetary policy stance from the RBA, and decent employment data in New Zealand. The ECB was also of particular focus at last week’s monetary policy meeting. In what was a “complicated decision” to leave monetary policy unchanged, further policy decisions will be very much data dependent. The low levels of inflation are a concern and will guide policy in the coming months. New US Fed chair Janet Yellen starts her reign later on today at her testimony to the Senate Finance and Expenditure Committee. New leadership at the Fed is a large variable to all markets given its far reaching policy implications. As the massive quantitative easing (QE) stimulation is unwound, it is likely the Fed will continue to provide the primary guiding force for markets for the remainder of 2014.

The Reserve Bank of Australia’s (RBA) move to a more neutral stance at their monetary policy meeting last week gave the local currency a substantial boost. The central bank is certainly more comfortable with the AUD trading sub 0.9000 to the USD, and this was evidenced by a complete removal of any reference to currency being overvalued. The RBA’s rate statement was followed by a decent reading on retail sales and a better than expected result for the trade balance. On Friday the RBA released its quarterly statement on Monetary Policy which, as you would expect, was very much in keeping with the rate statement released after their meeting only a few days earlier. However, Friday’s release did give more detail on the central banks forecasts which now have underlying inflation running at 3% by mid this year. This has been revised higher from previous forecasts thanks to a combination of a lower than expected exchange rate and higher December reading on CPI. With the RBA’s target band of inflation being 2% to 3%, this pretty much rules out any chance of another rate cut. In the last couple of hours we have seen business confidence data that improved slightly on the previous release. Tomorrow we get a reading on consumer confidence and this is followed on Thursday by key employment data.

New Zealand
Employment data for New Zealand was the only release of note last week, and this week the calendar is just as light. We get a reading on the manufacturing index on Thursday and that’s pretty much it for the week. Those employment figures last week on served to confirm the strength of the economy at the moment with an increase in employment of 1.1% against an expectation of 0.6%. Yesterday saw the release of house price data which showed prices are still appreciating and they now stand on average 12.8% above the previous market peak of 2007. Gains for January (+0.3%) were however substantially lower than those in December (+1.3%), but it is too early to say if this is the start of a trend caused by the Reserve Bank’s new loan to value ratio (LVR) limits.

United States
The focus for the US in the latter part of last week was on the key employment figures released on Friday evening. After Decembers result disappointed expectations due to extreme weather, the market was looking for a bounce back in January. Forecasts had been for a number in excess of 185k, with some even expecting +250k. Needless to say the market was again caught on the wrong foot when the actual figure printed at only +113k. The USD weakened across the board and interest rates fell. It certainly wasn’t a great report, although there were a couple of bright spots. Revisions to previous numbers totalled +34k, and the unemployment rate actually dropped to 6.6% from 6.7% previously. That’s a five year low. The drop in the unemployment rate took some of the negative sting out of the disappointing headline figure. Particularly as the level is now tantalizing close to the Feds previously stated forward guidance threshold of 6.5%. New Fed Chairman Janet Yellen will now have to address the issue and it will be very interesting to see how she deals with it. The US Fed finds itself in a similar situation to that of the Bank of England where one of the key targets, or thresholds, of forward guidance is achieved well in advance of what was forecast. In this instance the Fed was expecting 6.5% unemployment to only be achieved around mid-2015. They are obviously not going to start hiking rates over the coming months if that rate is achieved as is now likely, but moving the goal posts of one of the key thresholds brings the credibility of the entire policy into question. We will see more on this over the coming days and weeks. Janet Yellen is scheduled to give her first testimony on monetary policy in front of a senate committee on Tuesday, and later in the week we get retail sales and consumer confidence data.

The highlight over the past week from Europe was the ECB’s decision to keep rates on hold. President Draghi stressed the decision was a complex one and that the bank needs more information before taking further action. This has put the highlight on data between now and 7th March when the ECB meets again. To that extent industrial production figures from Germany, France, and Italy, have all undershot expectations over the last few days and it seems likely the Euro area figures will do the same tonight. We get GDP readings later this week that will also be closely watched. The EU’s Olli Rehn certainly thinks the central bank should act. He has been quoted as saying 0.8% inflation is quite far from the ECB’s target.  He says the ECB should take decisions to ensure it meets its inflation target thus better supporting Eurozone growth.

United Kingdom
This week should prove very interesting for central bank watchers in the UK. On Wednesday night the Bank of England (BOE) releases its latest inflation report and it is widely expected that Governor Carny will take the opportunity to address his policy of ‘forward guidance’. Unemployment has fallen much faster than the bank expected and it is now flirting with the 7% threshold set out only mid last year when the policy was announced. How the BOE deals with the situation will have far reaching consequences on the credibility of forward guidance as a tool. 25 out of 27 economists expect the issue to be addressed this week, but none of them have a clue how the bank will deal with it. We will likely get a verbal commitment from Carney to keep rates low even if employment falls below 7%, but what’s the point of having a threshold at all if it’s meaningless? In an interesting turn of events the US is now facing the same situation so we can be sure Fed Chairman Yellen will be paying close attention to what the BOE says and how the market reacts.

Yesterday’s current account data from Japan highlighted an increasingly familiar story. Weakness in the Yen has once again combined with huge demand for foreign energy, as a result of nuclear power plant shut-downs, to see imports massively outstrip exports. This has resulted in December producing another record current account deficit. At this point the government isn’t placing much emphasis on fiscal discipline as they try to drag the country out of a deflationary trap that lasted nearly two decades. But Japan has one of the world’s highest ratios of government debt to GDP and the long term viability of that debt load will start to be called into question if they continue to run current account deficits. Also yesterday we got consumer confidence data which declined for the second successive month. This comes ahead of April's sales tax increase that is likely to hit confidence further. Later in the week we have core machinery orders and the tertiary industry activity index to digest.

Late last week provided some respite for Canada’s recent run of poor economic data. The Ivey Purchasing Managers Index, which is a leading indicator of economic health, showed a notable improvement and beat expectations coming in at 56.8. This was followed by better than forecast employment data that came in at +29.4k against an expectation of +19.7k. The detail of the report made even better reading with full time jobs up 50.5k and part time work down 21.1k. The unemployment rate also fell from 7.2% to 7.0%. The Bank of Canada’s (BOC) Murray was on the wires saying a stronger global economy and weaker Canadian dollar should help foster growth in Canada. He also expects inflation to rise towards 2% over the next two years. The rest of this week is a little lighter for data with only manufacturing sales on Friday night of any note.

Major Announcements last week:
  • RBA leaves rates unchanged, drops reference to overvalued currency
  • UK construction PMI 64.6 vs 61.6 expected
  • NZ employment change +1.1% vs +0.6% expected
  • UK services PMI 58.3 vs 59.1 expected
  • US ISM non-manufacturing 54.0 vs 53.6 expected
  • Australian retail sales 0.5% as expected
  • Australian trade balance +0.47b vs -0.27b expected
  • BOE leaves rates unchanged
  • ECB leaves rates unchanged
  • CAD Ivey PMI 56.8 vs 51.3 expected
  • UK manufacturing production 0.3% vs 0.6% expected
  • Canadian employment change +29.4k vs +19.7k expected
  • US employment change +113k vs +185k