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FX Update - Central bank activity to increase in importance

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

2:30pm(NZT)
Market Overview:
For much of the past week the USD has been under pressure as disappointing data failed to inspire buyers. The one exception was Friday evening when the all-important non-farm payrolls data hit the wires. That better than expected result saw the big dollar gain sharply across the board, but somewhat tellingly, it has failed to hold on to those gains at the start of this week. We may well now see further weakness in the USD as more long (brought) positions get squeezed out. Central banks take centre stage this week with a general lack of other key data to focus on. The Bank of Japan (BOJ) and Reserve Bank of Australia (RBA) meetings conclude today, while Thursday sees the Fed minutes released ahead of the Bank of England’s rate meeting. A notable pick up in foreign exchange market volatility is providing opportunity for those who have left limit orders, or those who are quick enough, to take advantage of. These sort of trading conditions are likely to prevail through to the years end.
 

Australia
Data from Australia last week was somewhat mixed with a soft reading for retail sales countered by a healthy climb in building consents. The Australian dollar saw some volatility on the back of these results and that is likely to continue this week. This afternoon we have the RBA rate statement and then on Thursday employment data is set for release. No change is expected from the RBA and we will likely hear a repeat of the call for a period of stability in rates. However, the market is keen to see how the central bank views the recent weakness in the currency. In a little over month it has fallen from 0.9400 against the USD to a low so far of 0.8643. This could well prompt a change in language from the Reserve Bank. We are also likely to hear more warnings about the rise of investors in the housing market and the potential for implementation of macro-prudential tools. Thursday’s employment data will also be very interesting. Last month’s reading was a whopping 121k which raised all sorts of questions about the validity of the data, so some give back is expected this month.
 

New Zealand
It has been a very quiet past week for data from New Zealand. Last Wednesday evening we got the result from the latest Fonterra dairy auction and they saw another big fall. The 7.3% decline means prices have fallen around 50% now from the peak set earlier in the year. The New Zealand dollar didn’t react as many would have thought to the news, and actually made good gains in the 24 hours after the release. This was simply due to market positioning and a broad weakening of the USD which triggered a short squeeze in the currency. In the past few hours we have seen the quarterly NZIER business confidence index. This has replicated other confidence indicators and declined further from the peak set earlier in the year. With little else of note on the calendar for this week the focus will turn to offshore events and releases.
 

United States
For much of last week data from the United States disappointed by undershooting expectations. Consumer confidence, manufacturing PMI, and construction spending in particular drew attention for their soft readings. This caused the USD to lose ground throughout the week with sharp losses across the board on Thursday. However, Friday proved to be a very different story. Key employment data in the form Non-Farm Payrolls came in significantly better than expectations at 248k. Adding to that solid result was the unemployment rate that dropped from 6.1% to 5.9%. This was very good data and looking into the detail made for even better reading. Along with adding more employees, companies were pushing their existing workforce to work longer hours to meet demand. Hours worked increased to 34.6 from 34.5 which is the most since May 2008. That might not seem like much, but in terms of economic output it is the same thing as if hiring increased by 600,000 last month. Data like this is going to make it increasingly difficult for the Fed to continue in their belief that there is “significant slack” in the labour market. Along with the payrolls data on Friday we had stronger readings from service sector and this helped the USD make solid gains heading into the weekend. This week see a somewhat lighter economic calendar with the main focus on Thursday mornings Fed monetary policy meeting minutes.
 

United Kingdom
Last week’s economic data was by and large a little disappointing from the UK. The current account, mortgage approvals, manufacturing PMI and service PMI all missed expectations. The best result of the week came from construction PMI, which printed at 64.2 versus expectation of 63.7. But this failed to support the UK Pound to any large degree. We also saw a better final reading of GDP which came in at 0.9% against expectations of 0.8%, but this was calculated using new EU revisions and that likely accounted for the gain. This week we have the Bank of England (BOE) rate meeting on Thursday, although no change is expected at this time. We will then have to wait two weeks to get the minutes to see if the voting pattern changed at all. Tonight’s manufacturing production data will be closely watched and it is followed by the BOE credit conditions survey also set for release this evening.
 

Europe
The focus last week in Europe was on inflation data and the ECB rate meeting. Inflation remains dangerously low at just 0.3% and ECB President Draghi sounded a little more concerned than previously about the downside risks when he spoke at the press conference after the central banks meeting. Draghi suggested structural problems such as high unemployment were part of the problem. Since that meeting we have seen a couple of conflicting data releases. Friday’s retail sales came in significantly better than forecast at +1.2%, but then last night German factory orders saw their biggest drop since August 2009 when they fell 5.7%. Weak Eurozone growth and geopolitical concerns have certainly played a part in this decline, but the figures could also have been distorted by late school holidays in Germany. This week the economic calendar is much lighter with largely second tier data set for release. We do however have a speech from Draghi on Thursday to draw focus.
 

Japan
Last week’s Tankan survey showed there is a big divergence between business condition in the manufacturing and nonmanufacturing sectors. The large manufacturing index increased to its best level since March this year, while the large non-manufacturing index decline sharply for the second quarter in a row. A rapidly weakening Yen could be sighted as part of the reason for this and officials continue to suggest the pace of declines is a negative for the economy. The latest Bank of Japan (BOJ) meeting concludes today and it will be interesting to see their take on recent economic performance. Soft industrial production and stagnant inflation will certainly provide talking points for the central bank who are expected to leave current policy settings unchanged. Later in the week we get the current account, core machinery orders and the BOJ minutes to digest.
 

Canada
Last week saw a couple of disappointing releases from Canada that put the currency under some pressure. GDP for July came in flat against expectation for +0.2% The flat result was driven in part by a drop in oil and gas production. Friday saw the release of trade balance data that also missed forecasts by a significant margin, however last night Ivey PMI data provided a pleasant surprise. The index printed at 58.6 versus expectations of 53.4. That is a big jump from the prior reading of 50.9. It’s also the highest reading so far this year. Of particular interest was the prices component that jumped from 52.2 to 71.6. The Bank of Canada believes a recent jump in inflation is temporary, but data like this suggests we won’t be seeing a pullback any time soon. Still to come this week we have building permits, housing starts, and employment data.
 

Major Announcements last week:
  • NZ ANZ Business Confidence 13.4 vs 24.4 previous
  • Chinese HSBC Manufacturing PMI 50.2 vs 50.5 expected
  • UK Final GDP .9% vs .8% expected
  • European Inflation estimate +.3% vs +.3% expected
  • NZ GDT Auction Price Index  -7.3%
  • Canadian GDP +.9% vs +.8%v expected
  • Australian Retail Sales +.1% vs +.4% expected
  • US Manufacturing PMI 56.6 vs 58.6 expected
  • ECB leave monetary policy unchanged
  • US Unemployment rate 5.9% vs 6.1% expected
  • Canadian Manufacturing 58.6 vs 53.4 expected
  • NZ NZIER Business Opinion 19 vs 32 previously
 

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