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FX Update - Central bank decisions in focus

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

Market Overview:
The range bound nature of the wider financial markets continued for the most part last week. However, adding flavour to market sentiment are the increasing tensions in the Ukraine. Geo-political situations such as this situation usually see risk aversion emerge. This has been a little evident in increased demand for Japanese YEN and Swiss francs and to a lesser extent the US dollar, the traditional safe havens. If the situation escalates further, expect the safe haven demand to increase accordingly. Of note has been an improvement in the US economic numbers, after a couple of months of weather impacted readings. The latest personal income and consumption data joined more positive US manufacturing news overnight. This week sees monetary policy decisions from the RBA, BOC, ECB and BOE. The ECB have the highest chance of a change in policy, if at lower odds now than it was a few weeks ago. Any policy change from the ECB would be targeted at boosting the inflation outlook. The RBA, BOC and BOE will all leave policy unchanged. The RBA statement will be of particular interest following the awful capital expenditure numbers last week, and their previous move to a neutral bias at their previous statement.

Data from Australia last week was dismal. This was especially the case for the private capital expenditure figures released on Thursday which printed at -5.2%. The Australian dollar struggled badly in the second half of the week as the poor data weighed. Later today the Reserve Bank of Australia (RBA) concludes their rate meeting and releases a statement that will be closely watched. The central bank is firmly in the ‘neutral’ camp at the moment and is not expected to take any action at this meeting. That could change if data over the next couple of months continues to disappoint like last week’s figures, but for now the RBA will be happy to wait and see. Effects from previous rate cuts, and the lower level of the currency, are still flowing into the economy and this means the central bank can be somewhat patient. On a slightly brighter note there was some second tier data released yesterday that showed improvement. The manufacturing index climbed from 46.7 to 48.6 in February. The improvement is welcome although it is still below the 50 level which signals continued contraction in the industry. Job ads were surprisingly strong jumping 5.1% after a flat reading last month, and new home sales increased 0.5% from last month’s -0.4%. Later in the week we have GDP, retail sales and the trade balance to digest.

New Zealand
The run of very positive data from New Zealand continued late last week with the release of business confidence for February. The index jumped to 70.8 from a previous reading of 64.1 in January. That result means a net 71% of business are optimistic about future prospects. This is the strongest result in 20 years. On top of that, nearly one third of all business are expecting to hire more staff. This was a very upbeat survey and helped the New Zealand dollar maintain a firm tone at the end of last week. Yesterday saw the release of the terms of trade index and it was no surprise to anyone that it too came in on the strong side. The index printed at +2.3% for the fourth quarter against an expectation of +1.9%. NZ’s terms of trade is now at a 40 year high. This came alongside the news that dairy powerhouse Fonterra will be making a record pay-out for the season, and this added around 500 million to the GDP expectations. There is little else scheduled for release from New Zealand for the rest of the week. Markets will be paying close attention to the situation in the Ukraine with any escalation in tensions likely to weigh on the NZD.

United States
The mixed bag of data seen from the United States recently continued on Friday evening. On the negative side there was the second estimate of GDP which came in at +2.4% vs expectations of +2.6%. Looking into the detail of the report provided some relief with the core PCE component (an indicator of inflation) being revised up. The Fed’s Bullard was quick to point out that this confirms the central banks view that inflation is moving back to target. Offsetting the GDP figure however was Chicago PMI (a leading indicator of economic health) that surprised many improving to 59.8 from 57.9 previously, along with an upward revision to consumer confidence data. Last night we got the closely watched manufacturing PMI and personal spending data, which both beat expectations. It certainly seems the data is starting to improve after the recent weather affected soft patch. There is still plenty of data to come over the rest of the week, with the highlights being non-manufacturing PMI on Wednesday and non-farm payrolls data on Friday.

This week should prove to be an interesting one for Europe and the Euro. The ECB meeting on Thursday evening is the primary focus and there is the very real probability of some action from the central bank. However, the risks of action have diminished somewhat after inflation data on Friday night come in a touch stronger than expected. The CPI for February printed at 0.8% vs an expectation of 0.7%. That may have taken just enough pressure off the ECB to allow them to sit tight for another month. President Draghi was speaking last night and he stated the downward path in core inflation is mostly down to price adjustments in programme countries, and that this is mostly a one off effect. This would suggest they aren't overly concerned about the risks of deflation. However, Draghi did say the ECB needs to find a way to allow monetary changes to flow through into the economy. This is the same issue the Bank of England tried to address with its ‘Funding For Lending Scheme’ and it could be that the ECB will instigate a similar programme in Europe. Other data released recently includes unemployment which held steady at 12% in the Euro area, and manufacturing PMI which came in a touch above expectation at 53.2. Ahead of the ECB meeting on Thursday we get services PMI, retail sales, revised GDP, and German factory orders.

United Kingdom
Data from the UK has had little impact over the past week, with most releases printing close to expectation. There has been nothing to raise eyebrows or materially affect the current optimistic outlook. Consumer confidence at the end of last week was broadly in line with forecasts and last night’s manufacturing PMI came in exactly as expected at 56.9. Tonight we get construction PMI, and on Wednesday we’ll see the services PMI figure. These all come ahead of the Bank of England (BOE) rate meeting on Thursday evening, which should hold few surprises. The bank isn’t expected to make any changes to monetary policy.

Japan released a raft of data on Friday afternoon which, for the most part, was supportive of the economic recovery. Industrial production for January came in at +4.0% against expectations of only a +2.8% rise. This is the fastest month on month gain since June 2011. Retail sales showed its quickest rise since April 2012 printing at +4.4%, although a good portion of this increase is likely due to spending ahead of the impending sales tax increase. We are likely to see a comparative fall once the tax hike is implemented. Inflation is heading in the right direction, with the CPI improving to +1.4% from +1.3% previously. The jobless rate for January was steady at 3.7%. BOJ Governor Kuroda said the central banks easing’s’ are having the intended effect, and that the Japanese economy is in a virtuous cycle. I don’t know if I would go that far, but this data certainly indicates Japan is well on way to overcoming 15 years of deflation which has restrained their economy.

Last week was a quiet one for Canadian data with the highlight being GDP released on Friday evening. On an annualized basis GDP for the fourth quarter came in at +2.9% which was significantly better than the +2.6% expected. This was its biggest gain in over two years. However, GDP for the month of December was a little disappointing printing at -0.5%, although this was largely due to extreme weather during that month. Last night we had the Raw Materials Price Index (RMPI) which increased to +2.6% from +1.8% previously. This would suggest some pipeline inflation pressures in the economy which could be due to recent weakness in the Canadian dollar. It certainly reduces and chance of a rate cut from the central bank in the near term. The result of their latest meeting will hit the wires early Thursday morning, and this is followed by building permits, Ivey PMI, and employment data later in the week.

Major Announcements last week:
  • UK GDP, second estimate 0.7% vs 0.7% expected
  • US new home sales 468k vs 406k expected
  • NZ Trade Balance 306m vs 230m expected
  • Fonterra revises up forecast pay-out for 2013/14 season to $8.65
  • Australian Private Capital Expenditure -5.2% vs -1.0% expected
  • US Core Durable Goods Orders +1.1% vs -0.1% expected
  • NZ Business Confidence 70.8 from 64.1 last
  • Euro Area CPI 0.8% vs 0.7% expected
  • Canadian GDP 2.9% vs 2.6% expected
  • US GDP 2.4% vs 2.6% expected
  • UK Manufacturing PMI 56.9 as expected
  • US Manufacturing PMI 53.2 vs 52.3 expected.