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FX Update - Central bank releases offer little fresh insight.

Written by Ian Dobbs on June 10th, 2014.      0 comments

Market Overview:
The central bank focus over the last week has provided little in the way of new found insight. The European Central Bank (ECB) made its stimulatory moves as largely expected, whilst leaving itself the option of quantitative easing down the track. Certainly the prospect of negative deposit rates for banks cash reserves should be an incentive to lend, more of an issue maybe borrower appetite. The Bank of England (BOE) held policy steady as expected and the Reserve Bank of Australia (RBA) remain steadfastly neutral, with rates unlikely to altered in 2014. US employment numbers on Friday were close to expectation with 217,000 jobs added in May. Volatility has remained surprisingly low in the wider market, whilst the Australasian pairings, and the New Zealand dollar in particular, have seen periods of pressure throughout the last week.

It has been a very quiet start to this week with a bank holiday in Australia yesterday. Later this afternoon we get business confidence data and tomorrow we’ll get the latest reading of consumer sentiment. Employment change figures on Thursday will also be a major focus on the week, with the market expecting a gain in employment of around +10.3k. The prior reading was +14.2k. Data last week provided a mixed bag, although overall it lent support to the currency. Soft building consents numbers were countered by a stronger than expected reading from first quarter GDP. Digging into the detail of both reports tended to moderate the headline figures and as such the market impact was somewhat muted. The RBA are looking increasingly comfortable with current policy settings and it is very unlikely there will be any adjustment this year. We could well be waiting until the second half of next year before they adjust rates, although a lot can happen between now and then.

New Zealand
The economic focus for New Zealand this week is all going to be on the Reserve Bank decision on Thursday morning. Forecasters are almost unanimously expecting a hike of 0.25%, taking the cash rate to 3.25%, but there is a lot less agreement on expectations from there. Many expect the central bank to pause until much later in the year, enabling them to see how the economy develops over the coming months. Arguments for this are supported by the still relatively high level of the New Zealand dollar, lower than expected inflation, and very recent indications that the housing market in Auckland seems to be cooling. The LVR’s implemented by the bank late last year seem to be doing their job nicely and they could well end up being an inspired move that keeps the peak of this interest rate cycle a lot lower than would otherwise have been the case. On the other hand, some economists suggest the RBNZ will reaffirm their commitment to hike 200 basis points over the next two years on the back of strong growth projections and near record positive net migration. Either way, I suspect we are likely in for some volatility in the level of the NZD.

United States
The past week saw some key data out of the United States which all lent support to the current view that although the Fed should end asset purchases (quantitative easing) later this year, they won’t be hike rates anytime soon. A slightly weaker than expected reading from manufacturing PMI was countered by an decent improvement in non-manufacturing PMI. Then on Friday the all-important monthly employment data came in just a touch above expectation at 214k, with the unemployment rate holding steady at 6.3%. The equity market seemed to like this result and again made fresh all-time highs, while long term interest rates backed up a touch further and the USD gained a little ground. There seems to be growing confidence in the sustainability of the recovery, although the economy is far from threatening any theoretical ‘speed limits’. This week have retail sales, producer prices, and consumer sentiment to draw focus.

The main event late last week was the European Central Bank (ECB) meeting and the combination of measures they announced. A cut in interest rates was almost guaranteed, although taking the deposit rate negative was a bold move. Banks who deposit funds back at the ECB will now pay for the privilege. They also announced a liquidity programme tied to targeted lending and said they will continue to work on details for asset purchase programme. The overall impact on the Euro was limited, it actually strengthened a touch in the wash up, however the impact on long term interest rates was more significant. Ten year bond rates for Spain and Italy both fell close to 20 basis points. We have had a rash of comments from ECB officials over the weekend with Constancio saying that the talk of QE is not a bluff. Coeure’s statement was pretty blunt when he said “what’s clear is that for a very long period, several years, monetary conditions will be divergent in the Eurozone on one hand and in the US and UK on the other.” He added the ECB will “keep rates close to zero for an extremely long period.” The problem with extreme measures such as what the ECB (and other central banks) have undertaken is the complete mispricing of risk in the market. A good example of this is that Spanish 10 Government bonds are now trading at almost the same level as US Treasuries around 2.60%. At those levels I know who’s debt I’d rather own, and it’s not Spain’s for your guide. French and German holiday’s yesterday have made for a very quiet start to this week and we have to wait until Thursday to get the ECB monthly bulletin and industrial production data.

United Kingdom
The focus for this week in the UK will be on employment data set for release on Wednesday. The unemployment claimant count is expected to fall by around 25k which is in line with last month’s reading. We also have manufacturing production data and a speech from BOE Governor Carney to digest. The BOE provided no surprises after their rate meeting last week keeping policy unchanged. It will be interesting to hear Carney’s views when he speaks, although it’s increasingly evident that others on the Monetary Policy Committee are becoming a little more ‘hawkish’ than the Governor. The BOE’s quarterly inflation expectations survey released on Friday showed that 42% of Britons expect a rate rise in the next 12 months. That’s up from 40% in February and comes in the face of a small fall in inflation expectations to 2.6% from 2.8% previously.

Last week saw some pleasing results from Japan with capital spending and average cash earnings data both printing stronger than forecast. These were backed up by GDP data for the first quarter that came in yesterday at +1.6% vs expectations for +1.4%. All this really confirms is that there was a boost of consumer spending in the lead up to the sales tax increase, although it does seem companies are investing in equipment to help boost production. Over the weekend BOJ Governor Kuroda said the current policy has been having the intended effects leading to an improvement in financial markets, the real economy and prices. For the time being at least it does look like the economy will weather the impact from the sales tax hike a lot better than many had expected. Later this week we have the BOJ monetary policy statement and press conference to digest.

Last week proved to be a tough one for the Canadian economy and the Canadian dollar. Disappointing readings from the trade balance, Ivey PMI, building permits and employment change all weighed. Even the Bank of Canada struck a very cautious tone after their rate meeting saying underlying momentum in the economy could be less than previously thought. Friday’s employment data initially looked ok, printing just above expectation at +25.8k, but the breakdown of full to part time work took some of the shine off. Full time employment actually fell -29.1k and this comes on top of last months -30.9k result. The unemployment rate also ticked up to 7% from 6.9% previously. This week have housing starts, the house price index, manufacturing sales, and a speech from BOC Governor Poloz to digest.

 Major Announcements last week:
  • Australian Building Approvals -5.6% vs 2.1% expected
  • UK Manufacturing 57.0 vs 57.1 expected
  • US Manufacturing 55.4 vs 55.7 expected
  • Australian Retail Sales +.2% vs +.3% expected
  • RBA leaves Monetary Policy unchanged as expected
  • European Inflation +.5% vs +.7% expected
  • Australian GDP +.1% vs +.9% expected
  • BOC leave Monetary Policy unchanged as expected
  • BOE leaves Monetary Policy unchanged as expected
  • ECB introduces negative deposit rates, and targeted lending schemes to boost lending
  • US jobs Growth 217k vs 214k expected
  • Canadian Housing Starts 198k vs 185k expected