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FX Update - Central Banks remain the primary focus

Written by Ian Dobbs on November 5th, 2013.      0 comments

1:15pm (NZT)
Market Overview:
The wider markets have had an interesting last week or so. The primary theme of central bank focus remains in place. Last weeks’ unchanged monetary policy announcements from the US Federal Reserve, the RBNZ and BOJ were expected, and come ahead of this week’s decisions from the RBA, ECB and BOE. Only the ECB looks to have any chances of altering their monetary policy, as deflationary fears again build in the European markets. Correspondingly, the Euro was the weakest performing major currency last week. Accentuating this move was the continuation of the grinding recovery from the US dollar. This recovery has been across the board as a pick-up in the economic news has seen investors ease back pressure on the greenback. In terms of the Australasian duo, a rebound in Chinese sentiment has coupled with a stabilisation of the Australian economic news to increase demand for the Australian dollar. The improved AUD sentiment has seen it outperform the NZ dollar, as the expectations of further easing to the cash rate from the RBA are again lowered.

Today will be a big one for Australia markets, with the RBA rate statement late this afternoon. No change in the cash rate is expected, and it’s now very likely that we have seen the bottom in the rate cut cycle. Any hike is still a long way off, but there is less and less need for further cuts. At the end of last week we got producer prices data that came in well above expectation and showed the fastest year on year rise since last 2011. Yesterday saw the release of retail sales data for September, which was also much stronger than expected at +0.8%. Recent data from China has also showed improvement and this should lend support to the Australian economy going forward. All the signs are that the economy is slowly making a transition away from mining led growth, and the RBA will likely be happy to hold rates steady for an extended period to foster this change. Over the rest of the week there are more key releases with trade balance tomorrow and unemployment rate on Friday along with the RBA’s quarterly Monetary Policy Statement.

New Zealand
Late last week the New Zealand Treasury published its monthly economic indicators. In that release they said the outlook is for stronger growth in the coming quarters, and that loan limits are dampening mortgage demand. This they say leaves the RBNZ with more flexibility on rate rises. Although the loan limits are likely to have an impact it’s hard to see it being material enough, in the absence of further measures, to change the expectation of rate hikes starting next year and totalling at least 2% by 2016. Tomorrow we get employment numbers which will be closely watched. That however will be it for domestic data on the week and the focus will turn to offshore events, the highlight of which will be the US employment report on Friday.

United States
Data from the US continues to suggest the economic recovery is on track, despite the government shutdown in October. Activity in the manufacturing sector expanded in October for the fifth consecutive month and actually showed the highest reading since April 2011. Last night we saw data on factory orders for September, and although it came in a touch below expectation, it was a big improvement over the previous month. All this is helping the USD to a degree, as is some talk that a Fed QE tapering in December is not off the table. This obviously can’t be ruled out with the trend of improving data, but it seems unlikely given the potential in January and February for more political brinkmanship with regards to the debt ceiling. There is plenty of data out this week to draw focus. Non-manufacturing index, GDP, consumer confidence, and the employment report will all be closely watched.

It is going to be a very interesting week for Europe and the Euro. The main event will be the European Central Bank (ECB) rate announcement on Thursday evening. In the past week calls have been growing for action of some kind from the bank. It seems the market is split 50/50 on whether we will get a cut, but that’s a big increase on expectations of only a few weeks ago. The inflation environment certainly leaves them plenty of room to cut and we don’t have to go back far to remember the ECB saying they have discussed the potential for negative interest rates. President Draghi has certainly proved to be a man of action and there seems little risk in cutting rates again to support the very tentative recovery. Recent readings on manufacturing have been a mixed bag with improvements in Germany and Spain, while French and Italian readings decreased. Ahead of the ECB meeting we get data on retail sales and German industrial production.

United Kingdom
UK data continues to support the outlook for a solid economic recovery going forward. Late last week we got the latest reading on the manufacturing sector and although it was a touch below expectation, it is still at very healthy levels which represent decent expansion in the industry. Last night we saw data on the construction industry which accounts for around 6% of GDP. It was another strong reading gaining on last month and printing at the highest level in six years. We have also seen the Confederation of British Industry (CBI) revise higher their forecasts for growth in 2014 to 2.4%. This will all be welcome news for the Bank of England (BOE) who have their monetary policy meeting on Thursday. We can expect no change in interest rates and a reaffirmation of their forward guidance to keep rates low until unemployment hit 7%. That trigger could be hit a lot sooner than they think if the economy keeps up its current form. Ahead of the BOE meeting we get data on the service sector and manufacturing production.

There have been no economic releases from Japan since last week’s BOJ monetary policy statement. The bank was somewhat upbeat in that release and reaffirmed to keep policy very stimulatory until inflation reaches their 2% target. There isn’t going to be a lot to digest this week with only a speech from BOJ governor Kuroda this evening and the minutes from last week’s meeting tomorrow.

The Canadian dollar put in a bit of a recovery late last week, helped by better than expected GDP data. There is certainly room for the currency to recover more ground although with the central bank now very much in the neutral camp (from a previous tightening bias), broad based gains seem unlikely. Upcoming data this week will play a big part with building permits, business diffusion index, housing starts, and employment numbers all set for release.