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FX Update - Central banks take the focus

Written by Ian Dobbs on July 30th, 2013.      0 comments

4.45pm (NZT)
Market Overview:
This week is a big one for markets with a number of key events scheduled. Central bank policy meetings will dominate the middle of the week. The US FED’s decision on Thursday morning is followed by announcements from the Bank of England (BOE), and the European Central Bank (ECB) on Thursday evening. There is plenty of risk around these meetings with markets keen to get further insight from the FED on the timing of quantitative easing tapering. We are also looking for more details around the forward guidance the BOE signalled at their last meeting. In the last hour we have seen comments from the Reserve Bank of Australia (RBA) governor which have caused Australian dollar losses across the board. On top of all this, we have key US employment numbers at the end of the week. So we can expect lots more action and some decent ranges over the coming days.

It had been a quiet start to the week for Australia and the Australian dollar, but it’s recently livened up and the next few days should hold plenty of potential for more action. RBA Governor Stevens has just released some comments in the last hour that have seen the AUD come to life. He has said the recent inflation data leaves room for further rate cuts. This caused an immediate drop in the AUD. This is in contrast to the last RBA minutes didn’t give the impression the bank had its finger on the trigger to cut again in August. However, the market now seems to have priced in a very good chance of just that. Later in the week we get private sector credit, home sales data, and producer prices. But the biggest impact for the currency could well come from the US. The FED monetary policy announcement on Thursday morning, and US employment numbers on Friday night will be closely watched.

New Zealand
The New Zealand dollar had remained reasonably firm since last week’s RBNZ monetary policy statement, but backed away from its recent highs last night. The only other data out since then has been building consents release this morning. They came in surprisingly weak and saw the NZD give up a little more ground. These are volatile numbers however and shouldn’t have a lasting impact. Aside from business confidence out tomorrow, there is little on the domestic front for the rest of the week. The focus will now turn to central bank policy meetings for the UK, Europe, and the US. Then at the very end of the week we get US employment numbers which are always closely watched.
United States
This week should be a big one for the US, with the Fed policy meeting early Thursday morning followed by the employment report on Friday night. Last week ended on a solid note with consumer confidence showing gains. The result was actually the best reading since July 2007 and shows consumers are feeling very positive about the economy. The question is can this flow through into higher spending and more jobs? The Fed policy meeting will be closely scrutinized for indications as to the timing of any tapering of the quantitative easing programme. At this point most in the market are expecting that to happen at the September meeting. Key to any reduction in stimulus is the employment market, and Friday’s numbers will therefore be very important. There is plenty of other data out this week as well, the highlights being GDP data and a reading on the manufacturing sector.

There has been little to materially change the outlook for the European economy over the last few days. This week should however be a very interesting one, with the ECB monetary policy decision on Thursday evening. With a recent run of better data the ECB shouldn’t feel the need to ease monetary policy any further at this stage. President Draghi will no doubt repeat his comments from the last meeting where he pledged to keep interest rates low for as long as needed. That ‘forward guidance’ was a big departure from the norm for the ECB, and there is talk more changes could be in the pipeline. A number of articles recently have suggested the ECB will start publishing the minutes from meetings in the same way many other central banks do. Ahead of the ECB meeting, we have Euro-zone unemployment and a raft of German data including retail sales, consumer climate, and inflation.

United Kingdom
It’s shaping up to be a big week for the UK and the Pound Sterling. Things have started out on the right foot for the economy with data released last night in the form of CBI Realized Sales. That index has lept up to its best levels since January, and came in well above expectation. This is a good indicator of strong consumer spending and reaffirms some of the better data the UK has seen in recent weeks. The GBP however struggled to gain much ground on the result as the market awaits the BOE monetary policy announcement on Thursday evening. New Governor Carney has already made an impact at the bank, changing tradition and releasing a statement with the decision. The market is keen to get further details on his forward guidance for rates. The expectation is that firmer guidance on rates at this meeting will be a negative for the GBP. That is keeping a lid on any potential strength the Pound might see in the lead up to the BOE meeting. This week we also get readings on the manufacturing and construction sectors, as well as consumer confidence.

It seems that the aggressive growth and inflation policies from the Japanese government and the Bank of Japan are starting to work their magic. On Friday we got the latest reading on inflation and it came in above expectation at a 0.4% yearly rate. That’s the highest level since 2008, and it helped the Yen make some solid gains across the board. Yesterday we got retail sales data and although it came in a touch below market expectations, the numbers were still a substantial improvement on the previous month and show consumer spending continues to grow. We have however, had some less than impressive data today in the form of household spending and industrial production. Both these figures came in well below expectation, which just serves to show that the current ultra-easy monetary policy from the BOJ will be here for a long time.

There has been little significant economic news out of Canada since last week’s retail sales numbers. They were very strong and have helped to keep the Canadian dollar well supported, as we head into what is likely to be an eventful week for FX markets in general. On Wednesday we get Canada’s raw material price index which is a lead indicator of inflation, then on Thursday we get readings on Canadian GDP. The big focus however will be on releases from Canada’s neighbour, and biggest trading partner, the USA. With a FED monetary policy meeting and employment numbers in the second half of the week, there is plenty of potential for action.

Major Announcements last week:
  • LDP win Japanese upper house elections
  • Japanese Inflation +.4% on yearly basis
  • Canadian Retail Sales +1.2% vs +.1% expected
  • NZ Trade Balance +414m vs +5m expected
  • Australian Inflation .4% vs .5% expected
  • Chinese HSBC Manufacturing 47.7 vs 48.6 expected
  • European Manufacturing 50.1 vs 49.1 expected
  • RBNZ leave cash rate unchanged at 2.50%
  • UK prelim. GDP +.6%as expected