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FX Update - China reacts to tepid data

Written by Ian Dobbs on May 12th, 2015.      0 comments

Market Overview:
Recent disappointing data out of China has prompted further action from the Chinese central bank. The People Bank of China (PBOC) cut benchmark lending rates by 0.25% over the weekend, which marks the third cut since November. Subdued inflation data and disappointing trade figures were the trigger for the move and most analysts suspect growth targets are now starting to look tough to achieve. In the US it seems that although a interest rate hike may well still be on the cards for this year, it’s likely to get pushed out into sometime in the fourth quarter. Looking close to home, the rapid change in sentiment toward the New Zealand dollar seen over the past couple of weeks has kept the currency under pressure. Many economists are suggesting an interest rate cut as soon as June could be seen. Some heat has also come out of the Australian dollar which saw solid gains in the days after the Reserve Bank of Australia (RBA) cut interest rates last week.

Data released since the RBA cut interest rates last Tuesday suggests the economy still has a long way to go in ‘rebalancing’. Retail sales at +0.3% were a little weaker than forecast, as was employment change data which showed the economy lost 2,900 jobs last month. Full time employment actually fell by 21,900, with a rise in part time jobs of 19,000 offsetting much of that decline. The unemployment rate also ticked up to 6.2%. Yesterday we saw the latest reading of business confidence which remained unchanged at 3. The sub components didn’t make great reading with a drop in business conditions, the capex index, and the employment index. The RBA’s statement on Monetary Policy was released on Friday and it said the latest rate cut was to reinforce ‘encouraging trends’ in consumer demand. The bank has trimmed GDP forecasts for 2015 and they believe the Australian dollar is not offering enough support to the economy. They said further falls seem likely and necessary. Tonight we have the annual budget release to digest and tomorrow we get the wage price index.

New Zealand
Calls for a near term rate cut from the Reserve Bank of New Zealand (RBNZ) have increased in the wake of last Wednesday’s employment data. It seems strong positive migration flows are making it difficult for the unemployment rate to come down, and just as hard for wages to go up. This low level of wage growth, combined with low inflation, declining dairy incomes and the relatively high level of the New Zealand dollar has been enough to convince a number of local banks we will see an interest rate cut in June, potentially followed with another soon after. That does seem a big call with the current state of the Auckland property market. The central bank may try to address that situation using further macro prudential tools and if they can take some of the heat out of it, then an interest rate cut may well come later. But June just seems a little too soon for my liking. The RBNZ release their Financial Stability Report tomorrow and it will no doubt focus on the state of the property market. This may well provide the opportunity for the bank to outline proposed restrictions on property investors. Later in the week we get the Business NZ manufacturing index and retails sales data to digest.

United States
US employment data released on Friday had a bit of something for everyone, depending on your view. Those with an optimistic outlook would have been pleased to see the solid headline employment gain of 223k and the unemployment rate tick down to 5.4%. Those not so convinced about the current state of the US economy would point out that prior number was revised down by 41k, to a total of just 85k, and that wage growth remains decidedly average at just 0.1%. There is certainly nothing in the report to suggest the Fed can hike interest rates in June, and to be fair, as a result of the data the market has slightly reduced the chance of a September hike to around 20%. Prior to the data the market had been pricing in around a 30% chance of a September hike. This week to draw focus we get the latest reading on retail sales, producer prices, and University of Michigan consumer sentiment.

United Kingdom
If the is one that is certain as a result of last week’s UK general election, it’s that polling companies will be taking a long hard look at themselves. They were all so far away from the actual outcome that their very existence needs to be questioned. A majority win by the Conservative's was always going to be the most market friendly result and as such the UK Pound made strong gains. The Bank of England (BOE) held their delayed interest rate meeting last night and as widely expected they left rates unchanged. Although an interest rate hike is certainly not just around the corner, if the economy can see something of and post-election recovery, a hike late this year could still be on the cards. This week to draw focus we have manufacturing production and employment data along with a speech from Governor Carney and the BOE’s inflation report.

The focus in Europe is once again on Greece with last night’s EU group meeting failing to come to any agreement. There were comments that progress has been made, but time is rapidly running out. It seems Greece cobbled the money together to pay the IMF EUR750 million due today, but even Greek officials admit they don’t have enough funds now to get through the end of the month. It seems the Greeks are really digging their heels in over the two key areas of pensions and collective bargaining. An article over the weekend in the British press quoted a Syriza party official as saying they won’t relent on those two areas whatever the consequences. EU finance ministers meet tonight and Greece will again be the main discussion point. Then tomorrow we get GDP data from France, Germany, Italy and EU as a whole.

The only release of note last week from Japan was the Bank of Japan monetary policy meeting minutes. These had little impact as there were no surprises and they were from a meeting that took place over a month ago. Next week the economic calendar looks a little better with leading indicator, the current account, economy watchers sentiment, and consumer confidence.

Last week saw a mixed bag of data from Canada. Very poor trade balance figures were countered by a significant jump in the Ivey PMI and building permits. On Friday Canadian employment data was released and this was a little disappointing. Canada shed 19.7k jobs in April, with part time employment declining by the most in four years. The unemployment rate stayed steady at 6.8% as nearly 19,000 people left the labour force. Still to come this week we have the new house price index, the Bank of Canada review, and manufacturing sales data to digest.

Major Announcements last week:
  • Canadian Trade Balance -3.0b vs -0.8b expected
  • US ISM Non-Manufacturing PMI 57.8 vs 56.2 expected
  • Global Dairy Trade Index -3.5%
  • NZ Employment Change +0.7% vs +0.8% expected
  • NZ Unemployment Rate 5.8% vs 5.5% expected
  • Australian Retail Sales 0.3% vs 0.4% expected
  • UK Services PMI 59.5 vs 58.6 expected
  • Australian Employment Change -2.9k vs +4.5k expected
  • Australian Unemployment rate 6.2% as expected
  • US Non-Farm Payrolls 265k vs 277k expected
  • US Unemployment Rate 5.4% as expected
  • Canadian Employment Change -19.7k vs -4.5k expected
  • Canadian Unemployment Rate 6.8% vs 6.9% expected