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FX Update - Chinese easing’s raise growth concerns

Written by Ian Dobbs on April 21st, 2015.      0 comments

Market Overview:
The People’s Bank of China (PBOC) announced further easing’s over the weekend. This have only served to raise real doubts about the near term growth outlook for China. The PBOC cut the reserve requirement ratio for all banks by 100 basis points - the biggest cut in seven years. This come just two months after a 50 point cut back on February 4th and enables the banks to lend more of their capital to stimulate growth. China are also worried about the rapid appreciation of their stock market and over the weekend they announced a crackdown on margin financing and certain wealth management products. These contradictions highlight the complex nature of the Chinese economic strategy. The Chinese stock market has seen a flood of retail activity recently, with some six million stock accounts opened last month alone, almost the same amount that was opened in the whole of 2014. Margin purchases now account for some 20% of daily turnover and this has rightly got the authorities concerned.

Last Thursday’s Australian employment data was positive in just about every respect. The headline number was stronger than forecast, revisions to prior numbers were positive and the unemployment rate dropped to 6.1%. This gave the Australian dollar a significant boost across the board, but the currency hasn’t been able to kick on with the gains. Then last night RBA Governor Stevens did a good job of talking the currency back down. He said rising house prices and high leverage should not dominate policy but cannot be ignored completely. He added the RBA has signalled its willingness to lower rates if needed and that the Australian dollar is likely to fall further yet over time. In the past couple of hours we have seen the minutes from the last RBA meeting. These offered little in the way of fresh insight into the central banks thinking and as such the market impact has been muted.

New Zealand
The only data of any real note from NZ this week was released yesterday in the form of inflation. The CPI (consumer price index) came in a touch weaker than forecast at -0.3% for the quarter and +0.1% year on year. That is the smallest annual increase since 1999 and it was driven in large part by falling petrol prices. If you excluded petrol prices the quarterly figure would have been +0.3% and the annual number +1.0%. Those are both still soft results with the annual figure at the bottom of the RBNZ’s target band. The central bank really has no room to react to these numbers due to the red hot nature of the Auckland housing market and most forecasters expect interest rates to remain on hold for the rest of 2015. Later this week we get visitor arrivals and credit card spending figures, although neither is likely to have much market impact.

United States
Data from the United States last week was largely disappointing and only served to reinforce fears that weak first quarter growth may last longer than expected. The only really positive result we got was from Friday’s consumer sentiment data which came in at 95.9 versus 93.8 expected. Unfortunately this numbers impact was largely outweighed by figures showing inflation expectations had fallen significantly. One year inflation expectations dropped to 2.5% from 3.0% previously. Five to ten year expectations were also down.  The current core US inflation is actually running at 0.2% month on month, and 1.8% year on year. This is a touch stronger than expected and is probably consistent with a lift off in interest rates later in the year, but there is a lot of water to go under the bridge between now and then. Still to come this week we have existing home sales, unemployment claims, manufacturing PMI, new homes sales and durable goods orders.

United Kingdom
Data at the end of last week showed Britain's unemployment rate dropped to the lowest level since 2008 at 5.6% and the total number of people in work hit a record high above 31 million. This data will be a positive for the Conservative government who are currently locked in a very tight battle for re-election. Unfortunately for them, and this has been a theme for the past few years, stronger than expected job growth isn’t feeding through into stronger wages. Average hourly earnings actually fell a touch to +1.7% from 1.9% previously. Granted, this is currently higher than the level of inflation, which means living standards should be improving, but that is largely due to weak oil prices and for much of the past 5 years inflation has been running above wage growth. Nothing in this data will have altered the outlook for the Bank of England (BOE) who are expected to remain on hold for the rest of 2015. Still to come this week we have the minutes from the latest BOE meeting and retail sales data.

The uncertain outlook for Greece is continuing to draw attention in the Eurozone and weigh on the Euro. European Central Bank President Draghi has said they are now better equipped than in 2010, 2011 or 2012 to cope with a Greek exit, although they would still be entering into uncharted waters. Eurozone finance ministers meet this Friday although expectations of any deal are extremely low. Germany’s Schauble said he doubts there will be any Greek agreement reached this week. Negotiations are gathering pace and pressure is intensifying as Greece draws ever closer to default. The Greek government is scrambling for cash with large repayments due in May. Central banks in the south-eastern countries of Albania, Bulgaria, Cyprus, Macedonia, Romania, Serbia and Turkey have moved to protect their banking systems by instruction all subsidiaries of Greek lenders in their countries to exit all exposure to Greek state bonds and treasury bills. The exposure exit order also includes deposits in parent Greek banks and loans to Greece based lenders. Although Greece will continue to draw focus we do have other economic data this week to digest. German economic sentiment and IFO business climate readings are set for release along with manufacturing and service sector PMI’s from France, Germany and the Eurozone as a whole.

Data out of Japan last week was all a touch better than forecast. Core machinery orders, producer prices, industrial production and consumer confidence all showed a slight improvement. That trend continued yesterday with tertiary industry activity printing at +0.3% versus -0.6% expected. Prime Minister Abe’s effort to revive the Japanese economy is at an important juncture. While there are some encouraging signs, we are yet to see whether a ‘virtuous cycle’ of economic growth spreading through small and medium sized business in the country. Still to come this week we have the trade balance and manufacturing PMI data to digest.

Although manufacturing sales data disappointed last week, all the other releases from Canada were actually pretty positive. The Bank of Canada (BOC) struck a surprisingly optimistic tone with the release of their monetary policy statement, and this was followed on Friday by stronger than expected inflation and retail sales data. Canadian retails sales jumped 1.7% versus 0.5% expected and inflation printed at +0.7% against expectation of 0.5%. Last night we head from BOC Governor Poloz again and he gave the strongest hint yet that he may be done cutting interest rates. He said it looks like the last interest rate cut was ‘the appropriate insurance amount’, that he doesn’t have a bias on interest rates and he expects the Canadian recovery to start in the second quarter. This is a sharp turnaround from Poloz who only six weeks ago was referring to the first quarter as been ‘atrocious’. Tonight we get wholesale sales data along with the annual budget release. The week is rounded out with another speech from Poloz on Friday.

Major Announcements last week:
  • UK Core Inflation 1.0% vs 1.2% expected
  • US Retail Sales .9% vs 1.1% expected
  • Chinese GDP 1.3% vs 1.4% expected
  • Chinese Retail Sales 10.2% vs 10.9% expected
  • ECB leave Monetary policy unchanged as expected
  • BOC leave Monetary Policy unchanged as expected
  • Australian Unemployment rate 6.1% vs 6.3% expected
  • European Core Inflation .6% as expected
  • US Core Inflation 1.8% vs 1.7% expected
  • Canadian Core Inflation 2.4% vs 2.1% previous
  • NZ Core Inflation .1% vs .2% expected