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FX Update - Conflicting signals halt market momentium

Written by Ian Dobbs on July 16th, 2013.      0 comments

3:25pm (NZT)
Market Overview:
Conditions in the financial market over the last week have not been pretty. Mixed up confusion was the clearest theme. Lower levels of liquidity saw increased ranges following the mixed messages from central banks, and mostly disappointing economic news. Both the FED and ECB caused market consternation with mixed rhetoric on policy. Worsening conditions in Portugal and Italy highlighted on-going risks in Europe. Chinese news has been mixed at best, and intense focus on the health of its banking sector continues to cause unease. Expect these themes to remain at the forefront in the coming weeks and months. Levels of volatility are likely to remain elevated in most markets. The recent USD strength looks less convincing in recent sessions, and this will provide a point interest in the coming weeks.

The Australian dollar has remained under pressure recently on the back of negative news flow out of China. The currency made fresh lows on Friday evening. This came after comments from the Chinese Finance Minister suggested that GDP growth as low as 7% could be on the cards. The comments were later clarified as been misreported, but the damage was already done. The actual GDP figures for the second quarter were released yesterday and came in around expectation at 7.5%. This saw a small recovery in the AUD, but it’s clear the direction the market wants to take the currency. Anything slightly negative and the AUD get sold hard. We have however just had the release of the RBA minutes and that has helped the currency. The minutes say the bank sees the current policy as appropriate, and seem to take the risk of a near term cut off the table. There were some who were predicting a cut at the next meeting and they will no doubt now reassess that. This should continue to support the currency in the short term. Later in the week we get readings on  business confidence that will also be closely watched.

New Zealand
We’ve had New Zealand inflation data out today and it has shown a distinct lack of pricing pressures in the economy. The result came in touch under expectation and saw the NZD come off a few points. The only other news out of NZ has been on the RBNZ’s plan to implement Loan-to-value ratios (LVR’s) for mortgage lending. There is a lot of debate around this, but the fact remains the housing market is a big risk for the economy and it’s the RBNZ’s job to do whatever it can to mitigate those risks. House prices, especially in Auckland, are well beyond overvalued. For this reason the RBNZ has been signalling for some time that they want to use other tools, as opposed to a cash rate hike, to try and cool the market. These LVR’s are quite possible just the first of many steps to rein in house prices, and rate hikes are certainly not ruled out altogether.  The only reason the RBNZ hasn’t wanted to use rate hikes at the moment is due to the strength in the currency. But if the weakness we have seen over the last couple of months continues, then rate hikes toward the end of this year are a very real possibility.

United States
Data out of the United States has been a little patchy the last few days. On Friday night we got strong readings on producer prices. These are likely to make the Federal Reserve (FED) more comfortable in tapering asset purchases over the coming months. However, we also got consumer sentiment readings that came in below expectation and are slightly down in last month. This shows consumers are a little bit wary of the outlook going forward. That was backed up last night by some surprisingly weak retail sales data. These figures caught the market by surprise, and this saw a quick turnaround in the fortunes of the USD. The dollar rapidly gave up any gains it had made on the day, and sentiment was weighed on even further as a number of forecasters are now revising down the GDP figures for the second quarter. Although this ‘soft patch’ of data doesn’t change the overall outlook for the US economy as most commentators expecting a robust third quarter, it does leave the USD vulnerable to a sizeable correction. There is plenty of data out over the rest of the week, as well as a testimony by Ben Bernanke on Wednesday night that will be closely watched. After the mixed signals given recently, the market will be keen to get a better handle on the Fed chairman's outlook.

The Euro currency has been reasonably steady the last few days, consolidating gains made in the middle of last week. There hasn’t been much in the way of support coming from the news flow, but the currency hasn’t been affected too much. Friday night saw some disappointing industrial production data and rumours of a French downgrade. The rumours turned out to be true with Fitch ratings agency cutting France one notch from AAA. Political uncertainty in Portugal remains high and it’s not looking much better in Spain. The Spanish prime minister is facing fresh calls for his resignation over a payments scandal. In the face of this the Euro has remained well supported over the last few days. We have had comments from an ECB official overnight saying forward guidance allows for lower rates. But it’s hard to see how how Draghi’s guidance that ‘rates will stay low for an extended period of time’ has changed the markets view at all. We can only assume that the ‘extended period of time’ means until data improves. How is that different from before? Unless this gets clarified somewhat, I can only believe that the interest rate market will slowly unwind much of the moves seen after the ECB meeting. Tonight  we get some key data in the form of German economic sentiment, Euro-zone inflation and trade balance.

United Kingdom
Although it has started off quietly for the United Kingdom this week holds plenty of potential for action. We get inflation data tonight, the Bank of England (BOE) minutes on Wednesday and retail sales on Thursday. The BOE minutes will be particularly interesting as the market is keen to see weather new governor Carney voted for more stimulus or not. If he did, then we will probably see the GBP come under some pressure. But as the market is expecting that the bigger reaction will likely be if turns out he didn’t vote for more QE. The GBP has been relatively quiet since it made some gains in the middle of last week, but data over the next few days could well dictate medium term direction.

There has been no news to impact the market or the outlook for the Japanese economy over the last few days. This is in large part due to the Japanese holiday yesterday. There is no data set for release today and to be fair the only data of note this week will be minutes from the Bank of Japan meeting out on Wednesday. They are unlikely to show anything dramatic and should just reaffirm that the BOJ will keep policy very stimulatory until inflation reaches 2%. The Yen itself continues to slowly weaken now trading back above 100.00 to the USD.

It could be a very interesting few days for the Canadian dollar and its economy. The government is announcing a cabinet reshuffle today, which shouldn’t have much impact if as expected the finance minister retains his portfolio. We did get home sales data out overnight and although it showed gains, they were less than the market was expecting and sales activity is down on the previous year. Prices are however up 4.8% on the previous year. But the highlight of the week will be the Bank of Canada rate decision out in the early hours of Thursday morning. No change is expected at this meeting however the market is expecting a rate hike before the end of the year. In the last few days there have been a couple of articles suggesting the bank will push out the timing of any potential rate hike. The basis for these calls is an economy whose outlook isn’t all that bright and this may be enough for the bank to alter its expected path of interest rates. Later in the week we also get readings on wholesale sales and inflation.

Major Announcements last week:
  • NZIER Business Confidence 32 vs 33 (remains high)
  • Canadian Building Permits 4.5% vs 2.6% expected
  • Chinese Inflation 2.7% vs 2.5% expected
  • UK Manufacturing -.8% vs +.3% expected
  • AU Unemployment rate 5.7% vs 5.6% expected
  • BOJ leave Monetary policy unchanged as expected
  • US Consumer Sentiment 83.9 vs 85.3