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FX Update - Deal or no deal?

Written by Ian Dobbs on October 15th, 2013.      0 comments

Market Overview:
This past week has been all about the political situation in the United States. Talk of a near term deal last week saw a return of risk appetite which was positive for both the NZD and AUD. But when that fell apart over the weekend, gains were quickly reversed. Since then however, the news wire have been suggesting another deal is almost done, and again the Australasian currencies are performing well. We had one piece of data that took focus off the US for a moment and that was Chinese exports. They surprisingly showed an unexpected fall of -0.3% year on year for September against an expectation of +5.5%. At first glance this would seem negative for global demand and hence growth. However, commentators were quick to point out that it could have more to do with overly inflated data last year, than real current weakness.

There hasn’t been much in the way of economic data released in Australia since last week’s disappointing employment numbers. We did get home loan data for August yesterday, that came in below expectation at -3.9%, and had very little impact on the currency. In the past hour we have seen the release of minutes from the last RBA monetary policy meeting. They show that although a rate cut is not completely out of the question should things deteriorate, there is little chance of one in the near future. The RBA is also unsure of whether recent AUD strength will be sustained. They also believe previous cuts are having an impact with effects still flowing into the economy. Later this week we get business confidence data and a speech from RBA Governor Stevens to focus on.

New Zealand
There was a light economic calendar last week, and so far this week we have only seen a couple of releases of second tier data from New Zealand. The services index for September released yesterday showed gains, while house prices continue to appreciate at a concerning rate. Prices in September were 2.6% higher than August and 7.8% up on September last year. The RBNZ will be watching closely over the coming months to see if their loan-to-value ratios (LVRs) are having any impact. If they don’t, then we can expect interest rate rises sooner rather than later. Tomorrow we get inflation data and then that’s it for the week.

United States
All the focus in the US has continued to be on the government shutdown and debt ceiling debate. At the end of last week it looked as if a deal with close to being done, then it all fell apart. The latest news out of Washington is that we are again close to a deal, and with the Oct 17th deadline rapidly approaching, one hopes an agreement is reached. What does seem likely is that any deal will only be a temporary solution and we will be back here at some point in the coming months. On Friday evening we did get consumer sentiment data that printed at its worst level in nine months. That’s hardly surprising though with the first government shutdown in 17 years affecting consumers outlook. We can expect more delays in data this week with large parts of the government still non-operational.

We had a mixed bag of data last week from Europe. However, there was nothing that materially changed the markets current outlook for the region, which is that of a very gradual recovery. Over the last few days we have seen comments from ECB President Draghi stating that the risks to the recovery are on the downside, with inflation on the very low side of 2%. These views were backed up by ECB’s Bonnici last night who said he’s not sure if the current low inflation rate is a big concern. He added the ECB is prepared to go to a negative deposit rate if needed. Last night we also got industrial production data for the Eurozone and it came in a touch above expectation at +1.0%. Later this week we get German economic sentiment numbers, Eurozone inflation and current account data.

United Kingdom
After last week’s surprisingly soft industrial production number, the market is keen to see if any other economic indicators show signs of weakness. There hasn’t been a lot important data released since then, but over the rest of this week we do get some more pieces of the puzzle. Tonight’s inflation data will be closely watched, then on Wednesday we get employment numbers, followed by retail sales on Thursday. There is a fair amount of debate in the UK at the moment as to whether they are just stoking another housing bubble. Government “help to buy” programmes are certainly boosting demand and prices are rising significantly, but they are at least coming from a low base. There is talk the BOE might need power to dictate loan-to-value ratios (LVRs) in the future.

Data out of Japan last week was largely supportive of the economy going forward. Good numbers on core machinery orders and consumer confidence have lent support to the current ultra-easy monetary policy. At the G20 over the weekend a Chinese official was less than complimentary though, saying that there was widespread skepticism over Japan's economic plans. I can’t image the Government of BOJ will have paid much attention to his comments. There is very little in the way of data this week with just revised industrial production numbers out later today. BOJ Governor Kuroda is also set to make and on the record speech on Friday that will be closely watched.

Comments from Bank of Canada’s (BOC) Poloz last week weighed on the currency a touch. He said the Canadian economy is behind where the BOC thought it would be. This is in line with a recent announcement that growth forecasts will be downgraded soon. Canada needs growth above 2.5% to reduce slack in the economy, and it seems momentum in growth is coming slowly. On the positive side Friday’s employment data was supportive showing a gain of 11.9k jobs. This was above expectations of around 10k. The unemployment rate also dropped to 6.9%, although this was in large part due to fewer young people looking for work. Later this week we have manufacturing sales and inflation data to digest.

Major Announcements last week:
  • NZIER Business Confidence 38 vs 32 prior
  • UK Manufacturing Production -1.2% vs +.3% expected
  • Australian Unemployment rate 5.6% vs 5.8% expected
  • BOE leave monetary policy unchanged
  • Canadian Unemployment rate 6.9% vs 7.1% expected
  • Prelim. US Consumer Sentiment 75.2 vs 77.2 expected
  • Chinese Trade Balance 15.2B vs 25.2B expected