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FX Update - Divergent US & European growth profiles re-emerge

Written by Sam Coxhead on June 24th, 2014.      0 comments

2:40 PM (NZT)
Market Overview:
Throughout the course of the last week, we have seen the re-emergence of the divergent growth profiles between the US and European economies. The US recovery from the weather affected first quarter has continued over the course of the last week for the most part. Contrasting that is the situation in Europe, where the larger core economies continue to underperform expectations. This divergence should continue to play out in the remainder of 2014, with the impacts being seen across most markets. Increasing odds of further policy accommodation in  Europe should mean lower EUR demand and improved stock market performance. Contrasting that is the US, where the equity market looks to have lost momentum around the current levels, as the prospects of an eventual move away from free cash becomes more real as 2014 progresses. Also of note has been the Chinese manufacturing data overnight, revealing expansion in the sector for the first time in six months, with the energy in the data coming from growth in new orders.

Last week saw the Reserve Bank of Australia monetary policy meeting minutes debate whether or not the current low cash rate of 2.50% was low enough to counter the negative impacts of falling mining investment and lower fiscal spend. The fate of the Australian economy in the last year or so has always been about transition away from growth reliant on mining sector expansion, so its unsurprising when the topic again becomes the focus. No doubt this will again be a topic covered in next Tuesday’s RBA monetary policy announcement. This week has no scheduled economic news of note for the Australian economy. Yesterday’s positive Chinese Manufacturing numbers did impact the Australian dollar and interest rate markets to some extent, both being pushed high after the first expansion in the sector was recorded in six months.

New Zealand
New Zealand saw yet higher nett migration numbers released yesterday, highlighting again the attractiveness of New Zealand in the current environment. The volatile credit card spending statistics also were positive, showing year on year growth of 7.5% for the month. Trade numbers on Friday provide the next economic data which will be also of passing interest for the wider market. Of more material impact yesterday were the first positive Chinese manufacturing numbers in six months. The HSBC Manufacturing Index came in at 50.8 vs a 49.7 expectation, with a number above 50.00 indicating growth in the sector. This saw the New Zealand dollar higher against most trading partners, only being outpaced by advances in the more China-correlated Australian dollar. Next week will see Monday’s building consent and business confidence data provide the data highlights.

United States
It has been a positive start for the week in the US economy, with overnight releases revealing both manufacturing and existing home sales numbers well above expectations. The continued bounce back from the weather affected first quarter is encouraging. The manufacturing number is the strongest since March 2010. Still to come this week we have consumer confidence and new home sales numbers later today, durable goods sales and final GDP data tomorrow, and inflation and personal inflation numbers on Thursday. US equity markets remain close to record levels, but lacking momentum to push on from the current elevated levels. Ironically the improved economic news could hamper the equity markets over the coming year or two, as gradual interest rate hike expectations increase. Non-farm payroll numbers Thursday next week provide the primary focus looking forward.

Last night saw the release of European wide manufacturing data. These numbers did not make particularly good reading. Core members of France and Germany both underperformed expectations and these fed through into the wider European numbers that came in at 51.9 against a 52.2 expectation. Tonight we have the important German business sentiment index, and then the preliminary German inflation numbers on Friday. Also of note were comments in the offshore session from ECB member Nowotny. He stated that the ECB has no exchange rate target, but certainly are interested in limiting any Euro strength. Next sees the European wide inflation numbers released on Monday, ahead of what will be another closely watched ECB monetary policy announcement on Thursday.

United Kingdom
Interest in the UK monetary policy settings has really increased in the last week or so. Bank of England (BOE) Governor Carney’s comments with regards to interest rate hikes potentially being closer than than the market has priced has really seen a shake up in views. Even other BOE officials, previously noted as “doves” (bias towards lower interest rates), have started to toe the Governors line. BOE member Miles wrote in the UK Telegraph that “It now seems to me much more likely that a normalisation of monetary policy starting at some point in my remaining year on the MPC will become appropriate.” This week is fairly busy in the UK with the Inflation Report hearings tomorrow, house price and retail sales numbers tomorrow, further talk from Governor Carney and the current account and final GDP numbers on Friday.

Bank of Japan (BOJ) Governor Kuroda hit the headlines overnight re-titrating many of his well known thoughts. He again has had to state that the BOJ will not hesitate to make adjustments if needed and will continue to ensure price stability irrespective of the level of potential growth rate. Many participants had pointed towards easing inflationary pressure starting to re-emerge as the effect of a weaker YEN starts to pass through the economy. Private economists expect further easing from the BOJ as a response to the falling inflationary pressure. However, Governor Kuroda continues to state that inflation will fall to around 1.0% before resuming an up trend. This matters as any required further easing would further undermine the value of the YEN, in the short term at the very least. Household spending and retail sales numbers provide a passing focus on Friday, albeit they should not impact on the price action in the foreign exchange markets.

It was an interesting end to the last week in Canada. The latest inflation and retail sales numbers both surprised on the high side and saw a material boost in demand for the Canadian dollar that has been long suffering in 2014. These are solid numbers and some that could provoke some kind of exodus of large “sold CAD positions” that accumulated in 2014. This week is relatively light on economic news, but we did have Finance Minister Joe Oliver making comments on Bloomberg overnight. He stated that he sees inflation close to the 2% target and says that interest rates are likely to move up moderately over the next 2-3 years. The US recovery is looking increasingly solid, with encouraging signs from China, albeit Europe remains a concern.

Major Announcements last week:
  • European Inflation .5% as expected
  • UK Inflation 1.5% vs 1.7% expected
  • ZEW German Econ. Sent. Index 29.8 vs 35.2% expected
  • US Inflation +.3% vs +.2% expected
  • BOE leave monetary policy unchanged as expected
  • US FED adjust QE lower as expected
  • NZ Q1 GDP 1.0% vs 1.2% expected
  • UK Retail Sales +.5% as expected
  • Canadian Inflation +.5% vs +.2% expected
  • Canadian Retail Sales +.7% vs +.4% expected
  • HSBC Chinese Manufacturing 50.8 vs 49.6 expected
  • European Manufacturing 51.9 vs 52.2 expected
  • US Manufacturing 57.5 vs 56.5 expected