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FX Update - Established ranges dominate

Written by Ian Dobbs on November 19th, 2013.      0 comments

2:30pm(NZT)
Market Overview:
The presence of on-going US quantitative easing (QE) has continued to provide the primary driver for the wider markets over the last week. Incoming Fed Chair Janet Yellen laid the foundations for on-going stimulus from the Fed at her testimony last week. Since then the US dollar has seen weakness in demand, stock markets have hit all-time record levels, and bond markets remain in demand. This dynamic is the twisted logic of QE, where most asset markets rally in unison, and contrary to pre-QE price action. So the foreign exchange markets continue to trade within their increasing familiar broader ranges, with little in the way of developing trends. Expect this to continue through into the New Year. The prospect 2014 represents is of significant challenges in terms of predicting economic impacts. Expect US Federal Reserve monetary policy to remain of paramount significance. Any unwinding of the massive QE program will likely expose the markets addiction to cheap money and have a de-stabilizing effect across all markets. At the very least, 2014 will prove to be an interesting time to be watching the global financial markets.


Australia
Domestic data out of Australia last week had little overall influence. The currency was driven by broader market moves such as the USD weakness seen on the back of Janet Yellen’s testimony. The start of this week saw positive risk sentiment also boost the currency after Chinese officials laid out a solid reform package. In the last hour we have seen minutes from the last RBA meeting and these show the board has not closed off the chance of another rate cut. That being said, they saw mounting evidence that past cuts are supporting activity and decided it was prudent to hold rates steady. Later in the week we get more comments from Governor Stevens with an on the record speech set for Thursday.
 

New Zealand
There has been very little in the way of market influencing data since last week’s soft retail sales figures. Yesterday saw the release of the Business NZ PSI (Performance of Services Index) which showed strength increasing to 58.2 from 56.4. Although not a market moving piece if data, it does reinforce the view that the NZ economy is performing strongly. The bigger impact on the NZD has come after releases from the Chinese Communist Party meeting show they are planning on undertaking much broader reforms than expected. This has helped boost Asian stock markets and risk assets such as the NZD. We may well have seen some flow of funds into the NZD in order to buy some of the Air NZ shares the government is selling. But the amounts on offer means there won’t be a significant or lasting effect on the currency. Tomorrow we get producer prices data to focus on with credit card spending and visitor arrivals later in the week.
 
 
United States
Recent data from the US has been a touch on the soft side and this has seen the dollar weaken to a degree. At the end of last week we got capacity utilisation, industrial production, and import prices data that all came in under expectation and down on the previous month. It was the same story for manufacturing data out of New York. This data is considered a lead indicator for the wider manufacturing PMI data set for release in a couple of weeks. After Janet Yellen’s testimony last week saw the USD lose substantial ground. The expectation was that we would here a similar tone from a number of Fed speakers last night. This was the case to a degree with the likes of Dudley saying there was not yet enough growth momentum to give the Fed confidence in the labour market outlook. But over all his comments last night were somewhat balanced as he also said he sees some positive signs inflation will rise to target. There will be plenty of data to digest this week with the highlights being inflation, retail sales, and minutes from the last Fed monetary policy meeting.


Europe
Recent data from the Eurozone has done little to improve the economic outlook. The majority of data last week disappointed, printing either at or under expectation. Last night saw the release of current account and trade balance figures which have again done little to support the Euro. The current account came in well below expectation and down on the previous month, and although the trade balance seems to be strong printing at +14bln, it’s only as a result of very poor domestic demand. This means the Eurozone is surviving on exports, which obviously leaves it very exposed should we see a dip in global demand. There has been a lot of attention paid to comments made by ECB chief economist Peter Praet over the weekend. He suggested that even with interest rates toward zero, the central bank still has room for action in the form of quantitative measures. This could be it bond buying (such as the Fed’s QE program), or liquidity (cash) injections. A recent survey shows a large part of the market is expecting further such measures, in the form of an LTRO, in the first half of next year. Key data to watch over the coming days includes German economic sentiment, manufacturing and service PMI’s, consumer confidence, and German business climate.


United Kingdom
Last week saw a mixed bag of data for the UK, but two out of the three key releases undermined support for the GBP. The first was inflation data early in the week which surprised many coming in much softer than expected. Then near the end of the week we got retail sales figures which caught everyone off guard printing at -0.7%. However, between those two soft numbers we had another very good reading on employment and this helped the GBP maintain some composure on the week. Focus this week will come from the release of minutes from the last BOE monetary policy meeting, along with headlines from a number of on the record speeches that are scheduled.  
 

Japan
After a raft of softer than expected data, last week finished on a brighter note with GDP coming in better than expected at +0.5%. There is little domestic data to drive the Yen now until Thursday’s Bank of Japan (BOJ’s) monetary policy statement. Offshore factors are certainly impacting though with broad moves in the USD combining with news from China on plans for reform causing the Yen to swing back and forth.


Canada
Last week was a quiet one for Canada with only two data points out toward the end of the week. Both came in better than expected with the trade balance printing at -0.4% and manufacturing sales improving to +0.6%. We have seen some interesting data, although somewhat historical, on foreign flows into the Canadian stock market in September. It showed a big jump of C$8.36bn and this corresponds with a decent performance of the CAD over that period. There is more to focus on this week with wholesale sales, inflation, retail sales, and a speech from BOC Governor Poloz all set for release.


Major Announcements last week:
  • UK Inflation (core) YoY 2.2% vs 2.5% expected
  • UK Retail Sales (ex-fuel)MoM -.6% vs -.2% expected
  • UK Unemployment rate 7.6% vs 7.7% expected
  • NZ Retail Sales QoQ +.3% vs +.9% expected
  • Japanese GDP Q0Q +.5% vs +.4% expected
  • US Empire State Manufacturing Index +2.21 vs 5.00 expected
  • US Industrial Production MoM -.1% vs +.2% expected
  • China Communist Party 5year plan release sees positive response from markets
 

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