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FX Update - Established ranges dominate

Written by Ian Dobbs on January 21st, 2014.      0 comments

Market Overview:
The last week has been a relatively uneventful one for the wider financial markets. There has been little in the way of economic news that materially impacted pricing. The softer than expected Australian employment numbers offered the largest surprise, but will not be enough to see immediate action from the Reserve Bank of Australia (RBA) on their own. On a more positive note has been the latest news from Asia. Chinese growth numbers released overnight showed solid 7.7% GDP growth and export numbers from Taiwan also were buoyant. Helping settle markets have been solid retail sales figures from the UK and US also. Globally the inflationary pressure remains somewhat subdued, albeit today’s New Zealand numbers were higher than expected and provided a boost for the Kiwi dollar. Expect the range bound nature of most markets to continue in the short term at least, albeit there being increasing nervousness about the elevated global stock markets.

There has been no economic data of significance from Australia since last week’s surprisingly soft employment numbers. Those figures put the currency on the defensive and it has remained broadly under pressure since then. If we continue to get soft data from Australia then there is a very real chance of another interest rate cut by the RBA around the middle of this year. We did get Chinese GDP for the fourth quarter yesterday and that came in at 7.7%. This was only slightly weaker than the previous quarter and a touch above expectations. The result gave the AUD a short term boost but impact was limited in an otherwise very quiet trading session. Focus for the rest of the week turns to consumer sentiment and inflation data tomorrow, followed by inflation expectations on Thursday.

New Zealand
New Zealand’s economic performance remains very robust and this was highlighted by business confidence coming in at a 20 year high last week. In the last few hours we have seen the latest reading on inflation and that has also helped to support the currency. The 0.1% result for the fourth quarter was above expectations for a flat reading and the NZD leapt nearly half a cent against the USD after the data. Year on year inflation is now running at 1.6%. The only other data of note this week is the manufacturing index due out on Thursday. Next week we have the RBNZ rate meeting, and the market is pricing in a slight chance of a hike by the central bank. The most likely starting point for the upcoming tightening cycle is however March, when the bank releases a full monetary policy statement.
United States
The highlight of last week’s data from the US was core retail sales that came in substantially stronger than expected. Since then however, the majority of economic releases have come in at, or near, expectation and had little overall impact on the current outlook. This was reinforced by the Fed’s Jeffrey Lacker when he said recent data is ‘far from what would be needed’ to change his view on tapering. On Friday night we had the release of consumer sentiment data and although it was weaker than expected, printing at 80.4 vs a forecast of 83.4, the overall level is still very healthy and consistent with spending growth remaining at current levels. With a US holiday yesterday it has been a quiet start to the week and there really is little in the way of key economic data out over the coming days. Thursday’s weekly unemployment claims, manufacturing PMI, and existing home sales are the only releases of note.

Data out of Europe over the past week has provided no new insight into the state of the economy. Inflation remains very subdued at 0.8% and this is the biggest concern for the ECB. It will only take a hint of further weakness in consumer prices to force the central bank to act again. There are already predictions from some commentators that the bank will cut rates again in March. At this point it seems ECB president Draghi is hoping that strengthening his forward guidance will be enough. He has made it very clear, and nobody doubts, that rates are going to stay low in the region for a long time. But despite all his efforts, many are still suggesting Europe could be heading into a Japanese style lost decade, or two. Over the coming days we have some key data to digest starting with tonight's German economic sentiment figures. These are followed later in the week by manufacturing and service PMI’s and the current account balance.

United Kingdom
Last week’s data from the UK held no real surprises until the release of retail sales on Friday. It seems retailers in December had a much better time of it that anyone was expecting. Sales were up 2.6% from November against an expectation for only a 0.5% rise. Against December the previous year the growth was 5.3%. These were very positive figures and could well be an indication of stronger growth in the overall economy in the final quarter of last year. Those figures are release next week and an improvement over the third quarters GDP of 0.8% would help to boost the GBP further. Concerns about the housing market are growing with the CEO of a leading insurance and investment giant calling for the governments ‘Help to Buy’ scheme to be scrapped in London. He argued that house prices in London and the South East had reached “absurd” levels, and the scheme was just stoking a price bubble. On Wednesday this week we get minutes from the latest Bank of England (BOE) rate meeting along with the unemployment rate. Both of these releases have the potential to move the market and will be closely watched.

Last week saw a mixed bag of data from Japan that had little overall impact on the current economic outlook. The current account deficit continues to balloon thanks to massive energy imports and some concerns are starting to be raised on the issue. Restarting nuclear power plants would certainly have a big impact on the deficit, although it’s likely not a very popular option. On Friday we saw the latest reading on Japanese consumer confidence which dropped in December to 41.3 from 43.4 the previous month. Readings below 50 mean pessimists outnumber optimists and the assumption from this latest result is that consumers are less confident due to the impending sales tax increase. Prime Minister Abe was on the wires saying he will seek to translate improvements in corporate earnings into wage increases in order to create a virtuous economic cycle. That is exactly what they need, but the reality is that it’s likely to be an uphill battle to implement. On Wednesday we have the Bank of Japan (BOJ) monetary policy statement and resulting press conference to draw focus. It is also the only major release this week.

Last week was a very quiet one for economic data out of Canada. There were no releases of note, and hence no real opportunity to improve the current negative sentiment weighing on the currency. The second half of this week however, is packed with key releases and there is potential for further large moves in the CAD. Tonight sees manufacturing and wholesale sales data, and this is followed by the Bank of Canada (BOC) monetary policy statement on Wednesday. One major investment bank is calling for the BOC to adopt an easing bias at this meeting. The week is rounded out with retail sales and inflation on Thursday and Friday respectively.

Major Announcements last week:
  • UK Core Inflation 1.7% vs 1.8% expected
  • US Core Retail Sales .7% vs .4% expected
  • Australian Employment change -22.6k vs +7.5k expected
  • European Inflation +.8% as expected
  • US Core Inflation 1.7% as expected
  • Chinese YoY GDP 7.7% vs 7.6% expected
  • NZ Inflation 1.6% vs 1.5% expected