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FX Update - Established ranges dominate

Written by Ian Dobbs on February 25th, 2014.      0 comments

Market Overview:
The last week in the wider financial markets has reiterated the patchy nature of the global growth recovery. Soft economic news from the US, UK , Japan and Europe highlighted the issue. The US has seen an extended period of softer than expected economic news, albeit not enough yet to suggest a halt to the tapering of the quantitative easing (QE) program by the Federal Reserve. This increases the focus on the data in the coming weeks, and in particular the latest US GDP numbers, due for release on Friday. Obviously the Fed’s tapering program is a central theme for 2014, and any change in expectations will have far reaching implications. The US dollar has seen increasing pressure building on it as the data has disappointed. This pressure has seen the continuation of trade in increasingly familiar ranges for most pairings. The G20 meeting in Australia in the weekend was of interest. Whilst lacking in definitive action plans as usual, the verbal commitment to lift global growth by 2% is positive and represents increased global activity of around two trillion US dollars.

Australia has had no key economic releases since last Tuesday’s monetary policy meetings minutes. This week’s economic calendar is a little light as well with only ‘construction work done’ out tomorrow, then private capital expenditure and private sector credit released on Thursday and Friday respectively. The Australian dollar has been largely range bound around the 0.9000 level to the USD, with some weakness yesterday sharply reversed overnight.

New Zealand
Last week’s softer than expected retail sales and producer prices data had little overall impact on the positive economic outlook or the currency. Yesterday we saw very solid credit card spending figures which reflect the positive sentiment of the consumer. Spending on credit cards was up +1.0% in January from December and +9.2% on a yearly basis. Later today we get inflation expectations data then towards the end of the week we have the trade balance, building consents, and business confidence figures to digest.

United States
The recent run of soft data from the US has widely been blamed on the extreme weather seen in parts of the country over December and January. However cracks in that theory are starting to appear as the data is not telling a consistent story. Digging into the regional detail of some releases has shown weakness from west coast regions when the poor weather was an east coast event. Late last week we got the flash manufacturing PMI for February which beat expectations coming in at 56.7 up from last month’s 53.7. The improvement was signalled as a recovery from the previous weather affected data. That sounds plausible, but then why did last night’s flash services PMI for February disappoint with the weakest reading in four months? The index printed at 52.7 from last month’s 56.7. So the manufacturing sector has recovered but the service sector hasn’t? The inconsistencies in data is starting to raise eyebrows and close attention will be paid to this week’s upcoming releases of consumer confidence, new home sales, durable goods orders, and preliminary GDP. At this point the data hasn’t affected expectations for the Fed to continue to taper at the rate of $10 billion each meeting. The Fed have made it clear that it would take a lot to change the taper pace. But if recent soft data proves to be more than just weather affected, those expectations could change, and this would have an impact on the value of the USD.

For much of last week data from Europe disappointed. Soft readings on German economic sentiment, manufacturing PMI, and consumer confidence weighted on the currency. There was some slightly better news released last night in the form of German business climate and inflation. The IFO business climate survey came in at 111.3 vs an expectation of 110.7. An IFO official said this showed German companies were optimistic, and the trend in that survey has certainly been up for much of the past year. Euro area inflation for January was also revised up last night to +0.8% from the previous flash estimate of +0.7%. This didn’t have a big impact in the market which will put more weight on the flash estimate of February inflation set for release at the end of this week. A soft reading there could be the trigger for further ECB action at next week’s meeting. President Draghi was on the wires over the weekend stating the central bank is ready to act of the inflation outlook deteriorates. Although he stressed there is no evidence of deflation, he does promise the ECB will have the full set of information needed for deciding whether to act or not by next week’s meeting. Ahead of key inflation data on Friday, we get the EU economic forecasts, German unemployment, retail sales, and French consumer spending.

United Kingdom
The generally positive tone from last week’s Bank of England minutes and the bigger than expected fall for January unemployment claims have reinforced the current positive outlook for the UK economy. Even weaker than expected retail sales figures released on Friday have failed to noticeably impact current sentiment. January sales printed at -1.5% against an expectation of -0.9%, but the market has brushed it aside saying it needs to be taken in context of a strong surge in the previous month’s figures. That’s a fair call considering Decembers result at 2.5% was the biggest month on month gain since 2008. This week we get data on mortgage applications, CBI realized sales, a second estimate of GDP, and consumer confidence.

Last week’s data from Japan was unanimously weaker than expected. GDP, industrial production, industries activity, and the trade balance all came in on the soft side. This didn’t seem to impact the BOJ who maintained their current economic assessment at their regular meeting. However, they did stress they are willing to act if risks to that outlook materialize. At this point the biggest risk is the negative impact of the upcoming sales tax increase, and it’s a debatable point whether the economy is currently strong enough to withstand that. To that extent we will have to wait until Friday to get further economic data from Japan when manufacturing PMI, household spending, inflation, unemployment, industrial production, and retail sales are all set for release.

Canada released some mixed data late last week with wholesale sales and retail sales both coming in substantially below expectation. These were however offset by a stronger reading on inflation which printed at +0.3% vs expectations of +0.1%. That result helped to stem the losses for the Canadian dollar that was under some pressure in the later stages of the week. There is little to digest this week with only the current account and monthly GDP data set for release on Thursday and Friday respectively.

Major Announcements last week:
  • Japanese prelim. GDP (Q4) +.3% vs +.7% expected
  • BOJ leave monetary policy unchanged as expected
  • UK Inflation (mth) +.6% vs -.5% expected
  • European Econ. Sentiment 68.5 vs 73.9 expected
  • UK Unemployment rate 7.2% vs 7.1% expected
  • US Inflation (mth) 1.6% as expected
  • UK Retail Sales 4.3% vs 5.0% expected
  • Canadian Inflation (mth) +.3% vs +.1% expected
  • Canadian Retail Sales -1.8% vs -.4% expected
  • European Inflation +.8% as expected