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FX Update - Europe fumbles forward

Written by Ian Dobbs on February 24th, 2015.      0 comments

2:00pm(NZT)
Market Overview:
The agreement reached between Greece and the EU has generally been received positively by the markets. The reality is the agreement, at least at this stage, is very short on detail and we now have another major deadline to look forward to in four months. Greece’s debt pile is largely unsustainable and the chance of meaningful growth in their economy is very limited with the crushing austerity imposed on the country. The EU has done exactly what it has been doing since the crisis developed five years ago. That is to ‘kick the can down the road’ by taking no decisive action now and push the problem into the future. It’s hard to see how this is helping the Eurozone move forward. Fed Chair Janet Yellen’s semi-annual testimony before a senate committee tonight is the major focus for the markets this week. Recent US data has suggested something of a slowdown in economic activity and there were hints in the FOMC minutes that the Fed could hold off hiking interest rates in June. This testimony tonight could be key in shaping market expectations.
 

Australia
It has been a very quiet week for economic releases from Australia. There has been nothing of substance released since the Reserve Bank of Australia’s minutes last Tuesday. We do however have a couple of releases this week to draw focus. The highlight will be private capital expenditure data due out on Thursday. The market is expecting a result of -1.3% for the quarter. Ahead of that tomorrow we also have construction work done and the wage price index to digest.
 

New Zealand
We have seen only a couple of minor release from New Zealand since last Tuesday nights positive dairy auction. The first was producer prices that came in weaker than forecast at -0.4%. This data was for the fourth quarter of last year and was driven lower by the previous decline seen in dairy products and oil. The second was credit card spending numbers that hit the wires yesterday. Credit card spending was up 1.9% in January after a drop of 0.5% in December. Year on year card spending is now 6.2% higher. There was little market impact from either release. The discovery of fruit files in Auckland has the potential to impact NZ exports and the value of the New Zealand dollar to a degree. It would have to be a major widespread infestation for that to happen and so far that doesn’t seem the case. Later this week we have the trade balance, building consents, and business confidence data to draw focus.
 

United States
The past week has provided mostly disappointing data releases from the United States. Almost all of the regional manufacturing indexes have declined somewhat which suggests a broad drop off in activity. This won’t be helped by the very cold weather hitting parts of the country at the moment. Housing starts, building permits, and existing home sales have also all declined. Taking it all into account it seems very likely growth in the first quarter will be lower than forecast. This will only serve to reinforce the growing expectation that the Fed may hold off tightening in June, preferring to wait and see evidence of a pickup in growth and inflation. Last week’s FOMC minutes suggested as much, and if the data continues to come in softer than forecast, rate hike expectations will get pushed out into late 2015. The US dollar is going to find it difficult to make further gains in this environment. This week however could prove key in shaping expectations around just when the Fed will begin to hike interest rates. Tonight we have a semi-annual testimony by Fed Chair Janet Yellen to digest. Then later in the week we get new home sales, inflation, durable goods orders, and GDP data.
 

United Kingdom
The UK released some encouraging employment data last week which showed the unemployment rate dropping and wages rising. Unfortunately Friday’s release of retail sales wasn’t so positive. Retail sales for January fell 0.3% which was bigger than the forecast for a 0.1% fall. The previous reading was also revised down a touch. Although this made for disappointing reading it is only one month’s number and year on year sales are still looking much better. Still to come this week we have mortgage approvals, the Nationwide house price index, the second estimate of GDP, and preliminary business investment data.
 

Europe
Greece’s new Syriza party came into power recently talking a very tough game. Their rhetoric continued in the lead up to negotiations with the EU, saying they would never accept an extension of the current bail-out programme that has imposed crushing austerity on the Greek economy. On Friday they agreed to an extension of the current bailout programme, including the austerity measures. Syriza’s leader Tsipras went on TV to tell Greek citizen’s they had “won a battle” if “not the war”, but nothing could be further from the truth. The Irish finance minister summed it up best when he said “Their political problem is that this is a reversal of their election position. There is absolutely nothing on the table that could be considered a concession.” It is an embarrassing back down by Syriza who are bound to see a political backlash as a result. The four month bailout extension is contingent on acceptance by the EU of a list of further reforms that Greece will make. So although Europe may have taken a step back from a messy Greek exit in the near term, very little has actually changed. Greece is still burdened by an unsustainable mountain of debt, and there is little chance of their economy being able to grow in any meaningful way. In terms of data late last week we saw the service sector PMI reading for Europe improve a touch. This was offset however by manufacturing PMI which decreased a few points. Last night we also saw the latest reading from the German IFO business climate index. It fell a touch from the previous reading with the IFO saying it shows domestic demand has weakened slightly. ECB President Draghi is due to speak this week and we also get data on German inflation and unemployment, along with French consumer spending.
 

Japan
The Bank of Japan’s monetary policy statement held no real surprises last week with the bank maintaining a cautiously optimistic tone. The bank would have been encouraged by Thursday’s trade balance data that showed a dramatic fall in the trade deficit. Surging exports and falling oil prices have helped to cut Japan’s trade deficit by more than half. Unfortunately what didn’t make such good reading was manufacturing PMI which declined to 51.5 in January. That is a seven month low. The Bank of Japan minutes released yesterday had no market impact. They said members agreed the Japanese economy was gradually recovering and that exports should continue to pick up on the back of the global economy and weaker Yen. Oil price declines are however creating uncertainty around the ability to meet the inflation target in the 2015 financial year. Later this week we have household spending, inflation, industrial production, and retail sales data to digest.
 

Canada
We saw some very mixed data from Canada last week. Wholesale sales were very strong printing at +2.5% against expectations of just +0.4%. But these were countered by Friday’s release of retail sales that came in down 2.0% versus expectations for only a 0.3% fall. The core reading which excludes autos was even weaker. This data was weak enough to cement market expectations for another 0.25% interest rate cut from the Bank of Canada (BOC) at next month’s meeting. BOC Deputy Governor Agatha Cote was on the wires late last week saying the January cut was intended to provide insurance against downside risks to inflation, and that the March 4th rate decision will be based on a careful examination of the economy and how risks are evolving. We will hear from Governor Poloz tomorrow and then on Friday we get the latest inflation data.
 

Major Announcements last week:
  • GDT dairy price index +10.1%
  • Bank of Japan leave policy unchanged
  • UK unemployment 5.7% vs 5.8% expected
  • UK Average Earnings Index 2.1% vs 1.7% expected
  • Canadian Wholesale Sales 2.5% vs 0.4% expected
  • US building Permits 1.05m vs 1.08m expected
  • US Producer Prices -0.8% vs -0.4% expected
  • French Manufacturing PMI 47.7 vs 49.7 expected
  • German Manufacturing PMI 50.9 vs 51.8 expected
  • UK Retail Sales -0.3% vs -0.1% expected
  • Canadian Core Retails Sales -2.3% vs -0.7% expected
 

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