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FX Update - Europe remains the big risk

Written by Ian Dobbs on February 17th, 2015.      0 comments

Market Overview:
Continuing negotiations between Greece and the EU remain the focus in Europe, with little sign so far that either party is willing to relent. The clock is ticking with Greece’s current bailout deal, complete with its demands for fiscal austerity, due to expire on the 28th Feb. Greece will run out of money shorty after that and be forced to leave the Euro. The market generally believes a deal will be reached, albeit most likely at the last minute, as nobody wants to see Greece leave the Euro. So although we will see some Euro appreciation if the two parties come together, the big risk is a dramatic fall in the Euro if an agreement is not reached. Some economists suggest a Greek exit could see the EURUSD fall as far as 0.9000. Looking closer to home and the New Zealand dollar has been one of the better performing currencies over the past week. Gains have been seen on most crosses helped by strong retail sales data and stable monetary policy outlook. All eyes remain on the Reserve bank of Australia as the expectations for a further cash rate cut gyrates between their next meetings in either March or April.

The main data focus data from Australia last week was the employment numbers released on Thursday. It’s fair to say that they were disappointing in every respect. Employment dropped by more than expected at -12.2k, the unemployment rate jumped to 6.4% and there was a big swing away from full time work to part time employment. This data has only served to reinforce expectations for another 0.25% cut in interest rates from the RBA over the coming months. Governor Stevens spoke before the Australian parliaments House of Representatives on Friday and he said monetary policy still has capacity to give additional support to the economy. This certainly supports the view that they could cut rates again. However, the governor added that at the current level of interest rates, cut could have less impact than previously. In terms of the currency the Governor said the AUD is doing more or less what they were expecting, and that a further fall is likely to occur. In the past few hours the RBA have released minutes from the previous meeting, when the cut rates by 0.25%. These showed there was some debate around delaying the cut until March, and that they believe the AUD is still above most estimates of fundamental value.

New Zealand
There have only been two data points released from New Zealand over the past week and they were somewhat contradictory. The Business NZ manufacturing index showed a big fall from 57.1 In December to 50.9 in January, although most commentators believe the holiday period unduly impacted the data. On a more positive note, yesterday we saw the latest reading from retails sales and this suggests the consumer in is good spirts. Sales rose 1.7% in the fourth quarter versus a forecast of 1.3%. This comes on top of a 1.6% increase in the third quarter. It seems low credit costs and decent employment gains are helping to boost sales and this would suggest continued solid economic growth for the country heading into the first half of 2015. Good growth and low inflation will only serve to reinforce the RBNZ’s current neutral stance on interest rates. Still to come this week we have the latest dairy auction from Fonterra along with the producer prices index.

United States
A couple of key releases from the US last week both came in softer than expected. In fact it’s fair to say that over the past few weeks, aside from non-farm payrolls data, most of the key economic releases from the US have been disappointing. Last week’s retail sales and consumer sentiment data both fit that description. Retail sales fell 0.9% against expectations of a 0.4% fall, and consumer sentiment declined to 93.6 from 98.1 previously. Some context is warranted around the consumer sentiment number however. The previous result was an 11 year high, and even after this recent decline, the index is still at its second highest point since early 2004. So although US growth in the first half of 2015 is likely to be far from stellar, the consumer remains in good spirits and a solid employment market should underpin that. A bank holiday yesterday means it has been a slow start to this week, but there will be plenty to digest over the coming days. Building permits, producer prices, industrial production, the FOMC meeting minutes, and the Philly Fed manufacturing index are all set for release.

United Kingdom
Last week’s Bank of England (BOE) Inflation Report was a very balanced affair with Governor Carney confirming market expectations that the most likely next move in interest rates will be a hike. At this stage most forecasters believe that will come sometime in the first half of 2016. The central bank will look through the current period of low inflation, which should actually provide a small boost to economic performance. This is exactly one of the reasons the Confederation of British Industries have just upgraded their GDP forecast for 2015. They now believe the UK economy will grow by 2.7% this year, up from 2.5% previously. Improvements in employment and wage growth were the other key reasons cited for the increase. Tonight we get the latest reading of inflation with the market expecting a decline to 0.3% from 0.5% previously. Then later in the week we have employment data and retails sales figures to digest.

GDP data released from the Eurozone late last week provided a glimmer of hope for the region. Overall Eurozone GDP came in at +0.3% which was better than the +0.2% forecast. Not surprisingly German growth led the way printing at +0.7%, but there were also positive results for Spain and the Netherlands. French and Italian growth is minimal while Greece and Cyprus continue to contract. The data did provide a small boost to the Euro and European stocks, but the impact has been limited by the drawn out negotiations between Greece and the EU around the bailout package and conditions. The latest round of talks ended a few hours ago without any meaningful agreement and this saw the Euro back under pressure. No side is yet to back down or soften their stance far enough for a compromise, although pressure is certainly mounting. Greece will run out of funds on February 28th if there is no agreement or extension of the current programme. The EU’s Dijsselbloem who chaired the meeting of Eurozone finance ministers last night said Greece only has until this Friday to request an extension of the programme and he won’t accept one later than that. Focus will remain on negotiations over the coming days, although we also have data in the form of German ZEW economic sentiment, manufacturing PMI, service PMI, and for the first time ever the ECB will publish the minutes from their previous meeting.

We have seen largely disappointing data from Japan over the past week with one stand out result in the form of core machinery orders. These increased 8.3% against expectations for a gain of 2.4%. However, any positive impact has been countered by softer than expected reading from Tertiary Industry Activity and GDP. Although yesterday’s GDP data showed the Japanese economy exited a recession in the fourth quarter posting growth of 0.6%, this was weaker than the forecast for an increase of 0.9%. The economy minister said he expects wage hikes to materialise this year and firm private demand to help lead the recovery. Prime Minister Abe said he will push ahead with the biggest structural reform campaign since the postwar era. Tomorrow we have the BOJ monetary policy statement to digest, then on Thursday we get trade balance data.

Canada released some positive data at the end of last week in the form of manufacturing sales. Sales increased 1.7% against expectations of 0.8%. This was the biggest gain in three months and it was led by auto industry sales which jumped 9.0%. This helped to offset a sharp drop in petroleum and coal products. Later this week we get wholesale sales and retail sales figures, both of which will be closely watched. The Canadian housing market continues to be a focus, with one economic think tank recently prediction some cities will see the first major correction in house prices since 2008. Calgary and Edmonton in particular could see house prices fall up to 10% over 2015 and 2016 due to the impact on employment from oil price declines.

Major Announcements last week:
  • Chinese Inflation +.8% vs +1.1% expected
  • UK Manufacturing +.1% vs +.3% expected
  • US Retail Sales -.9% vs -.4% expected
  • European GDP +.3% vs +.2% expected
  • US UoM Consumer Sentiment 93.6 vs 98.2 expected
  • NZ retail Sales +1.5% vs +1.1% expected
  • Japanese GDP +.6% vs +.9% expected