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FX Update - Fed catches the market by surprise

Written by Ian Dobbs on September 24th, 2013.      0 comments

3:00PM (NZT)
Market Overview:
Developments from the United States have dominated price action over the past week. The big surprise was the decision from the Federal Reserve not to start tapering quantitative easing purchases this month, as was widely expected. That send shock waves through all markets and the resulting moves have been substantial. The US will remain in focus over the coming weeks as the market reassess the time horizon for tapering and the budget ceiling debate starts to take centre stage. There is the very real possibility of a US government shutdown and this would have negative implications for the USD. In the wider market the economic calendar is very light and this week and this will put even more focus on events in the United States.


Australia
It has been a very quiet week for Australia with little in the way of key data since last Tuesday’s RBA minutes. We did get good Chinese manufacturing numbers yesterday which helped to support the Australian dollar a touch. The reading of 51.2 was the highest in 6 months and continues the improving trend of late in Chinese data. The economic calendar for the rest of this week is very light as well with only the RBA financial stability review set for release tomorrow.


New Zealand
Last week was a positive one for New Zealand with descent data on consumer sentiment, current account and GDP all helping to support the currency. These combined with the boost from the Fed’s lack of tapering to see the New Zealand dollar make big gains across the board. Since then we have seen some consolidation with the currency holding onto most of those gains. The only data out domestically this week is the trade balance tomorrow and business confidence on Friday, so focus will continue to be on offshore events.


United States
The big event of the past week was the Fed’s decision to not adjust down the level of monthly quantitative easing purchases, currently at $85bln. That caused big moves in markets around the globe and has left many forecasters scratching their heads. Since then we have seen comments from a number of Fed officials and they have all said it was a very close call whether to taper or not. So where does that leave us? Is the data between now and the October meeting likely to improve enough to see them taper then? It seems unlikely we will get any dramatic change in economic numbers between now and then, but only time will tell. Last night we got a reading from the manufacturing sector that came in below expectation and a touch below the previous number, so that isn’t going to help. The focus is now shifting to the debt ceiling debate and the very real chance of a government shutdown. US Senate majority leader Harry Reid said last night the Republican-controlled House will have the choice of either passing a funding bill with no add-ons or shutting down the government. This may well be the real reason the Fed held off tapering last week. Key data to watch over the rest of this week will be consumer confidence, new home sales, durable goods, and pending home sales.


Europe
Last week we saw good readings on economic sentiment from Germany and Europe as a whole, and that positive mood has been reflected in the German elections over the weekend. Angela Merkel's party have increased their share of the vote by 8% to 42%. It is the best showing by the conservatives since 1990. The downside is Merkel’s coalition partner is out of parliament altogether and she now faces some difficult negotiations to form a new coalition. Last night we got a reading on the manufacturing sector for September and while the result was a touch under expectation, it was still in expansionary territory. The pullback in manufacturing activity was however offset by better numbers for the service sector which showed good gains. ECB president Draghi was also on the wires saying he expects a continued slow recovery, and that interest rates are to remain at record low levels for an extended period. He also said the ECB was ready to deploy another long term refinancing operation (LTRO) to the banking sector if required. Still to come this week are readings on the German business and consumer climate, German inflation, and French consumer spending.


United Kingdom
Last week’s poor retail sales number was the first piece of soft data the UK has seen in quite a while. The market seems to be taking it with a grain of salt and the impact has been limited so far. Should we get more average data over the coming week then the GBP could head for a decent correction. On Friday night we got figures on public sector net borrowing and they were a pleasant surprise. Although the overall level of borrowing is still high, it is coming down and quicker than expected. These figures suggest that public finances are benefiting from the stronger economic activity. We had comments from the Bank of England’s Broadbent last night. He said the third quarter was looking strong so far although he can’t be sure it will continue at this rate. He also said a faster drop in jobless would support a rethink on stimulus. Later this week we get the Nationwide house price index, current account, and the final reading of GDP.


Japan
There has been no data released in the past week that has had a material impact on the economic outlook for Japan. Recent comments for BOJ Governor Kuroda have been supportive of the outlook for Japanese growth and global growth. He says that overseas economies will gradually pick up as the US and European economies improve. He expects that to support increases in exports and output, as well as a pickup in capital expenditure in Japan. This week is another light one on the calendar with only inflation data scheduled for release.


Canada
Data out of Canada last week was overall supportive with good readings on manufacturing sales, wholesale sales, and core inflation. We also got an upbeat speech from the Bank of Canada’s Poloz who seems confident the economy is building momentum. It seems the biggest risk facing the economy is from the potential housing market bubble. But getting a reading on that is not as easy as it sounds. Recent figures suggest August real estate activity was up 11.1%, but we have also heard from Toronto’s land development association who say high rise sales were at a 10 year low in August. The only data this week is retail sales set for release tomorrow.


Major Announcements last week:
  • UK CPI 2.7% vs 2.7% expected
  • German ZEW 49.6 vs 45.3 expected
  • Canadian manufacturing sales 1.7% vs 0.6% expected
  • US CPI 0.1% vs 0.1% expected
  • FOMC no September tapering.
  • NZ GDP 0.2% vs 0.2% expected
  • GBP retail sales -0.9% vs 0.4% expected
  • Canadian Core CPI 0.2% vs 0.1% expected
 

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