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FX update - Fed tapering and leadership in focus

Written by Ian Dobbs on September 17th, 2013.      0 comments

3:00pm (NZT)
Market Overview:
The last week has been an interesting one in the financial markets. The influence of central banks on the price action has continued to emerge. After so long with static monetary policy from most central banks, there is a likelihood of increased volatility as a period of readjustment dawns. Undoubtedly the most significant influence will come from the US Federal Reserve. Not only do we have the prospect of the tapering of its massive quantitative easing program to digest, but the prospect of new leadership looms large for the start of 2014. As the prospect of lower levels of US quantitative easing has been digested, the repercussions have been seen across all markets. Higher longer end interest rates around the world are just the starting point. The potential impact will be felt across all asset classes and through most of the worlds economies. As the global economy attempts to emerge from a period of sustained economic pressure, there will be imbalances. Over the short to medium term, the success of central banks will be gauged by how they smooth this transition.

There has been no data of note out of Australia since last Thursday’s soft employment figures. The Australian dollar had remained under pressure heading into the weekend,  although yesterday’s announcement by Larry Summers that he was pulling out of the race for the Fed chairmanship saw the AUD snap higher across the board and recover it losses. Today’s minutes from the last RBA monetary policy meeting have had little impact confirming the banks more neutral stance. There is little on the calendar for the rest of the week with only a speech by assistant governor Edey scheduled for tomorrow and the RBA bulletin on Thursday.

New Zealand
The NZD has remained in demand since last week’s RBNZ monetary policy statement. We have had some second tier data out in the form of consumer sentiment and a reading from the service sector, both of which have come in just below expectation. The REINZ house price index for August also hit the wires yesterday. It showed continued strength in the sector, although sales growth did slow ahead of the impending loan-to-value limits been imposed by the RBNZ. We get current account data tomorrow and GDP figures on Thursday to digest. The market will also be paying close attention to the Fed’s announcement on tapering early Thursday morning.

United States
Recent data out of the United States has been a touch on the soft side. That trend continued at the end of last week with the release of retail sales, producer prices, and consumer sentiment. All three results were a little below market expectation and kept the US under some pressure. However, the data hasn’t been weak enough for the market to reassess expectations for the Fed to announce a tapering of $10 - $15bln when they meet later this week. If they announce a tapering of less than the forecast the dollar will no doubt weaken some more. Early yesterday morning we did get a sharp drop in the value of the USD across the board as Larry Summers withdrew himself from the race to become the next Fed chairman. With Bernanke’s term as chairman expiring at the end of January 2014, there has been a lot of interest in who will replace him. Summers was the frontrunner and was perceived to be in favor of a faster tapering than others (US dollar positive). His withdrawal was then seen as a negative influence on the USD and in thin Monday morning trade the news got a decent reaction. The key event this week will be that announcement from the Fed on early on Thursday morning. Markets worldwide will be focused on the pace of any potential tapering. Also this week we get inflation data, building permits, and existing home sales.

The last week has been a quiet one for European data, with no releases materially impacting the current economic outlook. However, over the weekend there have been a couple of interesting developments within the Eurozone. A poll from Germany shows the election there on the 22nd will be tight race. Angela Merkel's coalition looks like it has a very slim majority, but it’s almost too close to call. There is talk Merkel may need to get the support of more parties and form a ‘grand coalition’. This would have the effect of softening Germany’s tough austerity stance in the Euro zone as any likely coalition partners are advocating for more growth-stimulating policies. We have also seen comments from an ECB official who says more reforms are needed to stimulate growth in Europe. He sees very tentative green shoots of recovery and they must nurture that growth with care. He also stressed there is no consideration of any ECB rate hike anytime soon. We could see some fireworks from Italy this week with a senate panel set to vote on whether Berlusconi should be expelled from parliament. Some of his allies in parliament have threatened to bring the government down if the vote goes against him. Tonight sees the release of the latest German economic sentiment, and on Friday we get Eurozone consumer confidence.

United Kingdom
There has been no economic data of significance from the UK since last Wednesday’s strong employment numbers. The Pound Sterling has remained well supported on most crosses since then, although it is less noticeable against the NZD. There is a bit more this week to focus on with inflation data tonight, followed by the Bank of England minutes tomorrow night, and retail sales on Thursday.

Japan saw some patchy data last week but the highlight was the upward revision to second quarter GDP. We have seen a very quiet start to this week with a Japanese bank holiday yesterday and no data scheduled for release until Thursday when we get a speech from BOJ Governor Kuroda and Trade Balance data. Expect Kuroda to repeat the forecast that Japan is on track to beat deflation and achieve its 2% inflation target, even if the sales tax increase goes ahead next year.

Data out of Canada in the second half of last week was a little on the soft side with both housing starts and capacity utilization coming in under expectation. This saw the currency lose a little ground heading into the weekend, however it did snap higher against the USD yesterday after news of Larry Summers withdrawal from the race for the Fed chair. The major focus this week will be on the Feds potential tapering announcement, however from Canada we also have manufacturing sales, wholesales sales, and inflation data to digest.

Major Announcements last week:
  • Chinese Trade Balance 28.5B vs 20.3B expected
  • Chinese Inflation 2.6% as expected
  • UK Unemployment claims -32.6k vs -21.2k expected
  • RBNZ leaves monetary policy unchanged as expected
  • Australian Unemployment rate 5.8% as expected
  • US Retail Sales +.1% vs +.3% expected
  • US prelim. Consumer Sentiment 76.8 vs 82.6 expected