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FX Update - Foreign exchange volatility remains subdued

Written by Ian Dobbs on April 29th, 2014.      0 comments

Market Overview:
Throughout the course of the last week there has been little in the way of major news to alter sentiment in the wider market. Whilst Russian/Ukrainian tensions ebb and flow, the markets have not yet been materially influenced by the situation. Inflationary pressures remain relatively benign in almost all economies, enabling long periods of historically low interest rates. Interestingly, longer end bond markets remain very much in demand. This points towards an at best staggering recovery from a global outlook. All of these factors continue to point toward a continuation of the range bound nature of the price action in the foreign exchange markets. Of interest this week will be the preliminary growth numbers for the first quarter from the likes of the UK and the US, along with the latest monetary policy decisions from the Bank of Japan (BOJ) and the US Federal Reserve (Fed).

There has been no data at all from Australia since last Wednesday’s weaker than expected inflation figures. The losses seen in the AUD in the aftermath of that release have been sustained, although there isn’t much in the way or real downside momentum at the moment. A couple of second tier releases this week in the form of import prices and new home sales will draw some attention, but Friday’s producer prices data will be the highlight in an otherwise quiet week.

New Zealand
Last Thursday’s RBNZ rate statement was a relatively subdued affair. The central bank delivered a 0.25% rate hike that was universally expected. There wasn’t a lot to focus on in the actual statement either, with much of it in line with their previous release. However, the RBNZ did reference the high level of the New Zealand dollar and hinted that if maintained, it could influence decisions on future hikes. They also played down the recent weaker than expected inflation figures saying although ‘headline inflation is moderate, inflationary pressures are increasing and are expected to continue doing so over the next two years’. Another hike by the RBNZ is expected in June, but a real question mark now hangs over July’s decision. The central bank could easily pause, especially of the currency continues to trade above 0.8500. Earlier this morning we got the latest trade balance figures which showed trade numbers relatively close to expectation in March. Tomorrow we have building consents and business confidence to draw focus.

United States
Data from the United States over the past week has been largely supportive of the on-going recovery. Consumer sentiment jumped in April to 84.1 from 82.6 previously. This is only just below the post GFC high of 85, reached last July. Orders for long lasting manufactured goods (durable goods) also posted solid gains for the second straight month in March climbing +2.6% vs +2.1% expected. There is however, a question mark over the housing market at the moment, with some concerning signals that the recovery is waning in that sector. Most notable was last week’s new home sales figures which came in at 384k against an expectation of 455k. The previous result was 449k. This is the third biggest decline in the last 20 years and isn’t the only piece of data over the past few weeks to raise chatter about the housing market being a potential drag on growth in the second quarter. The market will be sensitive to other soft indicators. We did get a better result from pending home sales that hit the wires last night. The +3.4% result was well above the expectation of +1.0%, but broader housing market concerns remain. We have some key data to digest over the rest of this week with GDP on Wednesday, followed by the Fed meeting and manufacturing PMI on Thursday, and non-farm payrolls on Friday.

We’ve seen some mixed data from Europe over the past week. German manufacturing PMI improved from the previous month, while the French manufacturing PMI fell. It was a similar story for the services PMI as well and it just serves to underline the vulnerability of the French economy in 2014. This point was rammed home with data showing French jobseekers hit a record high last month at 3.349 million. We have also seen results from the latest German IFO business climate survey, which improved to 111.2 vs 110.7 last. Eurozone officials continue to be vocal with most of the chatter downplaying the chance of quantitative easing (QE) in the near term. Draghi himself was quoted last night as saying “although low inflation could continue to be a problem he doesn’t see the risk of deflation”. He added “QE is still a way off”. This comes after the ECB’s Hansson said “QE would be operationally complex”. Taking a look at the broader situation of government debt, we have seen data to show for the Eurozone as a whole the level has risen to a record 92.6% of GDP. Italian government debt has now increased to 132.6% from the previous reading of 127.0%. Still to come this week we have inflation data from Germany and the Eurozone as a whole, Euro unemployment, and German retail sales.

United Kingdom
The UK Pound continues to perform well on the back of a positive economic outlook. Public sector net borrowing data for March was much better than expected coming in at +4.861 bln vs +8.785 bln expected. This much improved borrowing data was good news, although the budget deficit still remains high and well above the 4.7% average for advanced economies. UK retail sales data continues to come in on the strong side with the Confederation of British Industry (CBI) index of UK retailers jumping to 30 from a previous reading of 13. This was backed up by an unexpected improvement in actual volume of retail sales for March that gained 0.1%. This comes on the back of February’s 1.3% increase. Tonight we get GDP data for the first quarter and the market is expecting to see a solid +0.9% result. Later in the week the focus will turn to manufacturing and construction PMI’s.

There have only been two data releases from Japan over the past week. The first was Tokyo inflation which is considered a reliable indicator of national price rises. It climbed to +2.7% in April helped by the sharp rise in sales tax imposed at the beginning of the month. This would suggest the national figure is on track to post a 22 year high in April when it gets released next month. Yesterday we saw retail sales data for March, which rose at its fastest pace in 17 years. However, the +11.0% result was largely due to consumers going on a shopping spree ahead of April sales tax increase. Later this week we have industrial production data, the Bank of Japan’s monetary policy statement, and household spending figures to draw focus.
Canadian wholesale sales came in better than expected at +1.1%, but the retail sales figures weren’t so flash. The headline of +0.5% was right on expectation, but once you looked into the detail, it was a weak report. The previous result was revised down to +0.9% from the initial reading of +1.3%. This saw the Canadian dollar come under some pressure in the wake of the release. The focus for this week turns to as speech from Governor Poloz tomorrow and GDP data on Thursday.
Major Announcements last week:
  • Australian Inflation 2.9% vs 3.2% expected
  • BOE leaves monetary policy unchanged as expected
  • RBNZ hikes cash rate .25% to 3.00% as expected
  • US Durable Goods Sales 2.6% vs 2.0% expected
  • Japanese Inflation -ex food 1.3% vs 1.4% expected