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FX Update - Geo-political intrigue adds to dynamic market sentiment

Written by Sam Coxhead on June 17th, 2014.      0 comments

3:20 PM (NZT)
Market Overview:
The general themes of 2014 have continued throughout the course of the last week, albeit with a new dynamic coming to the mix. Yield chasing investors have ensured the Australasian currencies remain in demand, and this should continue throughout the year. Adding credence to this view is the fact the Chinese government has pledged to provide policy accommodation to ensure their 7.5% growth targets are met. With a Chinese slowdown representing the primary risk to the Australian and New Zealand economies, this kind of pledge will be of comfort, given the autonomy of China’s economy. Adding to the mix are the increasing tensions in the Middle East. The fantastical prospect of some kind of Iranian/US allegiance against the ISIS uprising certainly adds an element of intrigue. Of more direct consequence are rising oil prices and the negative impacts on economic growth, especially in the United States.

Last week was a relatively interesting one for the Australian economy that saw employment numbers show a material shift in labour, from part-time to full time employment, and the unemployment rate remain unchanged at a healthy 5.8%. This week’s calendar is relatively quiet, with the RBA monetary policy meeting minutes released this afternoon the only release of note. Unsurprisingly, the minutes revealed little of new insight, with the final sentence of the minutes making a fine summary “the Board judged that the current accommodative stance of policy was likely to be appropriate for some time yet”. For the most part the Australian dollar has seen elevated demand, assisted at times by its smaller cousin from across the Tasman following the cash rate hike from the Reserve Bank of New Zealand. Amongst a global environment of very low (or zero) short end interest rates, expect the 2.50% cash rate in Australia to continue to draw demand. This will cushion any periods of softness in the near term at least, even in the face of materially lower commodity prices that the Australian dollar has traditionally been correlated to. Also of interest overnight were comments from Chinese Premier Li that the Chinese Government was prepared to use appropriate policies to ensure that its 7.5% annual growth target was met.

New Zealand
Last week in the New Zealand economy the focus came from the RBNZ’s bi-monthly monetary policy statement (MPS). The statement shows the inflation, GDP and 90 day interest rate forecasts all unchanged from the March statement. This caught the market by surprise to an extent, after analysts had cited a softening housing market and concerns over the Chinese economy as reasons for a potential pause to the cash rate hiking cycle in the coming months. Governor Wheeler has left himself a little room by stating the speed and extent of cash rate hikes remain subject to the economic and financial information as it comes to hand. The NZ dollar reacted strongly in the session following the MPS, albeit maintaining recent ranges within most pairings. This week has seen the Westpac consumer confidence survey remain at elevated levels. Interestingly for the RBNZ the latest housing numbers reveal a softening in the number of sales and pricing, further evidence that the LVR policy has had the desired effect. Tomorrow Fonterra dairy auction results offer some interest ahead of the first quarter GDP numbers on Thursday. The market expects a healthy 1.2% increase in activity, against a previous rise of .9%.

United States
The mixed nature of the US economy's recovery has been evident over the last last week. The retail sales numbers were uninspiring  and were coupled with lower than expected producer price and consumer sentiment data. On a more positive note, overnight the Empire State manufacturing, industrial production and NAHB housing data were better than expected. Interestingly, the manufacturing sector has finally eclipsed pre-recession levels of six and a half years ago. The US dollar remains largely out of favour and this is especially evident against the Australasian duo. Of increasing focus is the geo-political situation in the Middle East, and implications it may have on the wider financial markets, should it further escalate. In the meantime the main focus for the week is the Federal Reserve’s monetary policy statement early Thursday morning Australasian time.

Last week proved to be a relatively quiet one for economic news in Europe. The ECB and potential policy moves remains the main driver of sentiment. The move to negative deposit rates has undermined the EURO since the ECB policy announcement two weeks ago. From there the speculation has been on the potential drivers for a move towards full blown quantitative easing. Whilst this cannot be ruled out, logical thought points towards the impact of the current settings been able to run its course ahead of any further measures. Certainly when the relative longer term interest rates are taken into consideration, even after a slight move higher overnight for the European periphery, longer term interest rates must look very inviting for those looking to borrow. Last night the latest inflation numbers revealed an annual core rate of just .7%, stubbornly below the ECB target of close to 2% over the medium term. Later on today the latest German economic sentiment numbers are due for release and this is the primary data focus for the week.

United Kingdom
It has been a very interesting last week for the UK economy. Aside from continuing strength reported in the manufacturing and employment sectors (albeit average earnings behind expectations), potential new Bank of England (BOE) loan to value ratio powers for residential property lending hit the headlines. These kinds of policies seem to have had a desired effect in New Zealand, and potentially would work in the UK as they have similar property market pressures. Also of particular note were the deliberate comments from BOE Governor Carney. He hit the headlines with comments that interest rates in the UK could rise sooner that investors currently expect. The immediate effect was for GBP to strengthen and various economists to start talking about cash rate hikes potentially starting at the end of 2014. This week is another busy one for news in the UK. Inflation numbers come later on today and are followed by the BOE monetary policy meeting Wednesday and retail sales numbers Thursday. There are also numerous BOE officials due to make on the record speeches and these will be closely followed following the revelations from last week.

Last week saw the final Japanese Q1 GDP numbers revised up .2% to 1.6%. This positive result is tempered by the expectation of contraction in the 2nd quarter thanks to the sales tax increase implemented. The Bank of Japan monetary policy statement saw no change in the easy policy, with Governor Kuroda stating his intent to keep the easing policy firmly in place until the target of 2% inflation has been reached. The BOJ expect the economy to gradually recover from the impacts of the sales tax increase, but they see the impacts starting to recede from summer onwards. This week sees a fairly light calendar with the main focus coming from the BOJ meeting minutes released on Wednesday and further Kuroda musings scheduled for Friday evening.

Last week in Canada saw the mixed outlook continue. Housing starts were higher than expected, but the latest manufacturing numbers underperformed expectations. Friday saw Bank of Canada (BOC) Governor Poloz discuss the threat of a sharp correction in the elevated housing sector. It looms as the biggest risk to the economy, although the chances of a sharp correction remain low to his mind. External influences such as a sharp slowdown in the global recovery would increase the chances of the hard landing for housing and this would cause considerable stress. The BOC’s view remains that the housing sector will see natural soft landing, especially as the prospect of increasing interest rates approach at some stage in 2015. This week Friday’s inflation and retail sales data provide the data focus for the week, with increases expected of .2 and .4 percent respectively.

Major Announcements last week:
·  Japanese final Q1 GDP 1.6% vs1.4% expected
·  Chinese Inflation 2.5% vs 2.4% expected
·  UK Unemployment rate 6.6% vs 6.7% expected
·  RBNZ hikes cash rate to 3.25% as expected
·  Australian Unemployment rate 5.8% vs 5.9% expected
·  US Retail Sales +.1% vs +.4% expected
·  BOJ leaves monetary policy unchanged as expected
·  BOE’s Carney paves the way for earlier cash rate hikes