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FX Update - Global growth concerns draw attention

Written by Ian Dobbs on October 14th, 2014.      0 comments

2:30pm(NZT)
Market Overview:
The outlook for global growth has been in the spotlight recently with concerns centred around the prospects of China, Japan and the Eurozone. The IMF said on Saturday that “bold action” is needed to bolster the global economic recovery and they urged governments not to constrain growth by tightening budgets too drastically. China’s real estate market is certainly slowing down and there are real concerns that an outright collapse could eventuate, but for the time being it seems controlled. Other parts of the Chinese economy seem to be faring better as evidenced by yesterday’s release of better than expected trade data. There was a big increase in imports which is a positive signal for Chinese domestic demand. Economic growth in Japan however, continues to struggle to recover from April's sales tax increase, while the Eurozone remains in deep trouble, flirting with outright recession and deflation. The combination of these concerns along with the end of QE in the US is seeing the US stock market come under pressure with the S&P now down 6.4% from September’s peak. We have also seen long term interest rates decline significantly with US 10 year bonds trading to fresh cycle lows of 2.28%. Recent gains in the USD have also taken a pause and the only thing that is certain is that the increased volatility we are seeing in all markets is here to stay for the foreseeable future.
 

Australia
The two key releases from Australia over the past week both had little impact on the currency or the outlook for the economy. The RBA left rates unchanged at their monetary policy meeting and released a statement very much in line with the previous one. No movement in rates is expected from the central bank in the foreseeable future as they are very much in the neutral camp. Thursday’s employment change result was disappointing, however recent volatility in the series has meant the market is very cautious about putting too much weight on just one data point. The Australian Bureau of Statistics has all but admitted they don’t know what’s going on with the normal seasonal patterns in the data and that means the only prudent way to analyse the figures is taking an average of a few months’ worth of data. Still to come this week we have business confidence, consumer sentiment, inflation expectations and a speech from RBA Assistant Governor Debelle.
 

New Zealand
The only data released from New Zealand in the past week has been the REINZ house price index and the food price index. Both were released yesterday and it seems price gains in housing are levelling off with the latest result for September up just 0.2%. Against the same month a year ago house prices are up 5%, which is down from the 10% yearly gains seen back in April. The volume of dwellings sold increased in September from August by 7.8%, although they are still down by 12% on September last year. Yesterday also saw the release of the food price index. It came in down 0.8% on a year ago driven largely by fruit and grocery categories. The main focus this week however, will be on Fonterra’s latest dairy auction which will be held on Wednesday night. Prices continued their decline a fortnight ago falling by 7.3% and another fall will add pressure to both the New Zealand dollar and Fonterra’s forecasted pay-out for the 2014/15 season. This will be followed by the Business NZ manufacturing index on Thursday.
 

United States
The past week has been a relatively quiet one for data from the United States. A bank holiday there yesterday meant we have seen a very slow start to this week as well. Last Thursday’s release of the Fed minutes drew the majority of the focus and it’s fair to say the market was surprised by the overwhelming ‘dovish’ tone. The minutes showed the central bank was concerned about downside risks to global growth and the negative impact of a stronger US dollar. There was little in there to indicate any concerns over potential increases in inflation and as such the USD saw some broad based selling. Employment market indicators remain positive with weekly unemployment claims holding below 290k, and US job openings printing at the highest level since 2001 in the JOLTS report (Job Openings and Labour Turnover Survey conducted by the Bureau of Labour Statistics).  
 

United Kingdom
The UK Pound has failed to gain any real support from what has been a mixed bag of data over the past week. We have seen manufacturing and industrial production numbers signalling a cool down in the sector, while the trade balance came in better than expected thanks in large part to a big fall in imports. Construction output data surprised to the downside, although big upward revisions to the previous numbers countered the negative impact. House prices continue to appreciate with the latest Halifax House Price Index up 0.6% month on month. The Bank of England (BOE) left rates unchanged at 0.5% and with May 2015’s general election drawing closer the window to hike will rapidly start to shrink. Recent comments from Governor Carney have been viewed as a little ‘dovish’. He said as economies emerge from a period of exceptional unconventional stimulus, there will be greater volatility. “That in and of itself should not influence the path of normalization of monetary policy”. What they will take into account however, is the more modest global recovery, benign global inflation, and developments in their labour markets. This week sees the release of some key data for the UK. Tonight we get the latest reading of inflation and tomorrow we have employment numbers to digest.
 

Europe
There has been a lot of attention paid to Europe over the past week. Concerns were highlighted at the G20 meeting over the weekend about the prospects for global growth. A large part of those concerns are due to the European economy that could easily fall back into recession over the coming months. ECB President Draghi himself admitted a weakening in momentum that “may postpone somewhat a resumption in private investment”. While the ECB’s Praet agreed saying “the Eurozone economy has lost momentum”. Only a week ago the IMF forecasted there was a 1-in-3 chance of the Eurozone falling back into recession, but the reality is it’s more like 50/50. Add to this the risk of deflation which is no small matter for countries with borderline levels of debt to GDP. Europe needs inflation to help ease the debt burden of countries like France, Italy and Spain. Even under low inflation scenarios the debt to GDP trajectory for these countries looks unsustainable. Add in some deflation, and you get a cycle of debt and deflation feeding off each other which will end in catastrophe for the whole region. Germany's answer to the problem is for austerity and strict adherence to budget deficit targets, but this is killing any prospect of growth. This leads to lower tax income for governments and the need for further cuts to try and meet deficit targets. The ECB is doing everything it can to try and stimulate inflation and growth, but they are being fought at every turn by Germany and they are almost out of ammunition. The prospects for Europe are looking bleaker by the day. Fiscal rules need to be relaxed and policies that support growth need to be implemented. Once the region is growing again governments can then look to try and balance budgets. For this to happen German officials must perform a u-turn in their thinking. That seems very unlikely to happen until its way too late, if ever. Still to come this week we have German economic sentiment, Eurozone industrial production, and the final reading of inflation.
 

Japan
Last week saw core machinery orders come in much better than expected at +4.7%. This will have pleased the Bank of Japan (BOJ) who have acknowledged the recent slowdown production while maintaining the view that growth will pick up over the remainder of this year. The BOJ minutes revealed little in the way of fresh insight into thinking within the central bank. Most members agreed the BOJ should continue with QE for as long as necessary to achieve the 2% price stability target. They believe private consumption will be resilient due to the steadily improving employment and income situation. That last point isn’t backed up by data released on Friday. We saw a fall in consumer confidence and a weaker than expected result for the Tertiary Industry Activity index. There is almost no data of consequence set for release from Japan this week.
 

Canada
The past week has seen some very supportive data released from Canada. The Ivey Purchasing Managers Index, which is viewed as a lead indicator of growth, came in much strong than expected at 58.6. This was countered somewhat by much weaker than forecast building permits release, although that is a very volatile series and the latest fall comes on the back of three positive months prior. Friday night saw employment change data hit the wires and this was a very good number. Employment increased by 74.1K against market expectations for just 18.7k. The unemployment rate also dropped to 6.8% from 7.0%. Then yesterday we had the release of the Bank of Canada’s survey on business outlook. Again this was a positive release with a big improvement in hiring intentions and the balance of opinion of future sales. This week we have manufacturing sales and inflation data to draw focus.


Major Announcements last week:
  • Canadian Building Permits -27.3% vs -6.0% expected
  • FOMC minutes viewed as somewhat “dovish”
  • Australian Employment Change -29.7k vs 17.6k expected
  • Australian Unemployment Rate 6.1% as expected
  • Bank of England leaves rates unchanged at 0.5%
  • Canadian Employment Change 74.1K vs 18.7k expected
  • Canadian Unemployment rate 6.8% vs 7.0% expected
  • Chinese trade balance 31.0b vs 41.2b expected.

 
 

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