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FX Update - Low global inflationary pressure side-lines central banks

Written by Ian Dobbs on October 28th, 2014.      0 comments

Market Overview:
Low levels of global inflation are seeing expectations for changes in monetary policy pushed out. Expectations of hikes from the US Federal Reserve (FED) and the Bank of England (BOE) are being shunted towards the end of 2015 as the shaky global growth profile eases pressure for increasing interest rates. Both the Reserve banks of Australia and New Zealand also look poised to leave monetary policy settings unchanged for six months or more. The pushing out of expectation for monetary policy settings should offer some stability to the wider markets. When the time comes, the exiting of the zero interest rate environments will likely see increased volatility. Of material interest is the falling price of oil, especially if it can be sustained. Lower oil prices do offer stimulation to almost every economy as lower prices have an impact similar to a tax cut.

There has been no data of significance released from Australia since last Wednesday’s inflation numbers. We did see quarterly business confidence data late last week which came in unchanged, but as we also get monthly readings the quarterly one is considered old news and has little market impact. The Australian Prudential Regulation Authority (APRA) released a statement saying it has not yet decided on what action it might need to take to deal with risks in the housing market. The APRA oversees banks, credit unions, building societies etc and they could impose limits on certain types of loans or minimum deposit requirements for borrowers. The RBA have raised the issue of imbalances in the housing market a number of times over recent months and some sort of regulatory response is certainly preferable to raising rates. There is very little in the way of data from Australia this week as well. Import prices on Thursday and producer prices on Friday are the only releases of note.

New Zealand
The Reserve Bank of New Zealand (RBNZ) meet this week and their monetary policy announcement is due out on Thursday morning. No change is expected to interest rates, with the market focused the tone of the statement. Expectations for the next round of tightening’s have been pushed back from March 2015 to sometime in fourth quarter of 2015 and the market will be looking for confirmation from the central banks that is in line with their outlook. We saw two releases last week which the RBNZ will pay close attention to. The first was net migration data which surged to new highs. This has implication for the housing market, and in particular Auckland, and suggests no let-up in pressure or demand for the time being. However, this was countered by inflation data that surprised to the downside, coming in unchanged at just 0.3% for the quarter and 1.0% year on year. With no broad based inflation pressure in the economy the RBNZ should be in no hurry to raise rates further. Friday saw the latest trade balance data which came in well below forecasts. The -1350m deficit was driven by a decline in exports, most notably dairy and logs, but also by a surge in imports on the back of some large aircraft purchased in the September quarter. Excluding these aircraft imports were little changed at +0.2%. Other data to watch out for this week includes ANZ business confidence and building consents.

United States
The past week has seen some softer than expected readings from a number of data releases and these have caused the US dollar to lose a little ground. Core inflation, unemployment claims, manufacturing PMI, new home sales, pending home sales and service PMI all missed expectations by a small degree. None of the data was weak enough to raise any real concerns about the US recovery, however it also won’t put any pressure on the Fed to signal rate rises could be around the corner. The central bank meet this week and the FOMC statement should prove interesting. It is widely expected that the asset purchase programme (quantitative easing) will be wound up completely and attention will then turn to the timing of any potential rate hikes. Previous statements have referred to a “considerable time” between the end of QE and rate hikes. A removal of that phrase from this statement would be taken as a signal hikes could come sooner than expected and this will have positive implications for the USD. However, the Fed may leave that wording in the statement on the back of recent global growth concerns and fears of rattling markets that have been volatile lately. Other data to watch out for this week includes durable goods orders, consumer confidence and GDP.

United Kingdom
Last week’s Bank of England (BOE) minutes highlighted concerns about the outlook for growth in Europe and the effect this would have on the UK. They also drew attention to the current lack of inflation pressure and these two factors have been key in forecasters pushing back their expectations for a rate hike from the BOE. Data released toward the end of last week only served to reinforce those expectations with retail sales coming in well below expectations. The -0.3% result was the weakest since January and was driven by a big drop in clothing and footwear. This was largely driven by mild September weather causing shoppers to put off purchases of winter clothes and as such it doesn’t raise any real alarm bells for the UK economy. This data was also countered by last night’s release CBI realized sales data which showed 48% of retailers reported sales volumes increases in October. Only 17% said volumes had fallen and this gives a net balance of +31 which was the same as the previous months result. GDP data released on Friday came in bang on expectation at +0.7% and as such had little market impact. Still to come this week we have a number of speeches from Bank of England officials along with data on net lending to individuals, mortgage approvals, the house price index and consumer confidence.

Late last week we saw some improved readings from manufacturing and service PMI’s out of Europe. While French PMI’s continued to decline, improvements in German and Spanish readings helped to lift the Euro wide figures to 50.7 for manufacturing and 52.4 for services. These were both better than forecast and have been the first real bright spots in European data from some time. Unfortunately those improvements haven’t flowed through into confidence readings. Consumer confidence remained unchanged at -11 and the German IFO business climate index declined in October to 103.2 from 104.7 last. The IFO’s chief economist said there were almost no bright spots in the German economy right now. This was backed up by German’s Chamber of Commerce who slashed GDP forecasts for 2015 to +0.8% from the previous +1.5% forecast in August. Over the weekend we have also had the release of the ECB’s bank stress tests. 25 banks failed the tests and need to raise a total of about EUR 25 billion. It seems 12 of them have already raised the necessary funds and the others are mostly smaller regional institutions which were widely expected to struggle. Overall the results are considered positive for sentiment toward the Eurozone with many forecasters expecting more dramatic shortfalls. Still to come this week we have German CPI, unemployment and retails sales data, along with French consumer spending and Eurozone inflation figures.

There was little to get excited about last week from Japan with only the trade balance of any real note. The familiar story of massive energy imports driving another large negative result, something we have seen since the 2011 Fukushima disaster. We also saw manufacturing PMI come in above expectation, although there was little market impact. There has been some speculation recently that the Bank of Japan (BOJ) could adjust their inflation outlook and this has caused some volatility in the Yen and its crosses. The reason for this speculation has been the recent rapid fall in oil prices which could drag Japanese inflation back below 1%. There is little the BOJ can do about the price of oil which is completely out of their control. Sustained declines however, could have serious implications for the banks 2% inflation target. Still to come this week we have retail sales, industrial production, household spending, inflation and the BOJ monetary policy statement.

Last week’s Bank of Canada (BOC) rate statement proved interesting with the central bank dropping its reference to being ‘neutral’ in the statement. However, this wasn’t signalling a change in policy stance with the bank deciding specific guidance on their stance is no longer valid. This was signalled ahead of time and although the bank may now not state they are ‘neutral’, overall the statement was just that. The BOC see underlying inflation pressure as muted and suggest spare capacity in non-energy exports is still an issue. Last week we also saw retail sales figures that were much weaker than forecast. Looking into the detail however, took much of the sting out of the headline number as the declines were driven by big falls in gasoline sales.

Major Announcements last week:
  • Chinese GDP 7.3% vs 7.2% expected
  • Chinese Industrial Production 8.0% vs 7.5% expected
  • Australian Inflation +.5% vs +.4% expected
  • US Inflation +.1% vs +.2% expected
  • Canadian Retail Sales +.3% vs +.2% expected
  • NZ Inflation +.3% vs +.5% expected
  • Chinese HSBC PMI 50.4 vs 50.2 expected
  • UK Retail Sales +.3% vs +.12% expected
  • US Manufacturing PMI 56.2 vs 57.2 expected
  • UK prelim. GDP +.74% as expected