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FX Update - Lower levels of geopolitical tension

Written by Ian Dobbs on August 12th, 2014.      0 comments

Market Overview:
The past week has seen volatility diminish across most currency pairs in the FX market. Geopolitical tensions around the Russia and the Ukraine seem to have reduced with Russia pulling back troops that were amassing near the boards. But just as those concerns ease the US again looks to be getting heavily involved in Iraq. The Australasian currencies remain range bound not far off recent lows and the risks are still tilted toward further losses at this stage. Growth prospects in Europe show little sign of life while the outlook for both the US and UK economies remain very positive. That been said, neither the Fed nor the Bank of England have given any indication that rate hike expectations could be brought forward. Generally subdued inflation is providing the central banks the opportunity to keep rates lower for longer, but they do both risk falling ‘behind the curve’ at some stage.
The big data from Australia last week was employment change that disappointed coming in at -0.3k. Not only was this well below the expectation of +13.5k, but the unemployment rate jumped to 6.4% from 6.0% previously. In Friday’s RBA monetary policy statement that is released quarterly the central bank suggested the jump in unemployment could be partly due to survey changes and sample rotation. Only time will tell if they are correct, however they added they expect unemployment to remain elevated for some time, not declining materially until 2016. They believe slack in the labour market and improved productivity are likely to keep domestic price pressures contained. As such they have trimmed their forecasts for underlying inflation by a quarter of a percent. They have also done the same thing to GDP forecasts for the end of 2014, which now stand at 2.5% from 2.75% previously. Later today we get business confidence data and the house price index. These will be followed over the coming day by consumer sentiment, the wage price index, and inflation expectations.

New Zealand
The negative impact of continued falls in dairy prices is starting to see economists revise their RBNZ cash rate expectations. One local bank now sees the RBNZ on hold through until March next year and I would not be surprised to see that expectation become more widespread. Last week’s somewhat disappointing employment data won’t have helped the situation. Neither will have yesterday’s total card spending data that came in at -0.1% for July, down from the prior result of +0.5%. House price appreciation looks to be moderating and this is likely the start of a broader trend that will take some of the urgency away from rushing into the next round of tightening’s. Later this week we get the Business NZ manufacturing index along with retail sales data.

United States
Data from the United States last week was largely positive with a number of releases coming in better than forecast. These included non-manufacturing PMI, the trade balance, unemployment claims, and factory orders. On Friday evening we also saw figures for non-farm productivity beat expectation, although the previous number was revised down which took some of the shine off the headline. Labour cost data was the opposite with a worse than expected headline reading being countered by a big upward revision to the prior result. So a mixed bag of results to end the week that haven’t had any material impact on the economic outlooks going forward. Last night we heard from the new Fed Vice Chairman Stanley Fisher and he certainly sounded as if he is on the ‘dovish’ side of the fence. He focused on the low participation rate in the labour market saying “many of those who dropped out of the labour force may be discouraged workers. Further strengthening of the economy will likely pull some of these workers back into the labour market.” This would help to constrain wages and inflation and be viewed as a reason to not hike rates early. Still to come this week are the key releases of retail sales, producer prices and consumer sentiment.

United Kingdom
After starting last week with good construction and service sector PMI numbers, UK data began undershooting expectations with disappointing results for manufacturing production, industrial production and the trade balance. This data weighed on the GBP which has seen a decent pullback from the highs it reached against the USD only five weeks ago. The Bank of England (BOE) monetary policy meeting went by with little impact and we now await the minutes on the 20th Aug to get further insight. One thing the bank seems to be struggling with is the contrast between wage and employment data. Wage growth is low, below inflation in fact, and has been that way for much of the past five years. This would suggest there is slack in the labour market and this excess capacity should keep inflation pressures in check. However, unemployment recently fell to 6.5% and the total number of people in employment is at a record high of 30.6 million. The employment figures suggests there isn’t that much spare capacity in the economy and delaying rate hikes could risk higher inflation down the road. Trying to measure ‘spare capacity’ in the economy is a very difficult task and it is this debate that will be key within the BOE and for the eventual timing of a rate hike. That makes this Wednesday’s employment data all the more interesting. The market is expecting unemployment claims to fall by -29.7k and the unemployment rate to drop again to 6.4%. Also on Wednesday have the BOE inflation report, then on Friday we get the second estimate of GDP.

Data out of Europe last week was by and large a little disappointing. There was the odd bright spot such as French Industrial production and service sector PMI, but none of this could lend any support to the EUR which continues its slow grind lower against the USD. ECB President Draghi also took the opportunity to try and talk it down a touch after the central banks rate meeting on Thursday. He suggested the bank was pushing ahead with preparations to buy asset backed securities (ABS), although no final decision has been made yet. The OECD was on the wires last night suggesting that global growth is unlikely to pick up this year and that all indicators point to a slowdown in Germany. Germany has been at the core of growth in the Eurozone and a slowdown there would only heap further pressure on the ECB and the Euro. Tonight we get German economic sentiment data and later in the week we get GDP numbers, the ECB monthly bulletin and the final reading of inflation.

The end of last week saw the Bank of Japan (BOJ) hold their latest rate meeting. There was some expectation that the recent run of poor data could see them downgrade the economic outlook and that this would be the first step toward potential further easing’s. In the end the BOJ kept its assessment unchanged and said the economy continues to recover moderately as a trend. The did downgrade their assessment on exports and industrial production, but not enough to affect the overall outlook. The bank believes household spending remains resilient and the negative impact of the sales tax hike will gradually begin to wane. The vote to keep policy steady was unanimous. Over the weekend Governor Kuroda has been on the wires saying there is no reason for Yen strength and the recent correction of excessive strength in the currency has been positive for the economy. He added price stability is still the main goal, although the BOJ doesn’t only look at CPI (consumer price index) for policy. Expectations for further easing’s this year from the BOJ have now been reduced, with little in the statement to suggest they have lost confidence in their ability to achieve the 2% price target. They, and the market in general, will want to see and improvement in data over the coming months. The most recent estimates of second quarter GDP suggest it could come in as low as -7.1%. It is due to hit the wires on Wednesday followed by core machinery orders on Thursday.

Canada released some very positive data last week with much better than expected results from the trade balance and building permits. Unfortunately the positive impact from those releases was countered by a very poor employment report on Friday evening. Employment change came in at just +0.2k against expectations for +25.4k. To make matters worse the swing from full time to part time work was massive with -59.7k full time jobs replaces with +60k part time ones. The unemployment rate did fall from 7.1% to 7.0% but this was only due to a fall in the participation rate and therefore not very positive at all. The Canadian dollar obviously came under some pressure in the wake of these numbers. Last night we did get a slightly better reading from housing starts that came in at +200k vs expectations of +194k and this helped to stabilize the CAD to a degree. The focus now turns to the house price index and manufacturing sales out at the end of the week.

Major Announcements last week:
  • Australian Retail Sales +.6% vs +.3% expected
  • UK Construction PMI 62.4 vs 62.1 expected
  • RBA leaves monetary policy unchanged
  • UK Services PMI 59.1 vs 58.1 expected
  • European Retail Sales +.4% as expected
  • US Non-manufacturing PMI 58.7 vs 56.6 expected
  • NZ Unemployment rate 5.6% vs 5.8% expected
  • UK Manufacturing PMI .3% vs .7% expected
  • Australian Unemployment rate 6.4% vs 6.0% expected
  • BOE leave monetary policy unchanged
  • BOJ leave monetary policy unchanged
  • ECB leave monetary policy unchanged
  • Canadian Unemployment rate 7.0% as expected