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FX Update - Market now sees the Fed on hold

Written by Ian Dobbs on October 22nd, 2013.      0 comments

2:00pm (NZT)
Market Overview:
The pressure on the US dollar has been the dominant theme in the foreign exchange markets over the last week. The temporary resolution of the funding pressure in the US has not seen the markets consternation appeased. With the uncertainty of a definitive resolution remaining, the implications are far reaching. Primarily, the expectation of tapering of monetary stimulation from the Federal Reserve has been duly pared back. This has undermined US dollar demand, and will potentially continue to do so in the coming months. Implications for the Australasian currencies have been obvious. The easily made initial moves in the markets have been made. We can expect that momentum will likely wane from the current levels, and a new set of ranges be established across markets. Expect the volatility to remain in place for the remainder of 2014, albeit within recently establishing ranges for the most part.

Data out of China late on Friday afternoon was supportive for the Australian economy, and the AUD. Chinese GDP printed at a very respectable 7.8%, which is the fastest growth so far this year. Stronger domestic demand was the main driver, although forecasters are cautious about the future outlook for growth. An unexpected decrease in exports in September and declining growth in factory output suggest this last quarter's growth might be as good as it gets for the foreseeable future. On Thursday we get a reading of the Chinese manufacturing sector that will also be closely watched. Ahead of that on Wednesday we get Australian inflation data which should show pricing pressures in the economy are very benign.

New Zealand
There has been very little in the way or economic data from New Zealand since last week’s stronger than expected inflation data. Yesterday we did get net migration for September which showed the biggest gain in more than 10 years. This is partially the result of fewer Kiwis heading over to Australia and that’s a trend that could well continue over the coming months. This increase in net migration will only add more pressure to the housing market, as many will look to settle in Auckland where the current housing shortage has already caused dramatic price increases. The only other data this week is the trade balance released on Thursday.

United States
The United States dollar has remained on the back foot against most other currencies since last weeks (temporary) resolution to the government shutdown. This trend is likely to continue in the near term as any expectation of the Fed tapering asset purchases has now been pushed out to March 2014 at the earliest. With the government workers now back from their paid two week holiday, it’s time to play catch up with all the economic data that didn’t get published. The fun kicks off tonight with the all-important employment report and markets are expecting a result of around +179k. It seems the risks around the upcoming data are skewed to the downside. That is to say poor data will likely get a bigger reaction than stronger results in the current environment. Later in the week we get manufacturing data, new home sales, and durable goods orders to digest.

Last week’s data was generally supportive with the highlight being a decent improvement in German economic sentiment. This week we get readings on the manufacturing and service sectors from both France and Germany, along with German business climate and Eurozone consumer confidence. There have been plenty of comments from ECB officials recently, but nothing game changing. One official last night was on the wire saying he sees the European recession as being over in 2014. He says Spain and Portugal are on a good path, but problems in Greece will take longer to resolve. He’s right on that count, Greece has a funding gap in 2014 and 2015 of nearly 11 bln Euros that needs to be filled. After receiving 200 bln of aid so far, there is little appetite to write more cheques from the rest of Europe. But on the flip side, everyone is now too heavily invested to do anything else but help out. Greece is hopeful a deal will be reached by the end of the year.  

United Kingdom
Last week mostly saw more encouraging data from the UK. Unemployment claim had a big fall and retail sales come in better than expected. This week will be another important one with the Bank of England (BOE) minutes and third quarter GDP set for release. The economy is performing nicely and this should be confirmed with a solid GDP figure. There are however some real headwinds that could stop the economy kicking up into the next gear. The most important of which is a lack of real growth in wages. This is particularly true with current inflation running at 2.7%, and the outlook over the near term is for that to increase. Energy bills are increasing again in the UK, and not by a small amount. The three major suppliers are increasing prices by 10%, 8.2%, and 9.2%. This will squeeze consumers even further. On a brighter note, the UK banks are now in as good a financial position as they have been for the last five years. They are just not lending like they are. Funding for businesses (particularly small and medium sized ones) to expand or innovate is very constrained. This is what the BOE tried to tackle with their FLS (finding for lending scheme), but it has had little real impact to date. The UK recovery is certainly outperforming Europe, which will act as a drag for a long time to come. But if they can address the lack of real wage growth and flow of credit to business, the economy could easily find another gear or two.

Last week was a very quiet one for data out of Japan. This week we have only two releases of note, the first of which was the trade balance released yesterday. That showed the trade deficit narrowed but by substantially less than expected. This also marked the 15th consecutive month of deficit, the longest run in 30 years. The deficit is in large part a result of massive energy imports which are costing more on the back of a very weak Yen. The Yen is weak as a result of the policies put in place by the government and Bank of Japan (BOJ) to reflate the economy. Those policies seem to be working with the BOJ recently raising economic assessments in all regions. For the first time since 2005 the BOJ has used the word ‘recovery’ to describe conditions in all nine regions. The bank continues to reaffirm that policy will remain ultra-easy at least until inflation reaches 2%. The markets are also awaiting details for the ‘third arrow’ of President Abe’s economic policies which will be labour reform. This could prove to be the toughest to implement although it’s long overdue. At the end of this week we get the latest reading of inflation which will be closely watched.

At the very end of last week we got the latest readings on Canadian inflation. The headline was up a touch to 1.1% year on year, but the more important core inflation number was unchanged at 1.3%. The big event for this week will be the Bank of Canada (BOC) interest rate decision released very early on Thursday morning. Although rates will likely remain unchanged, the BOC is expected to revise down growth forecasts which could weigh on the currency. Recent comments from Governor Poloz that he is disappointed the economy is operating below the level the bank expected six months ago, are a signal we can expect a slightly softer tone from the statement. Ahead of that release we do get retail sales data to digest this evening.

Major Announcements last week:
  • Chinese Inflation 3.1% vs 2.8% expected
  • UK Inflation 2.7% vs 2.6% expected
  • German Economic Sentiment 52.8 vs 49.2 expected
  • NZ Inflation .9% vs .8% expected
  • UK Unemployment claimant count -41.7k vs -24.3k expected
  • Canadian Manufacturing -.2% vs +.3% expected
  • Eurozone Inflation 1.1% as expected
  • UK Retail Sales +.6% vs +.5% expected
  • US Philadelphia FED Manufacturing 19.8 vs 15.4 expected
  • Chinese GDP 7.8% as expected