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FX Update - Markets consolidate as risks subside

Written by Ian Dobbs on July 23rd, 2013.      0 comments

2:30pm (NZT)
Market Overview:
It’s been a quiet few days for the markets in general. The USD is slightly weaker across the board and commodities have made some gains, with gold in particular breaking back above $1,300.00. Global stocks are nearing five year highs and this comes in the face of some patchy earnings reports. The majority of the market still expects the Fed to scale back asset purchases in September, and this must surely weigh on stocks at some point. Over the weekend Japan's prime minister Abe has strengthened his power base after the upper house elections. This will see his growth policies unchallenged going forward and comes as the G20 pledged over the weekend to put growth before austerity. Also over the weekend China has announced it’s taken steps to liberalise lending rates that could help to increase funding to businesses. Portugal's political risk has subsided and this has seen peripheral Euro-zone bond yields fall. As a result of this combination of factors, there is a small amount of positivity around risk assets, of which the NZD and AUD are included. This has seen gains for both currencies in the early part of the week. The question is how far can this positive sentiment push them within the context of their broader downtrends?

Although there hasn’t been any hard economic data out of Australia in the last few days, there have been a couple of interesting articles published. The Australian Financial Review has carried a story that said an August interest rate cut is on the cards. This will be possible, according to their panel of experts, because of very soft inflation numbers that are due to be released tomorrow. Another article over the weekend has stated that the Australian Treasury is going to revise down growth forecasts and revise up the budget deficit. The impact on the currency has limited. The AUD has actually gained ground thanks in part to a slightly weaker USD and stronger commodity prices, but it also got a boost from surprise action by the Peoples Bank of China (PBOC). They have announced measures to further liberalize lending rates which it is hoped will increase competition amongst banks and increase lending to businesses. This has helped to underpin the AUD in what has otherwise been a very quiet start to the week.

New Zealand
There has been very little in the way of economic news out of New Zealand over the last few days. The market will be looking forward to the RBNZ monetary policy decision on Thursday to get a clearer picture on their thinking. It will also be interesting to see if we get any further details on the loan to value ratios (LVR) they are bringing in for home lending. I suspect they can’t be overly happy that just when they are looking to try and take the heat out of the property market, the government look to counter that by fiddling with the Kiwisaver scheme rules for first home buyers. This seems pretty far from a unified response to one of the biggest threats facing the NZ economy. There will no doubt be plenty of debate around this over the course of the week. Before the RBNZ statement on Thursday we have the trade balance figures to digest on Wednesday.

United States
The USD is a touch weaker across the board in the early part of this week. It has not been helped by a weaker than expected reading on existing home sales. The second half of the week will provide a fair bit more for the market to digest. Key readings on the manufacturing sector, new home sales and durable goods orders all scheduled for release. As the market has now had time to digest all the comments, mixed signals, and testimony from Fed officials over the past few weeks, Reuters has produced an interesting poll on tapering expectation. It shows the vast majority of economists still see September as the likely starting point for tapering of the quantitative easing. A few see is starting somewhere between Oct - Dec, while only 2 of the 56 polled see the Fed waiting until 2014. The Fed has been at pains to stress it is all data dependant, but unless we see a marked deterioration in the economic figures, it seems likely that asset purchases will be wound back in September.

It’s been very quiet on the news and data front in Europe over the last few days.  As we head into European holiday period, we can expect more of the same over the coming weeks. The only event of note has been and easing in the political crises in Portugal. The Portuguese president has backed the present government and ruled out early elections. This has seen borrowing costs for the country reduce significantly in the last couple of days. What isn’t so great is the aggregate level of government debt in the Euro-zone. Eurostat have released figures that show overall government debt has risen from 90.6% of GDP at the end of last year, to 92.2% at the end of the first quarter this year. When you take into account that Germany actually reduced their debt, you start to see the precarious position some of these other countries are in. The ECB can try to keep rates low for as long as possible, but they can do nothing about reducing government debt. Big reforms are still needed in Europe and it’s going to be long time before risks from that part of the world can be discounted.

United Kingdom
It’s been a very quiet start to the week on the data front in most counties, and the UK is no exception. In fact this whole week is light on data from the UK, with the only major release being GDP out on Thursday evening. The Pound Sterling has remained well supported against most other currencies since last week's surprise 9-0 vote against further quantitative easing by the bank of England. The mood in the UK does seem to be improving in line with the data. An interesting article in the Telegraph yesterday states the economy is seeing the ‘green shoots’ of recovery.

Japan had upper house elections over the weekend and Abe’s ruling LDP party have taken a big win. They now have a comfortable majority in both houses of the Japanese parliament. This certainly gives the party the green light to continue with the growth policies that have become labelled as ‘Abenomics’, and makes further reform a much smoother process. On Monday we also had comments from a Bank of Japan (BOJ) official saying that the bank is finally seeing a self-sustaining recovery in Japan, although it does not rule out additional policy steps. Later this week we have the trade balance and inflation data to digest.

Canada had inflation data released as the very end of last week. It came in on expectation at 1.3% (annually), but this is well below the Bank of Canada’s medium term target of 2%. This reinforces the softer than expected tone we got from the BOC as its policy meeting last week. The markets were caught a little by surprise after that meeting, and have pushed out the chance of any rate hike in the next 12 months. This inflation data has cemented that move. The initial weakness in the Canadian dollar after that announcement was short lived as the CAD has benefited from rising oil prices over the last few sessions.  The next key piece of data comes in the form of retail sales out early Wednesday morning.