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FX Update - Markets regain composure, for now at least.

Written by Ian Dobbs on October 20th, 2014.      0 comments

Market Overview:
Last week was a volatile one in financial markets as global growth concerns fed through into some wild moves in stocks and long term interest rates. The action all kicked off mid-week with US and European stock markets down 3-4% at one stage, and US 10 year interest rates moving well below 2.0% for a time. The second half of the week saw some better data out of the US and this helped to improve sentiment, but we can expect further volatility over the coming months as the transition away from ultra-easy monetary draws closer. Concerns about the Chinese economy are part of the reason for the lower global growth outlook and over the weekend the Chinese central bank has announced that it plans to inject liquidity in a number of large banks in an effort to shore up growth and counter the slowdown. The other big concern is Europe where indicators are suggesting the third quarter could again see negative growth. German data has been worryingly weak and as the engine room of European growth at the moment, this is a bad sign. Greece is again starting gain attention with its debt situation far from under control, and the political landscape looking very shaky. Greek 10 year government bonds rose up toward 9% at one stage last week, before recovering slightly.

Data from Australia last week had no major impact on the markets. A slight decline in business confidence was offset by a small improvement in consumer sentiment, while inflation expectations moderated a touch to 3.4% from 3.5% previously. The recent announcement from the Bank of China that they intend to inject further liquidity should help sentiment toward the Australian dollar this week. We also get the latest reading on Chinese GDP tomorrow, along with minutes from the latest Reserve Bank of Australia rate meeting. These will be followed by inflation data on Wednesday and a speech from Governor Steven’s on Thursday.

New Zealand
There were only two releases from New Zealand last week to draw any attention. Both were mildly positive, although their impact was negligible as volatility in the wider financial markets took centre stage. Dairy prices halted their decline, at least for now, and even managed a 1.4% recovery. However, we will need to see a much bigger bounce if Fonterra are going to be able to achieve their forecasted NZ$5.30 per/kg payout for the 2014/15 season. The manufacturing sector in New Zealand seems to be enjoying the recent fall in the NZD. The Business NZ manufacturing index improved from 57.0 to 58.1 which is consistent with healthy levels of activity in the sector. This week we turn our attention to inflation, due out Thursday, and the trade balance, out on Friday. Inflation is expected at 0.5% for the quarter which will be a pick up from the prior reading of 0.3%.  

United States
Last week was a very volatile one for US financial markets. Poor retail sales numbers seemed to compound recent fears about the outlook for global growth and the markets went into a tailspin mid week. Stocks sold off dramatically and long term interest rates collapsed before a run of better than expected US data later in the week underpinned a recovery. Unemployment claims, industrial production and the Philly Fed manufacturing index, all came in better than forecast on Thursday evening. The run of supportive data continued on Friday with consumer sentiment showing a solid improvement. It jumped from 84.3 to 86.4 which is the highest level since 2007. The gains were largely led by improving expectations. Also on Friday we saw housing starts and building permits that were largely in line with expectations. With the markets now regaining composure on the back of somewhat better sentiment, the USD could well see some further strength this week. Data to watch out for over the coming days includes inflation, existing home sales, jobless claims, manufacturing PMI, and new home sales.

United Kingdom
Much weaker than expected UK inflation data really undermined support for the GBP last week, as did the growing concerns about the outlook for the Eurozone. These two factors are the main drivers behind the market starting push back their expectations for the first rate hike from the UK. The third quarter of 2015 is now looking like a better bet and this view was backed up on Friday by the Bank of England’s chief economist Andrew Haldane when he said recent data favours a later interest rate hike. The other key data last week was that of employment. Although the claimant count (unemployment claims) fell by less than forecast, the unemployment rate still dropped to 6.0% from 6.1% previously. In an indication of just how far the UK economy has come, that rate is now a full 1% lower than the earlier forward guidance threshold (for considering rate hikes) which, a year ago, the bank did not expect to achieve until 2016. We get the BOE minutes this week which will help to give a better insight into their thinking, along with the key releases of retail sales and GDP.

There was little to get excited about from Europe last week. A collapse in German economic sentiment was reinforced by cuts to growth forecasts by the German Economic Ministry. Industrial production was weaker than expected while the final reading of inflation affirmed the extremely low rate of 0.3% year on year. Over the weekend the ECB’s Nowotny said they may have to revise down Eurozone GDP forecasts for 2015, while Constancio said any additional hits to inflation expectations could be harmful. The ECB’s negative deposit rate is filtering through to institutions with several global banks now charging large clients to deposit their money in Euros. This week we have manufacturing and service sector PMI’s to draw focus along with the EU economic summit and the German Consumer Climate index.

The only data of note from Japan last week were revised industrial production numbers. This came in below expectation at -1.8% and over the weekend BOJ Governor Kuroda acknowledged as much saying production has shown some weakness, although private consumption has remained resilient as a trend. He still believes BOJ easing’s are having intended effects, and that the 2% inflation target can be reached around 2015. The Japanese stock market had some wild swings last week, but it looks like some support could be just around the corner. Rumors are that the GPIF (Government Pension Investment Fund) will have its weighting for domestic stocks increased from around 12% to around 25%. This could spur buying of eight trillion yen in Japanese stocks. This trade balance, due out on Wednesday,  is the only data of note this week.

There were two releases of note from Canada last week. The first was manufacturing sales that came in softer than expected at -3.3%. It seems a large chunk of that decline was driven by a decline in autos and parts which were down 11.6%. On Friday we got the latest reading on inflation. The core reading for September was a touch stronger than expected at 0.2%, but year on year is was bang on expectation at 2.1%. The Bank of Canada (BOC) targets a rate of 2.0%. With inflation largely in line with their target, it should have little impact on their rate meeting this week. This is particularly true considering the lower global growth outlook and declining commodity prices. Ahead of that meeting we get wholesale sales and retail sales data to digest.

Major Announcements last week:
  • UK Inflation 1.2% vs 1.4% expected
  • ZEW German Econ. Sentiment -3.6vs +.2 expected
  • China Inflation 1.6% sv 1.7% expected
  • UK Unemployment rate 6.0% vs 6.1% expected
  • US Retail Sales -.2% vs +.2% expected
  • NZ Fonterra GDT Auction +1.4% vs -7.3% previous
  • Canadian Manufacturing Sales -3.3% vs -1.6% expected
  • US Industrial Production 1.0% vs .4% expected
  • Canadian Inflation +.2% vs +.1% expected
  • Prelim. UoM Consumer Sentiment 86.4 vs 84.3 expected
  • PBOC inject liquidity into the 20 largest Chinese banks