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FX Update - Markets wind down for the year and liquidity dries up

Written by Ian Dobbs on December 16th, 2014.      0 comments

4:00pm(NZT)
All the team at Direct FX would like to thank you for your continued support throughout 2014. We wish you all a safe and cheerful holiday period and a prosperous 2015.
 
Our Weekly commentary will be taking a break now until the week of 19 January, but we are operational for dealing throughout the holiday period with the exception of the statutory holidays in Australia and New Zealand.
 

Market Overview:
As the markets wind down for 2014, expect the general levels of liquidity to lower in the coming week. These lower levels of liquidity leave the price action vulnerable to sharper than usual moves at times. From an Australasian perspective, following today’s uneventful release of the minutes from the RBA’s previous meeting, the final pieces of NZ data become the focus. Tomorrow’s Fonterra Global Dairy Trade (GDT) auction results will be closely followed. Any further pressure on prices would like see the NZ come under renewed pressure, albeit RBNZ seem calm about the impacts on the wider economy. After the GDT results the attention transfers to the release of the third quarter NZ growth numbers that will be on office on Thursday morning.
 

Australia
The Australian dollar has continued to struggle this past week despite what looked like some good employment data last Thursday. Employment change came in at +42.7k against expectations of just +15.2k. However, most of that gain was in part-time work and the unemployment rate actually edged up to 6.3% from 6.2%. The RBA’s Edwards said employment won’t grow strongly in 2015 and interest rates will remain low. The Australian Treasury released their Mid-Year Economic and Fiscal Outlook yesterday and they see unemployment now rising to 6.5% by the second quarter which is up from May’s estimate of 6.25%. They have left their GDP forecasts largely unchanged, but have significantly increased their budget deficit expectations for the next few years. The RBA released their minutes earlier this afternoon and as there was little new, the impact was non-existent. The rest of the week looks pretty quiet with only leading indicators tomorrow and the RBA’s quarterly bulletin on Thursday.
 

New Zealand
There has been very little in the way of significant data since Last Thursday’s surprisingly ‘hawkish’ RBNZ monetary policy statement (MPS). Governor Wheeler spoke to parliament's finance committee in the wake of the MPS and he said he was concerned about house price inflation in Auckland. He also said they have no plans for further macro prudential instruments. This is significant as it only reinforces the expectation that more rate hike are on the way at some point in the future. Wheeler did however, say that the RBNZ are on hold for a long time and the need for rate tightening has been pushed out. Still to come this week we have another dairy auction from Fonterra to digest and key GDP data is also set for release on Thursday.
 

United States
We have seen some mixed results from the US this past week, although taken as a whole, the results have been very supportive of the economy going forward. Producer prices and the Empire State Manufacturing Index were both weaker than expected but these have been outweighed by other more positive results. Retail sales were significantly stronger than forecast and the prior numbers were also revised up. The University of Michigan Consumer Confidence Index was very strong, printing at the highest level since 2007. Last night we saw industrial production and capacity utilization data and both these result also came in on the strong side. This week should prove to be very interesting with inflation data and the FOMC rate statement set for release. Will the Fed signal rate hikes are on the horizon, or will the low level of inflation see then sit on their hands for much of next year? Long-time bond investor Bill Gross believes the Fed will wait until inflation hits 2% before hiking, and that won’t happen until at least very late in 2015. The Fed need to start normalizing rates before then. The hunt for yield in this ‘zero rate’ environment has caused a massive mispricing of risk across various asset classes and the Fed could easily be sowing the seeds of the next crisis by maintaining this policy for too long. The shale oil industry in the US is just one example. Low interest rates allowed them to finance a massive amount of investments with estimates suggesting they have issued $550 bln in bonds. With oil now below $60 a barrel a huge portion of that industry is now uneconomical. Some producers may ride through this, but others, particularly those highly leveraged, won’t and large scale bond defaults are a very real possibility.
 

United Kingdom
The past week has seen some mixed results from largely second tier data which has failed to support the UK Pound to any degree. Construction output printed much weaker than expected, but offsetting this were large scale positive revisions to previous results. The CBI industrial trends survey out last night was a bit better than forecast printing at 5 vs 3 expected. The main focus however, is on a number of key releases still to come this week. We get the results of the bank stress tests tonight along with inflation data. On Wednesday we have employment numbers and on Thursday we get retail sales. These results will set the tone for the GBP heading into the thin liquidity of the Christmas period.
 

Europe
Late last week the ECB held its Targeted LTRO (long-term refinancing operation) and the uptake from banks was at the lower end of expectation. The central bank lent EUR 129.84 bln worth of loans, which is far less than the EUR 270 bln of old loans due to be repaid. This has the effect of shrinking the ECB’s balance sheet which is the opposite of what the central bank wants. The ECB is trying to expand their balance sheet by EUR 1 tn to try and fight deflation but it seems the banking system doesn’t need any more ultra-cheap money. The only way forward for the ECB now is full-blown sovereign bond purchases known as ‘quantitative easing’ (QE). It seems increasingly likely a decision on this will be taken in the first quarter of next year. It really is just a matter of overcoming German opposition to launching a QE programme. But with growth forecasts for Germany getting revised down by most forecasters, and Euro wide deflation a very real threat it seems the Germans will have to relent. For the French it can’t come soon enough. Recent data showed that core inflation in France turned negative for the first time since modern data began. Adding insult to injury, ratings agency Fitch have just downgraded France AA from AA+ previously, sighting the weak economic outlook and high ratio of public debt. Attention this week now turns to manufacturing and service sector PMI data, along with German ZEW economic sentiment and IFO business climate surveys.
 

Japan
Japan held elections over the weekend and it was a resounding win for PM Abe with his coalition gaining a near two thirds majority. Abe will now push ahead with his plan to fight deflation, while also trying to deal with the government's perilous fiscal position. Ratings agency Fitch said they will probably downgrade Japan if the 2015 budget doesn’t offset the recently delayed sales tax hike. Yesterday’s quarterly Tankan report was a very mixed bag. The manufacturing index declined while the non-manufacturing index increased. There was a notable split between large and small firms however, with the smaller firms much more pessimistic. The focus now turns to Friday’s BOJ monetary policy statement.
 

Canada
The Canadian new house price index came in right on expectation at +0.1% month on month. Governor Poloz last week suggested house prices are 10%-30% over valued, but this week the finance minister Joe Oliver says he doesn’t see a housing bubble in Canada and there is no need to take dramatic steps to cool it down. Capacity utilization data out on Friday came in at 83.4% versus 83.0% expected, suggesting there may not be as much slack in the economy as thought. There is also potential for some M&A activity to support the CAD in the near future with the Spanish company Repsol looking at a $8 billion takeover bid for Canada’s Talisman Energy. We still have a number of key releases to come this week with manufacturing sales, wholesale sales, inflation and retails sales all set for release.
 

Major Announcements last week:
  • Chinese Trade Balance 54.5 B USD vs 44.3B USD expected
  • NAB Australian Business Confidence Index 1 vs 5 previous
  • UK Manufacturing Production -.7% vs +.2% expected
  • Chinese Inflation 1.4% vs 1.6% expected
  • RBNZ leave monetary policy unchanged
  • Australian Unemployment rate 6.3% as expected
  • US Retail Sales +.5% vs +.1% expected
  • Chinese Industrial production 7.2% vs 7.6% expected
  • US UoM Consumer Sentiment 93.8 vs 89.6 expected
 

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