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FX Update - Mixed messages and data keep the markets guessing

Written by Ian Dobbs on August 19th, 2014.      0 comments

Market Overview
A lack of direction in the wider market has eventuated as geo-political tensions ebb and flow and the global economic data remains patchy. Adding to the clouded picture were mixed messages from Bank of England Governor Carney have added some volatility to the UK Pound over the past week. Meanwhile from Canada, a re-release of key employment data did the same thing to the CAD after the initial release was found to be completely wrong. The Euro remains under pressure with little sign of life coming from the European economy, and gains in the USD have stalled thanks in part to further declines in long term interest rates. Geopolitical tensions have kept the market on its toes, although there has been little evidence of an escalation in Ukrainian situation to date. This weekend’s Jackson Hole Symposium should prove interesting with speeches from Janet Yellen and Mario Draghi. Ahead of this we have the FOMC and BOE minutes to digest.

Last week was a relatively positive one for Australia with improvements in business confidence and consumer sentiment along with stronger than expected house price gains. Wage growth however remains subdued and this is a trend seen in many parts of the developed world at the moment. In the last few hours we have seen the minutes from the last RBA meeting and these have held little in the way of surprises for the market. The bank believes a period of stability in rates is the most prudent course of action and that the AUD remains high by historical standards. The see signs of improvement in non-mining investment and labour demand although it will take some time before unemployment begins to fall. Governor Stevens is scheduled to speak tomorrow and this provides the only other highlight of the week.

New Zealand
Last week was a reasonably quiet one for economic data out of New Zealand. We did get a better than expected result from retail sales which came in at +1.2% and this gave the currency a small boost. Yesterday we saw the Performance Services Index which jumped to 58.4 from 54.7 prior, although this data isn’t a big market mover. Earlier this morning we have also seen Producer Prices data and this was a surprise coming in much weaker than forecast. PPI input printed at -1.0% against expectations for +0.7% and the output figure was -0.5% vs expectations for +0.8%. These would indicate a lack of pipeline pricing pressures in the economy, although the declines were mainly driven by lower dairy and energy prices. With data like this we could easily see the market in general push out the date the next RBNZ hike to March next year. However, the key release of the week could well come tonight with the latest Global Dairy Trade auction from Fonterra. 11 of the past 12 auctions have resulted in declines, with the last couple down more than 8% each. At some point prices should stabilize but it’s tough to say just when that will happen. In USD terms prices have already fallen 41.4% from February’s peak. This has been a key factor in the NZD pulling back from recent highs.

United States
Mixed data from the US last week has failed to influence current market sentiment which is that the Fed will be in no hurry to raise rates once they end quantitative easing purchases. Disappointing retail sales and consumer sentiment data was offset to a degree by a better than forecast result from industrial production and some upward revisions to Q3 GDP estimates. This week could prove very interesting, with a couple of key events scheduled. The first is the release of the minutes from the last Fed meeting. These hit the wires on Thursday morning, and they will be followed by the Jackson Hole Symposium at the weekend. In the past, that symposium has been used to signal policy changes by the Fed, so plenty of attention will be paid to what Fed Chair Janet Yellen has to say at the event. If we get any indication from either of those two events that the Fed are becoming a little more ‘hawkish’ the USD should find good support. Other releases this week include inflation, housing starts and existing home sales.

United Kingdom
Bank of England (BOE) Governor Carney has been sending out some very mixed signals recently and as such the UK Pounds has been pushed around a bit. Last week the BOE inflation report paid particular attention to the lack of wage growth and its implications for the degree of slack in the economy. This saw the GBP come under serious pressure as many interpreted that to mean rate hikes won’t be coming sooner than expected i.e. late in the first quarter of 2015. Over the weekend however, Governor Carney was quoted in a Sunday times article saying he does not have to wait for real wages to turn positive before raising rates. He only needs to be confident that wages are going to grow sustainably, and that he would be comfortable with being the first of the big four central banks to raise rates. This has helped the GBP recover some of its losses, but it has also left the market a little confused. The UK employment market remains strong and last week’s reading of GDP showed the highest year on year rate since 2007 coming in at +3.2%. Although the latest monthly house price figures have shown a dip, it’s largely as a result of the time of year and since July 2013 prices are still up 5.3%. There is little reason for interest rates to still be at the emergency lows of 0.5% although the BOE don’t seem in any hurry to raise them. Tonight we get inflation data which is expected to come in at +1.8%, this will be followed by the BOE minutes on Wednesday and retail sales on Thursday. These releases provide plenty of opportunity for further volatility in the days ahead.

Data from Europe continues to disappoint and of particular concern will be the recent softness in figures from Germany which to date has been the core of Eurozone growth. Even the Bundesbank have said the outlook for Germany in the second half of 2014 has dampened. GDP and inflation forecasts are being revised lower by the market and this is pressuring the EUR which should remain on the back foot over the coming weeks. The focus this week will be on manufacturing and service sector PMI numbers set for release on Thursday. French manufacturing is expected to remain in contraction territory, while the German manufacturing index is forecast to moderate to 51.8 from 52.4 previously. At the end of the week we get a speech from ECB president Draghi at the Jackson Hole Symposium in the US. Although the ECB are expected to remain on hold until at least December, the market will be keen to see if there is any hint of further potential easing’s from the central bank. It is likely Draghi will also take the chance to talk the EUR down further.

April’s sales tax increase was always going to hurt Japanese growth in the second quarter, the only question was by how much. Last week we got the answer with a quarterly GDP figure of -1.7%. On an annual basis the fall was 6.8% although this was a little better than the forecast for -7.1%. Although these figures seem frightening, they really only just reverse the pre sales tax implementation boost that was seen. What will be of more importance is how quickly the economy recovers. Data over the coming weeks and months will therefore be critical in judging the success or failure of President Abe’s measure to boost the economy, known as ‘Abenomics.’ This week the only release of note is the trade balance on Wednesday.

About ten days ago, on Friday August 8th, Canada released their monthly employment data and it was a shocker coming in at just +0.2k against expectations for +25.4k. The CAD came under all sorts of pressure as a result. It seems however that ‘human error’ in the calculation of that data caused an incorrect figure to be released so last Friday, they re-released the data with the corrected result. Employment for July was actually +41.7k with the unemployment rate dropping to 7.0% from 7.1% previously. As you would expect the CAD found support from the ‘correction’ and Statistics Canada swear the error was an isolated incident. To add to the positivity at the end of last week we also saw manufacturing sales data that printed at +0.6% against expectations of +0.4%. That’s the fifth gain in the past six months. This week the focus turns to wholesale sales, inflation and retails sales figures set for release on Thursday and Friday.

Major Announcements last week:
  • ZEW European Economic Sentiment 23.7 vs 41.3 expected
  • Japanese Prelim. GDP -1.7% as expected
  • UK Unemployment rate 6.4% as expected
  • US Retail Sales 0.0% vs +.2% expected
  • NZ Retail Sales +1.2% vs 1.0% expected
  • European Inflation +.4% as expected
  • European GDP Q2 -.2% vs -.1% expected
  • Canadian Employment numbers revised higher after error
  • Canadian Manufacturing +.6% vs +.5% expected
  • US UoM Consumer Sentiment 79.2 vs 82.7 expected