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FX Update - More central bank easing

Written by Ian Dobbs on May 7th, 2013.      0 comments

5:15 PM (NZT)
Market Overview:

The theme of central bank stimulus providing the lead for the wider markets continued last week. The equity markets saw continued demand boost them to fresh record highs. Joining the apparent bonza, are well supported debt markets across the globe. Notably in Europe the peripheral members states are issuing debt with increasing ease. Global economic data remains patchy, with ongoing softness becoming evident in China and the closely related Australian economy. The pick up in UK economic activity has surprised many, and GBP has reacted accordingly. The US employment numbers continue to improve, with the unemployment rate pushing lower to 7.5%.Today’s RBA decision to take the opportunity to ease their cash rate 25pts to 2.75% is another acknowledgement of the global economies underperformance in the first quarter 2013. Lower global inflation levels enabling the ongoing support a wide range of central banks.

Australia started the week on a disappointing note with more soft data having an impact on the currency. Retails sale came in well below expectation, job ads data was soft, and figures on the Chinese service sector showed the slowest growth in 20 months. Today the RBA has also decided to cut rates by 0.25% to 2.75% in what was a line ball call by most in the market. With inflation at or below trend, and most other indicators softening, the RBA had plenty room to move and they have done just that. Thursday sees the release of important employment data. Adding to the mix will be further data releases from China this week. Continued pressure on the Chinese economic data , will increase the vulnerability of the Australian dollar.

New Zealand
Last week offered little in the way of fresh insight into the NZ economy, with most of the focus was on offshore events. Better than expected US employment numbers did nothing to hurt demand for the NZD, which actually made ground against the US Dollar on Friday. This week’s economic calendar offers a bit more of interest than last week. The highlight will be the NZ unemployment rate on Thursday, which has the potential to put a spanner in the works for the currency. The NZD has been well supported lately and the outlook is for it to remain firm throughout this year. But disappointing unemployment figures could well catch the investor market with large holdings of NZ dollars. If this proves to be the case, expect a larger reaction than might otherwise be the case. This is certainly the biggest risk on the week. Until then, dips for the NZD will remain supported, and second tier data in the form of hourly earnings and retail card spending should have little impact.

United States
The US economy ended last week on a mildly firmer note with the release of all important employment data. It came in a little stronger than expected, but of more impact were the substantial upward revisions to both February and March’s figures. The unemployment rate also dropped to 7.5% which is the lowest level since December 2008. The impact was however tempered somewhat by weaker manufacturing data. None of this does anything to change the near term outlook for the Fed, who have publically stated they are targeting a 6.5% unemployment rate. US equity markets continue to make gains with fresh highs in the S&P 500 on Friday. This week see a relatively light calendar with only consumer credit, weekly jobless claims, and wholesale inventory data of any note. These come ahead of a speaking engagement by FED chairman Bernanke on Saturday.

A mixed bag of data out of Europe on Monday had little impact on the currency or the out look. Services sector data was slightly better than expected, while retail sales came in a touch worse.
After last week’s ECB rate cut the market was keenly focused on a speech by Draghi last night. He reiterated the point that the ECB council are studying closely what impact a move to negative deposit rates would have ,and that they stand ready to act if needed. Just like Thursday last week when he mentioned it, the currency has reacted to the downside. Talk of negative rates will always do that, but any move by the ECB in that direction would not happen soon. Draghi is most probably just “jawboning” the currency down.  This view is backed up by comments from another ECB governing council member, Ewald Nowotny, who said on Friday “negative rates are not something of relevance in the immediate future”.

United Kingdom
The recent run of stronger than expected economic releases out of the UK continued on Friday. Data on the services sector, the largest part of the economy, unexpectedly strengthened in April.This follows improved data on the manufacturing and construction sectors earlier in the week, and the better than expected GDP data the week before. This leaves little doubt in anyones mind that the BOE rate decision on Thursday will see no change in either the interest  rate or the total level of quantitative easing, currently set at 375 billion pounds. This meeting should have little impact on the currency. As pleasing as the recent data will be for both the BOE and the government, it is way too early to call the start of a sustained recovery. It may well be that what we are seeing is a bit of a bounce back from severe weather affected data earlier in the year. This week should shed a little more light on how the economy is performing with industrial and manufacturing production data set for release along with trade balance and construction output.

Japan has little in the way of domestic data out this week with trade numbers and JPY leading index the only releases of note. Offshore factors will therefore drive demand for the YEN, and that was certainly the case on Friday with the release of US employment data. Coming in better than expected and with a fall in the unemployment rate, there seemed to be a ‘risk on’ attitude enter back into the market. As a result the JPY weakened significantly, most noticeably on the crosses against the NZD, AUD and EUR. Against the USD, a test of the psychological 100.00 level could well be on the cards over the coming week. Over the weekend Japan has announced it’s intention to boost financial ties with Asean countries by increasing foreign bond holdings through investment in a Pan Asian Bond Fund. While no amounts were given, the flows required are all JPY negative and it will reinforce the heavy Yen sentiment.

Canada posted it’s first trade surplus in a year at the end of last week, helping to underpin the stable outlook. This will be good news for the Bank of Canada (BOC) that has stated the economy's need to move away from an over- reliance on domestic consumption. Exports to the US were responsible for a large part of the improvement in the trade figures. Friday’s positive US employment data will only help to underscore this. The CAD has remained on a firm footing at the start of this week in which the focus will be on Canadian employment numbers and housing data.

Major Announcements last week:
  • US Personal Consumption 1.1% v 1.2% expected
  • Euro-Zone CPI 1.2% v 1.6% expected
  • Euro-Zone Unemployment 12.1% as expected
  • CAD GDP 1.7% v 1.3 expected
  • US Consumer Confidence 68.1 v 61.0 expected
  • US ISM Manufacturing 50.7 v 50.5 expected
  • US Fed leaves rates unchanged as expected
  • ECB cuts rates by 0.25%
  • US Non-farm Payrolls 165k v 140k expected