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FX Update - NZD and AUD struggle amid increased interest rate cut expectations

Written by Ian Dobbs on June 2nd, 2015.      0 comments

Market Overview:
The Australasian duo have seen their fair share of pressure over the past week with disappointing data from both countries weighing on their respective currencies. Interest rate cuts are very likely to come from both central banks eventually, however the timing of which are open for debate. The Reserve Bank of Australia may well provide some guidance to that end when they deliver their rate statement later this afternoon, while in NZ we have to wait until Thursday next week to get a feel for what the RBNZ are thinking. Improving data from the United States has increased the chance of an interest rate hike by the Federal Reserve in September and this is helping to keep the trend toward a stronger USD well intact. We are seeing officials from all over the world warn that the move toward a more ‘normal’ interest rate setting in the US will not be a smooth one, and markets should be braced for some volatile price action over the coming year. The European Central Bank and the Bank of England also hold interest rate meetings this week, although they shouldn’t contain any real surprises.

The economic outlook in Australia took a big hit last week with the release of private capital expenditure data. It’s looking like the process of ‘transitioning’ away from a mining led economy is going to be a lot tougher than the central bank expected. Other sectors of the economy just don’t seem to be picking up the slack and that was very evident in declining capital expectations for the coming year. The Australian Treasury Secretary recently acknowledged that forecasts are pointing to significant headwinds for the economy as non-mining businesses are reluctant to commit to invest. Moody’s investor service said that unless the declining trend in capex reverses, Australia’s growth over the next two years will be lower than the 2.9% average of the past decade. They added that lower growth is credit negative. Yesterday we saw building approval data come in below forecast at -4.4%. The prior reading was +2.9%. There is still plenty to focus on this week starting with the Reserve Bank of Australia’s (RBA) rate decision this afternoon. Although last week’s capex data has increased the chance of another cut at some stage from the RBA, we are unlikely to see any action from them today. Tomorrow we get GDP data and then Thursday sees retail sales and trade balance numbers hit the wires.

New Zealand
Last week proved to be a tough one for the New Zealand dollar. Fonterra’s announcement was a little disappointing and suggests the dairy farmers a going to be in for another tough season in 2015/16. The negative sentiment was then compounded by Friday’s release of business confidence data. Headline business confidence fell nearly 15 points in May to print at 15.7 versus the prior reading of 30.2. Business inflation expectations also fell to a historic low of 1.62 per cent, while firm hiring plans and investment activity also moderated. We do need to be mindful that confidence is falling from relatively high levels and we are still above long term averages on many indicators. This week should be a little quiet on the data front with the main focus being Fonterra’s dairy auction result.

United States
Last week saw largely positive economic data from the United States that has significantly increased the chance of an interest rate hike from the Fed in September. That prospect also boosted the US dollar that has made significant gains across the board. Durable goods orders were one of the key releases that triggered the latest move, although we also saw good data on home sales, GDP and consumer sentiment. The GDP revision for quarter one came in at -0.7% versus -0.8% expected, while consumer sentiment improved to 90.7 from 88.6 prior. Data released so far this week has been a little more mixed, although it hasn’t adversely impacted the USD at all. US personal spending figures mirrored the recent disappointment of retail sales data coming in at 0.0% versus 0.2% expected. This was however countered by an improvement in the ISM manufacturing PMI reading which jumped to 52.8 from 51.5 prior. That marks the first rise in seven months, and may well be another signal that the economy has turned the corner from the recent soft patch. There is still plenty to digest over the course of this week with ISM non-manufacturing PMI and non-farm payrolls data the highlights.

United Kingdom
The UK economy remains on a firm footing despite a couple of indicators coming in below expectation recently. There was a lot of speculation that GDP for the first quarter would be revised higher to +0.4% last week, but in the end the result remained unchanged at +0.3%. Last night we saw manufacturing PMI improve a touch to 52.0 from 51.8 prior. The market was however expecting a bigger jump to around 52.7. The UK’s CBI (Confederation of British Industry) suggests business activity increased markedly in the three months to May. Their monthly growth indicator which is based on a survey of 800 manufacturers, retailers and services rose to +33 in May from +19 in April. That’s the highest reading in a year. Service companies output jumped at the fastest pace since 2006. The CBI said “as we move through the second quarter, growth has cranked up several gears and businesses expect that faster pace to continue”. Still to come this week we have PMI readings from the construction and service sectors to digest, along with the Bank of England (BOE) monetary policy meeting.

Data from Europe continues to support the outlook for a gradual improvement in economic conditions. The biggest risk to that forecast is Greece and the potential for it to provide much more than just a speed bump on the road to recovery. Inflation looks to be improving with better readings from Germany, Spain and Italy recently. German retail sales were also significant better than forecast, largely offsetting another disappointing reading from French consumer spending. The manufacturing sector also looks to be making gains, no doubt helped by the weaker Euro. Spanish manufacturing actually printed at an eight year high last night, while improvements in both Italian and French manufacturing countered a small fall in the German reading. The Greek situation continues to be the biggest risk factor with both sides playing a very dangerous game of chicken. So far there is still no agreement to allow the release of further bailout funds and Greece is going to be struggling to make payment to the IMF on Friday. A disorderly Greek exit could have much wider ramifications than for just Europe, with markets and officials already nervous about how the globe will react to the eventual rise in US interest rates. The timing for this game of brinkmanship is less than ideal, although to be fair, a more comprehensive solution should have been agreed a long long time ago. Still to come this week we have service sector PMI’s, Eurozone inflation and retails sales data to digest, along with the ECB interest rate meeting.

Recent data from Japan recently has been something of a mixed bag, although overall you would have to say the signs are encouraging for the economy going forward. We did see disappointing results from retail sales and household spending last week, but these were countered by improvements in inflation (+0.3%), unemployment (3.3%) and industrial productions (+1.0%) . Yesterday’s release of capital spending was also positive printing at +7.3% versus +0.1% expected. The focus this week will be on tomorrow’s release of average cash earnings data. The government has been trying hard to get companies to increase wages and officials are confident we will see ‘fairly significant wage increases’ over the coming months.

At the end of last week Canada released GDP data for March and the only positive you can take away from the numbers were that at least it’s all in the first quarter that is now well and truly behind them. GDP in March declined 0.2% versus expectations of a +0.2% gain. The prior month was also revised down. Over the first quarter business investment dropped 9.7%, exports fell 1.1% and growth contracted by the most since 2009. The very poor first quarter has been well recognized by the Bank of Canada and they reacted quickly at the start of the year with a rate cut. Governor Poloz is a lot more upbeat about the outlook going forward and he will be hoping to see data over the coming weeks confirm is optimism. This week we have the trade balance, Ivey PMI and employment change numbers to digest.

Major Announcements last week:
  • US Core Durable Goods Orders 0.5% as expected
  • US CB Consumer sentiment 95.4 vs 95.2 expected
  • The Bank of Canada leave interest rates unchanged at 0.75%
  • Fonterra cuts 2014/15 payout by 10 cents. Estimates 2015/16 at $5.25/kg
  • Australian Private Capital Expenditure -4.4% vs -2.2% expected
  • UK Second Estimate of GDP unchanged at 0.3% vs 0.4% expected
  • NZ ANZ Business Confidence 15.7 vs 30.2 last
  • Canadian GDP -0.2% vs +0.2% expected
  • US Preliminary GDP -0.7% vs -0.8% expected
  • UK Manufacturing PMI 52.0 vs 52.7 expected
  • US Manufacturing PMI 52.8 vs 51.9 expected