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FX Update - Opposing forces see ranges continue

Written by Ian Dobbs on August 20th, 2013.      0 comments

3:00pm (NZT)
Market Overview:
It was a busy week for economic news last week, and this saw further bouts of volatility contained by the broader ranges in most markets. Better than expected economic news in the UK, and to a lesser extent from Europe, kept the pressure on the US dollar for the most part. This pressure opposes the improving outlook in the US, and the potential lowering of monetary stimulation from the Fed in the coming months. Expect the rangy nature of the price action to continue in the near term at least, as these kinds of opposing forces battle for ascendency. Australian sentiment remains under pressure for the most part, helped by the political posturing as the September 7th election approaches. Today’s announcement from the RBNZ of the October 1st implementation of restrictions of high “loan to value ratios” (LVRs) has dented confidence in the NZ dollar. The move impacts expectations of cash rate increases, albeit to a limited extent. This week is relatively light on major global economic news, although the annual central bankers symposium in Jackson Hole offers heightened focus.

Recent data from Australia has been subdued at best, although it’s had little impact on the currency. The key event for this week was the release of the Reserve Bank of Australia (RBA) monetary policy meeting minutes. These revealed nothing new with the RBA maintaining and easing bias, albeit to a lesser extent than before. They say a further rate cut is possible, but not imminent. These remarks should have little lasting impact on the currency. There is little out for the rest of the week that could materially impact the current outlook for a softening economy.  

New Zealand
Sentiment within the NZ economy has remained positive throughout the last week. The second quarter retail sales materially exceeded the markets expectations, coupling with strong manufacturing numbers to underpin NZ dollar demand. The possibility of economic drag from Australia remains real, but for the time being has been of limited impact. This week’s economic calendar is light with the RBNZ inflation expectations survey offering some domestic focus. The interest rate market continues to grind higher as the chances of a cash rate hike from the current emergency lows at 2.50% becomes more likely at some stage early in 2014. The prospect of a higher cash rate will continue to be NZD supportive for the most part. However today the RBNZ have announced that from Oct 1st banks will be subject to restrictions on high loan-to-value lending. Although this had been widely signalled it has had a big impact on the currency sending the NZD lower by around 80 points against the USD so far.

United States
The US had consumer confidence numbers out on Friday night that came in below expectations and below last month's reading. The fall was unexpected, although the previous reading was a six year high, and has been blamed on rising interest rates. Long term interest rates have moved one full percentage point higher over the last three months. Although the result was a surprise, the market impact has been limited as most commentators view it as a bump in the road on an otherwise improving economic outlook. The United States dollar has generally remained on the back foot since late last week in what has been quiet trading. Later this week we get housing data, the Fed monetary policy meeting minutes, and weekly unemployment claims to focus on.

At the very end of last week we saw the release of inflation data for the Euro-zone. It came in bang on expectation at 1.6% and therefore had little impact on the currency. Around the same time we got slightly disappointing data on the Euro-zone trade balance and current account. Both pieces of data come in a touch under market expectations, but no so far as to cause any real concern. The next few days will provide a better opportunity to gain an insight into Euro-area performance with readings on both the service and manufacturing sectors due for release. Then at the end of the week we also get consumer confidence data. The market will be looking for this data to confirm its view that there is a very gradual recovery taking place in the Euro-zone at the moment.

United Kingdom
This coming Friday, the Office for National Statistics (ONS) publishes its second reading of quarter two GDP. The first estimate published a few weeks ago came in at a healthy 0.6%. But after the recent run of much better than expected data there is talk the (ONS) will revise up the data to reflect a better performance in the June quarter. This is helping keep the GBP well supported and long term UK rates being pushed higher. In fact UK 10 year government bond yields have climbed to the highest level in two years over the last few days. On Monday we got a report that showed UK house prices actually dropped in August. This was the first dip in seven months while year on year prices are still up over 5%. We have also seen the Confederation of British Industry (CBI) release their forecast for UK growth which they say will print at 1.2% for 2013 and a healthy 2.3% for 2014. So it seems everyone is getting behind the recovery story in the UK at the moment. There is other second tier data out this week but nothing that should materially change the current outlook.

The Japanese economy has a disappointing start to last week as the preliminary second quarter GDP number came in at +.6% vs the expectation of a +.9% result. Yesterday saw a weaker than expected trade balance, with the deficit the 3rd largest on record, and a consequence of the recently weak YEN. A large portion of the rising import demand was thanks to increased energy demand as reliance on nuclear energy falls following the earthquakes of 2011. The economic calendar remains quiet for the remainder of the week, as focus moves to offshore influences.

Friday evening saw the release of Canadian manufacturing sales for June. The market was expecting a small increase but instead the result was a small decrease of 0.5%. This marks the fourth decrease in six months and won’t help the outlook for second quarter GDP that has already been lowered thanks to the floods in Alberta. Later this week we will be further insight into the Canadian economy with wholesale sales, retail sales, and inflation data all set for release.

Major Announcements last week:
  • Japanese prelim. GDP +.6% vs +.9% expected
  • UK Inflation 2.8% as expected
  • German Investor Sentiment 42.0 vs 40.3%
  • US Retail Sales +.5% vs +.4% expected
  • NZ Retail Sales +1.7% vs +1.4% expected
  • UK Unemployment claimant change -29.2k vs -14.3k expected
  • European GDP +.3% vs +.2% expected
  • UK Retail Sales +1.1% vs +.7% expected
  • US Inflation +.2% as expected
  • CAD Manufacturing Sales +.5% vs +.5% expected
  • US Consumer Sentiment 80.0 vs 85.6 expected