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FX Update - Political games take centre stage

Written by Ian Dobbs on October 1st, 2013.      0 comments

2.15pm (NZT)
Market Overview:
There has been a strange dynamic in the financial markets over the last week. With a limited amount of economic data released, the focus moved away from the central banks towards the various political issues emerging. The German economic elections held limited drama as Angela Merkel’s looks to form a stable coalition. However the games continue in Italy, with Signor Berlusconi’s party remaining a disrupting force, pushing the Prime Minister to undertake a confidence vote. Things are no better in the United States where the debt ceiling negotiations remain a tool for political posturing that could be of a very destabilizing nature. Needless to say, it seems likely that a last minute agreement will be reached. All of these factors continue to promote the trendless nature of most markets that we have seen evolve of the last few months and seem likely to play out for the remainder of 2014 at least.

There has been very little in the way of economic data in Australia over the last week. Of note has been the mixed data released on the Chinese manufacturing index. For the most part the focus has been on the monetary policy statement due from the Reserve Bank of Australia (RBA) later on today. No change is expected from the RBA, but the statement will provide the focus. Expect the wording to remain broadly neutral without ruling out further reduction of the cash rate if the economic indicators resume a weakening trend. After the digestion of today’s statement the focus moves to next week’s monthly employment numbers.

New Zealand
There has been a limited amount of economic news in New Zealand over the last week. Trade balance figures were slightly disappointing, but these have been more than balanced off by the news from NZ diary behemoth Fonterra that they have increased their payout forecast for the season to 8.30 per kilogram. This increased payout potentially boosts the payout, relative to last season by five billion NZ dollars. This week’s domestic data focus has come in the form of yesterday’s building approval and business confidence numbers. The volatile monthly building consents number bounced back into positive territory, whilst the business confidence improved further to very healthy levels. Next week sees the NZIER’s quarterly survey of business opinion the main data focus. Expect this to mirror this week’s positive outlook. The overall picture for the NZ economy remains relatively robust as the increasing momentum in the Christchurch rebuild underpins the wider economy to a certain extent.

United States
On Friday evening we got the final reading of US consumer sentiment for September and it showed consumers are becoming a little wary. The index is now at its lowest point in five months with concerns about government policies and jobs at the forefront. Confidence in the government won’t be improving anytime soon as a political stalemate remains and there is no agreement on raising the debt ceiling. A partial government shutdown is now underway and if agreement isn’t reached by Oct 17th, the US will start defaulting on debt payments. On a more positive note, overnight we got some decent manufacturing activity readings from Chicago and the Dallas Fed, but with all eyes on the circus in Washington there has been little impact. Tonight we get the overall index of manufacturing and on Thursday it will be the nonmanufacturing index. The big data for the week was going to be the employment report on Friday, however the latest news is it will not be released if there is a government shutdown.

A couple of data releases last night from Europe both came in on the soft side. German retail sales and the flash estimate of monthly inflation both missed expectations although the impact has been limited with the market focusing instead on the political situation in Italy. Over the weekend we got news that five ministers from Berlusconi’s party have resigned from the government coalition. Meetings on Friday about delaying the planned sales tax increase failed and this seems to have kicked off the crisis. Prime Minister Letta will now hold a confidence vote on Wednesday and if he losses that vote he will be forced to resign. Elections will then be held in November. All this has kept the Euro under pressure and the confidence vote on Wednesday will now be key. Still to come this week we have unemployment data, followed by the ECB rate decision and press conference. Although no change in rates is expected, over the weekend we have seen comments from ECB member Coeure who said the ECB retains and easing bias and the possibility of further cuts remain. We can expect President Draghi to take a similar tone and reaffirm that further LTRO’s (long term refinancing operations) are possible. Pretty much everything is still on the table should the Eurozone crisis flared up again over the coming months.

United Kingdom
The UK economy remains on a firm footing with recent data on house prices showing they rose the most in more than six years in September. The continued increase in demand is partially been driven by government measures. David Cameron’s ‘help to buy’ scheme is boosting demand and the second phase of his plan will start this week, three months earlier than expected. This is all fuelling a debate as to whether the government isn’t just creating another housing bubble. In the long run it may well do so, but until now it has really only been London and the south east that has seen all the price increases. Markets outside of London are only now just starting to see price increases after five years of falling or flat prices. The rest of this week will be interesting with key data on the manufacturing, service, and construction sectors set for release.

Late last week data on Japanese inflation hit the wires. It showed core inflation hit 0.8%, year on year in August, which is the biggest annual rise since November 2008. This will be welcome news for the Bank of Japan (BOJ) as they creep slowly towards their 2% target. The next step is to get the private sector to start raising wages, but that could prove more difficult. The BOJ has been vocal about the need for wages to rise in tandem with inflation. If they don’t then household incomes will get squeezed and this will stiffen any economic recovery. It will also make the planned sales tax increase a lot harder to swallow. We are expecting an announcement of that today from Prime Minister Abe. Also today we have seen the latest readings on the manufacturing and service sectors, which on balance were close to expectations. On Friday we have the BOJ monetary policy statement, albeit this likely be overshadowed by the tax announcement this week.

GDP out last night from Canada has confirmed the economy is heading in the right direction. After a poor June reading, thanks in part to flooding and strike action, the July number bounced back showing a 0.6% gain. That’s one of the biggest increases in the last two years. This supports Bank of Canada (BOC) Governor Poloz’s belief that the economy has reached a tipping point where business confidence is high enough to trigger more capital spending. Exports are rising driven by demand from an improving United States. This could easily be affected however by a protracted US government shutdown, and that is the most immediate concern. The only other data set for release this week is a survey of purchasing managers out on Saturday morning.
Major Announcements last week:
• HSBC Chinese Manufacturing 50.2 vs 51.2 expected
• German Business Climate Index 107.7 vs 108.4 expected
• Canadian Retail Sales 1.0% vs .6% expected
• US Consumer Confidence 79.7 vs 79.9 expected
• US Durable Goods Sales -.1% vs +1.1% expected
• US New Home Sales 421k vs 422k expected
• US Pending Home Sales -1.6% vs -.9% expected
• ANZ NZ Business Confidence 54.1 vs 48.1 previous
• Canadian GDP .6% as expected