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FX Update - RBNZ set to stand out from the crowd

Written by Ian Dobbs on March 11th, 2014.      0 comments

Market Overview:
The last week’s trading in the wider markets has further cemented the mostly directionless nature of markets in the current conditions. The diminishing tensions in the Ukraine saw risk assets grind back to recover ground from the previous week, and more positive economic news in Europe, the UK and US further tempered negative sentiment. The result of which saw the Australasian currencies in demand for the most part. However, the on-going concerns over the Chinese economic imbalances and debt burden has seen risk aversion emerge to start this week. Iron ore prices fell a whopping 8.3% yesterday and Asian stock markets under pressure following the latest trade numbers from China. The Reserve Bank of Australia (RBA), Bank of Canada (BOC), Bank of England (BOE) and European Central Bank (ECB) all left monetary policy unchanged last week. The focus now turns to the Bank of Japan (BOJ) and Reserve Bank of NZ (RBNZ) this week. The RBNZ are almost certainly going to hike the cash rate 25pts from the emergency low 2.50% set following the second earthquake in Christchurch in March 2011. With the current momentum in the NZ economy, it seems likely that a further eight or so hikes will be forthcoming in the next year or two, until a neutral cash rate of 4.5-5% is met. This has provided an underlying demand for the NZD, and shielded it from the pressure that has been seen on the AUD in the past year.

Last week proved to be a very positive one for the Australian economy with a number of key releases surprising on the strong side. Building approvals were came in at +6.8% vs and expectation of only +0.7%, however the real benefit to the currency came on the back of retail sales and trade balance data. Retail sales printed at +1.5% vs +0.5% expected and the trade balance was also much better than forecast. These two releases saw the currency make solid gains in the latter part of the week. We also head from RBA Governor Stevens on Friday and he seemed to suggest the cash rate was unlikely to fall further from its current level. He said he does not see the need for lower rates at the moment, and predicts a period of stability in rates. He also said it remains unclear if a shortfall in demand can be made up quickly through monetary policy action. This further supported the currency, although he did reiterate the Australian dollar remains high by historical standards. He believes fair value for the currency is in 80’s not the 90’s in relation to the USD. Over the weekend we have seen some awful Chinese trade data which has weighed on the AUD a touch.  The magnitude of the fall in Chinese exports for February (-18.1%) suggests the data can’t be trusted, but even so it is still disappointing. In the last few hours we have seen business confidence has decreased a touch from the previous reading. Tomorrow we get a reading on consumer sentiment then on Thursday we have employment figures.

New Zealand
There has been almost nothing of economic significance released from NZ over the past week. The current focus is on the RBNZ monetary policy statement due out Thursday morning at 9:00am. A 25 point rate hike is as much of a sure thing as you can get in the financial markets, and the real impact will come from the banks forecasted track for the cash rate going forward. Previously they have suggested we can expect interest rate hikes of 2% to 2.5% over the next couple of years. Any deviation from that will impact the currency.

United States
After nearly two months of soft ‘weather affected’ data, the past week has seen some improving results the most notable of which was non-farm payrolls data released on Friday. This was a particular surprise as all other indicators of employment had signalled the risk of another soft reading. The market was expecting a reading of +140k, when in fact the result came in at +175k. There were even positive revisions to previous results totalling another +25k. The unemployment rate did tick up to 6.7% from 6.6% due to an increase in the number of people joining the workforce, but it’s still very close to the 6.5% level the Fed had previously tied its forward guidance to. There were still some poor readings last week, with the most notable of which were factory orders and non-manufacturing ISM which both came in well below expectation. If we do start getting a bounce back from recent weather affected data, this may well overstate the current situation. Therefore, it could be another month or two before we get a true picture of the US economy. This highlights this week to watch out for are retail sales, producer prices, and consumer sentiment.

The big focus for last week was the European Central Banks rate decision on Thursday evening. There was a real risk of action by the central bank, but in the end the ECB decided to sit tight. This ‘no change’ decision caused the Euro to rally strongly and European long term interest rates to move higher. The central bank actually sounded a little more positive than many had expected, lifting its forecasts for growth and inflation. They also reiterated that rates are to be held at or below current levels for an extended period of time. Officials have stated that the ECB had a broad discussion about a rate cut, and the bank will take decisive action if needed, but at this point there was no strong reason to act. This ECB decision was followed on Friday by German industrial output data that rose in January by +0.8% (expected +0.7%), and this marks the third consecutive month of gains. The economic calendar is a little lighter this week with only German trade balance, Euro-area industrial production, and the ECB monthly bulletin of any note.

United Kingdom
Data from the UK has for the most part been consistent in its support of the current economic recovery. The BOE left its policy rate unchanged at their meeting on Thursday night and released no statement. Minutes from the meeting will be released on March 19th and only then will we get a feeling for what was discussed. However, Deputy Governor Charlie Bean was on the wires last night, stating that the strong UK Pound could delay any potential future rate hike by the bank. He said he was comfortable with the current level of the GBP, but any further broad gains would not be helpful in rebalancing the economy towards net exports. The GBP came under pressure in the wake of these comments. This week we can look forward to hearing from BOE officials as they testify before Parliament’s Treasury Committee on the inflation outlook. We also get a reading on retail sales, the trade balance, and industrial production.

There has been very little of economic significance released from Japan lately. Tuesday last week saw average cash earnings data that disappointed when it printed at -0.2% vs expectations of +0.3%. Since then we have seen leading indicators, the current account, and GDP data all come in bang on expectation. We do have the BOJ monetary policy statement later this afternoon which will be closely watched, although no policy change is expected. Later in the week we have the Tertiary activity index, the BOJ monthly report, consumer confidence and core machinery orders.

Most of the data released from Canada last week surprised on the strong side. Building permits, Ivey PMI, the trade balance, and labour productivity all beat expectations. However, one key result wasn’t so flash, and that was the employment change released on Friday. The result of -7.0k came against expectations for a gain of +16.9k and weighed on the currency to a degree. The detail of the report made slightly better reading with full-time employment up 25,900 and part time jobs -18,900. The unemployment rate stayed steady at 7.0%. This week is a quiet one with only housing starts, the new house price index, and capacity utilization set for release. The BOC’s Murray has sounded a warning by saying household debt and housing activity have approached levels where real estate busts took place elsewhere.

Major Announcements last week:
  • US ISM Manufacturing 536.2 vs 52.0 expected
  • RBA leave monetary policy unchanged
  • Australian Q4 GDP 2.8% vs 2.5% expected
  • European Q4 GDP  +.5% as expected
  • BOC leaves monetary policy unchanged
  • BOE leaves monetary policy unchanged
  • ECB leaves monetary policy unchanged
  • US Employment growth +175k vs +149k expected
  • Chinese trade balance -22.98B sv +14.5B expected
  • Japanese Q4 GDP +.7% vs +.9% expected