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FX Update - Risk aversion abates

Written by Ian Dobbs on March 18th, 2014.      0 comments

Market Overview:
The last week has been an interesting one for the financial markets. Apart from the usual influence of economic news, the Ukrainian tensions continued to simmer and coupling with increasing credit bubble fears in China, led to periods of risk aversion. The Reserve Bank of New Zealand (RBNZ) became the first developed nation central bank to raise the cash rate, with others not expected to do the same until well into 2015. The Reserve Bank of Australia reiterated their neutral monetary policy stance and this looks to have been cemented as the latest employment statistics were materially stronger than expected. The Australasian situation contrast that of Europe, whose lower than expected inflation numbers now firmly open the door for further policy accommodation from the European Central Bank (ECB). Widespread concern over corporate credit default in China seems to be intensifying, with almost daily reports of default in a wide spread of sectors.

The key piece of data from Australia recently was the employment numbers released last Thursday. The 47.3k gain was much higher than expected and looking into the detail made even better reading with a big swing from part time to full time employment. When you combine this result with the previous week’s strong data on building approvals, retail sales, and the trade balance, it brings into question some of the more negative forecasts for the economy. We have already seen one major bank revise their forecasts for further interest rate cuts by the RBA. They now see the central bank on hold for the remainder of the year. There are obviously still plenty of headwinds, the least of which is not China and the potential for a credit crises there, but at least at this point it seems the Australian economy has regained some composure as it transitions away from the mining led boom. RBA minutes released this afternoon held little in the way of surprise. The cash rate could ”remain at its current level for some time”.

New Zealand
The New Zealand dollar has continued to perform well in the wake of Thursday’s RBNZ rate hike. Since then we have also seen data on NZ manufacturing which was largely unchanged from the previous months and at healthy levels overall. Consumer confidence rose again to 121.7 from 120.1. It now stands at its best level in nine years. And the latest NZIER forecasts show New Zealand growing strongly over the next couple of years. They believe economic growth will pick up from 2.9% in March 2014 to 3.6% the following year. We get the latest quarterly GDP figures on Thursday which should make good reading. Ahead of that, we have current account data on Wednesday.

United States
The general theme from US economic releases recently, seems to be that we are seeing a gradual recovery from previous weather affected data. There are still some patchy results, but it certainly seems that overall the numbers are improving slowly. Late last week we saw retail sales that printed above expectation at +0.3%, although looking into the breakdown of the data took some of the shine off the release. Weekly jobless claims also fell to 315k from 330k. If this can be sustained it will bode well for next month’s employment report. Import prices rose 0.9% vs 0.4% expected. The main driver of this was petroleum. More positively, export prices also rise by the largest amount in a year. Last night’s release of industrial production was much better than forecast printing at +0.6% vs +0.2% expected. This is the largest gain in six months. On the negative side though we have seen consumer sentiment dip a touch to 79.9 in March from 81.6 in February. What does all this mean for the Fed meeting on Thursday morning? Well it seems almost certain they will continue to taper quantitative easing by another $10 bln which is widely expected. The interesting aspect could come from whether they decided to tweak / clarify the forward guidance threshold of 6.5% unemployment. Somehow the Fed need to back away from that threshold as the unemployment rate is currently not far away from there, yet they are a long way from raising rates. Ahead of the Fed meeting we get data on building permits and inflation.

Late last week saw some positive releases from the Eurozone in the form of stronger French inflation and much better than expected Spanish retail sales. However, these have been countered by last night downward revision to Euro area inflation for February. It had previously been reported at +0.8% year on year, taking a little heat off the ECB to act at their last meeting, but it has now been revised down to +0.7%. The ECB believe that rate will pick back up towards 1% by mid this year, hence their recent decision not to act. But president Draghi has stressed they stand ready to act if needed. He was quoted late last week as saying the ECB has been preparing non-standard measures to guard against deflation. Any further weakness seen in inflation over the coming months could trigger the implementation of those measures. Key data to watch out for this week comes in the form of German economic sentiment, the current account, and consumer confidence.

United Kingdom
There has been nothing of significance released from the UK over the past week. Friday’s trade balance was a little worse than expected, although its impact was muted. The Bank of England (BOE) warned in its Quarterly Bulletin that the GBP could come under pressure due to the UK current account deficit. However, they did stress there are very mixed views on the subject and it is far from clear if the sizeable deficit is currently a focus of the market. The key release this week comes in the form of minutes from the last BOE meeting. These hit the wires on Wednesday evening and will be followed by the release of the UK budget which is likely to have a limited impact.

The wave of corporates and large institutions announcing base pay rises in Japan has continued with news Japanese banks are considering hiking base pay 0.5%. This is all good new ahead of April’s sales tax increase. The government expects the impact of that to be limited and for the economy to remain on the recovery path. That positive outlook was supported by core machinery orders data released late last week. The +13.4% result was much higher than expectations of +7.0% and largely reversed the previous months record fall. This week is a quiet one with only the trade balance and a speech by BOJ Governor Kuroda of any note.

Some positive results from the Canadian housing market over the past few days have been countered by a small drop in the rate of capacity utilization. The new house price index climbed +0.3% in January up from +0.1% previously. Existing home sales were also up +0.3% which was much improved from the previous -3.3% reading. But capacity utilization (which is a leading indicator of inflation) came in at 82.0%, which is a touch below the expected result of 82.3%. The overall impact on the Canadian dollar from these releases has been minimal. We get much more important readings on inflation, retail sales, and manufacturing sales later this week.

Major Announcements last week:
  • The BOJ leave monetary policy unchanged
  • The RBNZ hike cash rate 25pts to 2.75%
  • Australian Employment growth +43.7k
  • US Retail Sales +.3% vs +.2% expected
  • US Consumer Sentiment Index 79.9 vs 82.0 expected
  • European Industrial Production 2.1% vs 1.9% expected
  • UK Industrial Production 2.9%vs 3.0% expected
  • Chinese Industrial Production 8.6% vs 9.5% expected