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FX Update - Risk aversion wanes for the time being

Written by Ian Dobbs on September 3rd, 2013.      0 comments

2:00pm (NZT)
Market Overview:
The patchy nature of the global growth profile was again exposed last week. In the US we saw softer durable goods and home sales numbers balance by materially better than expected 2nd quarter GDP figures. The UK data remains positive and there were better signs coming from Europe. The political risks associated with the Syrian debacle saw the wider market suffer from widespread risk aversion for much of the last week. The risk aversion saw the Australasian currencies under considerable pressure at times. The lower than expected numbers in NZ saw the NZ dollar underperform its counterpart from across the Tasman. Respite finally came over the weekend in the form of better than expected Chinese manufacturing numbers. These numbers coupled with the de-pressurising of the Syrian situation from the UK and US. Whilst a strike remains likely, a measured approach has lowered risk aversion in the markets for the time being. With the patchy emergence of global growth, and increased geopolitical tensions, expect further volatile trading within the established broader ranges for most markets in the short term.

This week has certainly started off better than the previous one for the Australian dollar. Over the week we have seen an easing of the risk aversion that kept the currency under pressure for much of last week. The news that President Obama will look for support from Congress before launching any strike on Syria has meant any potential strike is at least a week or more away. Add to this some better than expected Chinese data on manufacturing and we have seen a positive start to the week for the AUD. The more buoyant tone was aided by Australian building approvals data that hit the wires yesterday. It came in at +10.8% against an expectation of +4.1% and helped to increase demand for the currency. In the last couple of hours we have also had retail sales numbers that came in below expectation and have weighed on the currency a touch. But key for the AUD will be the RBA decision later this afternoon. No change in policy is likely, although the market will be keen to get a feel for what the RBA are thinking going forward from the statement release at the same time. Tomorrow we also have GDP data and on Thursday we get the trade balance. So a big ahead week for the Australian economy.

New Zealand
The risk aversion that swept through the market last week and caused the NZD to lose a lot of ground has abated somewhat. This is largely due to the dwindling support for any strike against Syria, and the fact that President Obama has now asked for a vote from congress before any decision is made. This pushes the time horizon for a strike out about 10 days or more and has helped the New Zealand dollar regain some of the lost ground in the early part of the week. This week is very light on the data front domestically however yesterday we did get the terms of trade index which came in better than expected. The focus will now turns to offshore events, with a number of central bank meetings over the coming days and the US employment report on Friday.

United States
The end of last week saw some mixed data from the United States. Weaker than expected figures on personal income and spending were offset by a revision higher of the consumer sentiment numbers for August. Over the weekend the news that President Obama will seek a vote from Congress before any potential strike on Syria has seen the market breathe a sigh of relief. Safe haven flows into the USD last week as the threat of a strike loomed saw it make good gains against the NZD and AUD. Some of this has now been reversed. Aside from that it has been a quiet start to the week with the Labour Day bank holiday in the US on Monday. There is plenty of data out over the coming days with the key releases being manufacturing data tonight, non-manufacturing data on Thursday night, and the employment report on Friday evening.

Late last week we got readings on inflation and unemployment from the Euro-Zone. Unemployment remained stubbornly high at 12.1% and comes as many other indicators are showing improvement, albeit at a very gradual pace. Inflation across the region is no threat at all coming in below expectation at 1.3%, which is down from the last reading of 1.6%. This is well below the central bank’s target of 2%, and there is some talk that this leaves them plenty of room to cut rates this week should they see fit. I suspect however, that is very unlikely given the improving nature of other indicators, and the need to keep some powder dry should things turn ugly again. Last night we got data on the manufacturing sectors of Spain and Italy, both of which have improved and moved above the 50 level which denotes expansion in the industry. This backs up similar data recently seen for Germany and supports the view that a gradual recovery taking place across most of the region. Although there should be no surprises in the actual rate decision by the ECB, there will however be plenty of attention paid to the statement released and the subsequent press conference. Ahead of that ECB decision we get readings German retail sales and factory orders.

United Kingdom
This week is a big one data wise for the United Kingdom. On Thursday evening we have the Bank of England rate decision, but before that we get data on the construction and services sectors of the economy. Last night we got the latest reading on the manufacturing sector which accounts for around 10% of UK GDP. The trend has been for improving UK numbers and this data didn’t disappoint. It came in at a solid 57.2 against an expectation of 55.0.  Looking into the detail of the report is even better with the subcomponents of output and new orders expanding at their fastest pace in 20 years. Figures like this underline the broad based recovery that is taking place in the UK and should help to support demand for the GBP. The outlook for third quarter GDP could also be revised up. Long term interest rates keep moving higher with the 10 year now at its highest level since July 2011.

Some patchy data late last week has done little to change the current outlook for a gradual recovery in Japan’s economic situation. That view was highlighted yesterday with the release of capital expenditure data that came in better than expected. Although the result was still only flat at 0.0%, it is the first time it has not declined since the third quarter last year. There is still a lot of focus and discussion on whether the economy is strong enough to withstand the sales tax hike from 5% to 8% planned for April next year. The economy minister recently heard seven days of testimony from a panel of experts who recommended the planned tax hike goes ahead but it’s implemented with some other stimulus measures to help counter the impact. The key event this week will be the Bank of Japan monetary policy statement and press conference on Thursday.

Friday evening saw the release of GDP data for June and the result was a little weaker than expected. It came in at -0.5% against an expectation of -0.4%, and it caused some volatility around the time of release. Overall however  the Canadian Dollar ended mostly unchanged on the day. The reading was the first negative number in five months, but was largely because of the floods in Alberta and the construction strike in Quebec. The one-off nature of those impacts has allowed the market to mostly look through this figure and concentrate on the slowly improving picture of its neighbour and biggest trading partner, the United States. The second half of this week is jam packed with key releases from both Canada and the US. Canadian trade balance and reserve bank rate decision tomorrow night are followed by employment numbers for both Canada and the US on Friday night.

Major Announcements last week:
  • NZ Trade Balance -774m vs -18m expected
  • US Durable Goods Orders -.6% vs +.6% expected
  • German Business Climate 107.5 vs 107.1 expected
  • IS Consumer Confidence 81.5 vs 79.6 expected
  • US Pending Home  Sales -1.3% vs +.2% expected
  • ANZ NZ Business Confidence 48.1 vs 52.8 previous
  • AU Private Cap. Ex 4.0% vs .5% expected
  • US Prelim. GDP 2.5% vs 2.2% expected
  • CAD GDP (month) +.5% vs -.4% expected
  • Chinese Manufacturing (official) 51.0 vs 50.6 expected
  • HSBC China Manuf. 50.1 vs 50.2 expected
  • UK Manufacturing 57.2 vs 55.2 expected
  • Spanish and Italian Manufacturing both stronger than expected
  • AU Retail Sales +.1% vs +.4% expected