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FX Update - Risk on / risk off theme continues

Written by Ian Dobbs on October 29th, 2013.      0 comments

2:40pm (NZT)
Market Overview:
The patchy nature of the global economic recovery was well presented last week. The vulnerable US economy continues to see softness return to their economic data. This is an issue that will have been exacerbated by the on-going debt ceiling political standoff. Adding to the volatility were concerns in China over the banking sector, and this spilled over into the wider markets. On a positive note, the UK continues to see relatively buoyant economic news with preliminary 3rd quarter GDP numbers coming in on expectation at +.8%. The balance of the news provided some sustained periods of risk aversion and this was evident in the weak performances of the Australasian currencies in the later part of last week. It can be expected that the recent rangy nature of the price action will continue in most markets this week. Central bank focus comes in the form of the US Federal Reserve (FED), Bank of Japan (BOJ) and Reserve Bank of NZ (RBNZ) monetary policy announcements. No change is expected from any of the three, but all will be closely watched by market participants.


Australia
There has been no economic data released in Australia since last week’s inflation numbers that came in on the strong side. We have to wait until Thursday this week when we get building approvals and new home sales, and then on Friday we have producer prices data. In the last few hours we have seen a speech from RBA Governor Stevens which has seen the currency come under some pressure. He said the unusually high Australian dollar was not supported by fundamentals and it seems likely the currency will be materially lower at some point in the future given the declining terms of trade.


New Zealand
There has been nothing to impact the economic outlook for New Zealand since last week’s better than expected trade balance. A holiday yesterday means it has been a very quiet start to this week as well, but things should get more interesting come Thursday. That’s when we get the RBNZ cash rate review and statement, building consents and business confidence. All eyes will be on the RBNZ to see if they give any more clues as to the timing of any potential rate hike. At this point the market is expecting one in the first quarter of next year, but developments in the housing market could easily change this. Governor Wheeler was on the wires recently saying the high New Zealand dollar dampens inflation and gives the central bank a degree of freedom on rates. That may be so, but if the housing market continues to appreciate strongly, the bank won’t have any choice but to hike the cash rate from its “emergency low” of 2.50%.


United States
Recent data from the United States has been mixed at best. There are definite signs of softening activity which won’t be doing anything to support the expectation for Fed tapering in March next year. Late last week we got durable goods orders that looked ok on the headline number, but this was boosted by strong aircraft orders. The core number that excludes transportation wasn’t so flash, falling by 0.1% against an expectation of a 0.6% gain. The final reading of consumer confidence also came in below expectation, although this data could well have been affected by the government shutdown. Last night we saw data on pending home sales which showed the biggest drop since 2010 and the fourth consecutive month of decline. The housing market recovery has been a big factor in the improvement of the broader economy, and this data shows that growth in that sector is starting to wane. There have however been some bright spots, and industrial production data released last night was one of those. It came in above expectation and showed a noticeable improvement over the previous month. There is plenty more data to digest this week. The highlights will be retail sales, inflation, Fed monetary policy decision, and the manufacturing index.


Europe
Last week saw data that mostly came in below expectation for the Eurozone. The trend continued on Friday evening when we got German business climate index. Not only was it below the level expected, but it showed the first fall in six months. The broader trend in this series has been improving and expectations are that this is just a small blip and not the start of a more serious decline. We have seen a number of positive comments recently from officials with regard to Spain. The overriding theme is that Spain has made good progress and ‘turned the corner’ so to speak. The ECB’s Asmussen was a little more cautious when talking about Italy. He said Italy’s fate will determine the Eurozone’s fate. Italy is too big to be rescued from the outside and it has to make the turnaround alone. There is nothing new here, but it serves as a reminder that Europe has a long way to go and many more headwinds to deal with. The Euro however continues to surprise many with its recent strength. There is a lot of second tier data out this week from Germany to draw focus along with Eurozone inflation and unemployment on Thursday.


United Kingdom
At the end of last week we had United Kingdom GDP for the third quarter. It printed at a very respectable 0.8% which was bang on expectation. The result is actually the strongest reading since the second quarter of 2010. Officials were quick to comment with PM David Cameron saying the result shows the economy has real momentum. The UK treasury said Britain is on the path to prosperity and the data shows the hard work is paying off. They will all be hoping for continued strong results later this week when we get lending data, house price index, and a reading on the manufacturing sector.


Japan
In another endorsement of the aggressive monetary policies put in place by the Government and Bank of Japan, inflation data on Friday came in close to a five year high. The core reading of 0.7% was also the fourth consecutive monthly increase. There is plenty more data to come this week including household spending, retail sales, industrial production and the BOJ monetary policy statement. There has been some political posturing between Japan and China over the last few days with regard to territorial boundaries. Kyodo news reported that Japan scrambled jets for the third consecutive day in response to Chinese military aircraft flying near the Okinawa island chain. Any escalation in the posturing could start to worry the markets, but for now the impact has been muted.


Canada
The Canadian dollar struggled last week on the back of a softer economic outlook from the Bank of Canada (BOC) at their monetary policy meeting. Most economists are still predicting modest growth over the next few years but the BOC seems to be stepping away from the outlook for a rate hike late next year. We could get more insight from Governor Poloz on Wednesday when he set to speak, and at the end of the week we get GDP data.


Major Announcements last week:
  • Canadian Retail Sales +.4% vs +.2% expected
  • US Unemployment rate 7.2% vs 7.3% expected
  • Australian 3rd quarter Inflation 1.2% vs .8% expected
  • BOE leaves monetary policy unchanged
  • BOC leaves monetary policy unchanged
  • HSBC Chinese Manufacturing  Index 50.9 vs 50.5 expected
  • German Business Sentiment 107.2 vs 108.2 expected
  • Prelim UK GDP +.8% as expected
  • US Durable Goods Sales +.1% vs +.6% expected
 

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