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FX Update - Shifting central bank expectations drive currencies

Written by Ian Dobbs on December 9th, 2014.      0 comments

Market Overview:
The US dollar has been the biggest gainer over the past week, driven by a much better than expected result from non-farm payrolls data on Friday. While this has increased the potential for sooner than expected rate hikes in the US, locally the Australasian duo have seen pressure on reduced expectations of future growth. Last week’s surprisingly poor Australian GDP data has seen many forecasters now calling for rate cuts from the RBA next year. From the RBNZ’s perspective, the slowdown in Australia combined with that in China must surely see them moderate their forecasts for growth and inflation when they release their monetary policy statement on Thursday morning. In Europe policy makers seem far away from any consensus on outright sovereign quantitative easing and it looks like President Draghi will have an uphill battle on his hands trying to get it introduced next year. Meanwhile the Eurozone stagnates further and perpetually low inflation isn’t helping the debt dynamics of many Eurozone states. The social consequences of continued austerity, as opposed to growth policies, is seeing a rise in popularity of fringe ‘anti-Euro’ parties which could dramatically change the landscape in a number of states.

Data from Australia last week proved to be a mixed bag. There were better than expected results for company profits, building approvals, retails sales and the trade balance. But these were all overshadowed by a dramatically weaker than forecast GDP result. The quarterly reading of +0.3% was well below expectations of +0.7% and a number of banks are now forecasting rate cuts in 2015 on the back of the data. The Australian dollar has suffered as a result and the latest trade data from China, released yesterday, didn’t help either. Imports into China were much lower than forecast signalling weaker economic growth ahead for this major trading partner. In the past couple of hours we have seen the latest reading of business confidence. This showed deterioration from last month and has only reinforced calls for rate cuts. Still to come this week we have consumer sentiment, inflation expectations and employment change data.

New Zealand
Last week saw the latest Global Dairy Trade (GDT) auction results reveal a further softening in prices for New Zealand’s all important export sector. The index fall of another 1.1% will put further pressure on the season payout expectations that are due for release this week. The lowering of expectations to below average farm gate costs is of real concern to not only the farmers themselves, but also the wider economy. Finance Minister English acknowledged this last week, when he commented that given the fall in prices, that expected growth rates for 2016 maybe optimistic. This week’s focus is all about the RBNZ monetary policy decision on Thursday morning NZT. Whilst no change is expected, the accompanying Monetary Policy Statement will be closely watched. Later on that day, Governor Wheeler also makes his testimony on the economy to the Finance and Expenditure Committee.

United States
Over recent months there have been a number of employment indicators suggesting the US should be seeing some very strong payrolls gains, but the actual numbers while solid enough weren’t overly spectacular. That all changed on Friday evening with the latest non-farm payrolls data that blew expectations out of the water. The gain of 321k was miles above forecasts for 230k, and on top of this the previous result was also revised up by 29k. That’s the best reading in over four years. While the unemployment rate remained unchanged at 5.8%, average hourly earnings rose by +0.4% which was double the expectation for +0.2%. Make no mistake, this was very very good data that came on the back of strong PMI readings for the manufacturing and nonmanufacturing sectors earlier in the week. The data was so good in fact a number of Fed watchers have started calling for rate hikes earlier than expected. The Fed however, seem to be pouring cold water on that idea. In the past 24 hours two Fed officials, Lockhart and Williams, have been on the wires suggesting patience is needed for the lift off in rates, and that mid-2015 or even later is still appropriate. The Fed no doubt feel that the lack of inflation pressure means they can keep rates ultra-easy for longer. But focusing solely on inflation at this point is a mistake. Zero rates are not appropriate for an economy growing at around 3% and producing stellar jobs growth. The unintended consequences of this prolonged policy setting will start to outweigh the benefits. This week we have retail sales, producer prices and consumer sentiment to draw focus.

United Kingdom
Data from the United Kingdom last week was supportive of the economic outlook and this helped the UK Pound regain some ground. PMI’s from the manufacturing, construction and service sectors suggest a continued healthy pace of expansion and as widely expected the Bank of England (BOE) left policy setting unchanged. House prices also continue to gain with the latest reading for November showing an increase of +0.4%. In line with a global trend however, inflation expectations are falling with the latest data showing consumers expect prices to rise 2.5% over the next twelve months, down from 2.8% in August. Five year inflation expectations are now 3.0% down from 3.4%. This week we get manufacturing and industrial production figures, the trade balance and an estimate of GDP from the NIESR (National Institute of Economic Research).

The main focus in Europe over the past week was on the ECB rate meeting held last Thursday. It seems some in market were expecting something more concrete from President Draghi in terms of a sovereign QE programme and his failure to deliver saw the Euro make some gains. What the meeting did show is that there are big divisions within the governing council and that it is going to be very hard to get any consensus on plans to buy government bonds. The statement released talked about expanding the banks’ balance sheet to the levels it had at the beginning of 2012, but the decision to include that wording in the statement wasn’t even unanimous. The bank has revised its growth projections ‘substantially downward’ with 2015 GDP now seen at 1.0% from 1.6% previously, and inflation in 2015 expected at 0.7% down from 1.3%. Dramatic revisions like those would normally suggest further action is coming, but it’s all too clear that there is a lack of support, particularly from Germany, for full-blown QE. Since the meeting we have seen comments from the ECB’s Nowotny who said although QE was successful in the US and UK, those are individual countries and it is a whole different ball game across the 18 countries that make up the Eurozone. The Bundesbank’s Weidmann said the discussion over unconventional policies is difficult and that current monetary policy is too expansive for Germany. He added they cannot use the same formulas that were used in Japan and elsewhere. There will be further debate on the issue within the ECB in the first quarter of next year and it could well be the case by then that a further deterioration in economic data will force their hand, but at the moment it seems sovereign QE is far from certain. The economic calendar this week contains largely second tier data, although we do get the results of the target LTRO on Thursday evening which will be closely watched.

Three weeks ago we had preliminary GDP data from Japan that showed the economy was in recession with a second quarter of negative growth, this time by -0.4%. Yesterday we got the final reading of that GDP data and it’s got worse, with a -0.5% decline now registered. The market was expecting a revision up to around -0.1%. In annual terms the economy contracted by 1.9% from July to September and it was driven by a big fall in business spending. The poor GDP result last month caused Prime Minister Abe to call a snap election, which is now only days away. He is seeking a fresh mandate to continue is “Abenomics” policies and also delay the next planned sales tax hike scheduled for 2015. All indications are he will again win a healthy majority. Adding to the negative tone of data we also saw the Reuters Tankan survey of confidence among manufacturers fall in December and expectations are for it to deteriorate further. Still to come this week we have consumer confidence, core machinery orders and tertiary industry activity data.

We have seen a rash of data hit the wires since the Bank of Canada left rates unchanged at 1.00% last Thursday. The Ivey PMI index came in much stronger than expected at 56.9, but gains in the Canadian dollar on the back of this data were short lived. Employment change figures on Friday evening disappointed printing at -10.7k vs expectations of +5.3K, with the unemployment rate ticking up to 6.6%. Weaker than expected results have also been seen for the trade balance, housing starts and building permits. Governor Poloz was quoted as saying he sees a larger drag from falling Canadian oil prices and we can look forward to further comments from him on Thursday when he is set to speak again. The week is rounded out with the New House Price Index and capacity utilization data on Friday.

Major Announcements last week:
  • Chinese HSBC Manufacturing PMI 50.3 vs 50.5 expected
  • UK Manufacturing PMI 53.5 vs 53.1 expected
  • US ISM Manufacturing PMI 58.7 vs 57.9 expected
  • RBA leaves monetary policy unchanged
  • NZ GDT Auction prices -1.1%
  • Australian GDP .3% vs .7% expected
  • BOC leaves monetary policy unchanged
  • ECB leaves monetary policy unchanged
  • Canadian Jobs growth -10.7k vs +5.3k expected
  • US Jobs growth 321k vs 231k expected
  • Chinese Trade Balance 54.5b vs 44.3b expected