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FX Update - Soft data keeps USD under pressure

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

Market Overview:
Last week saw a continuation of the recent soft economic data from the United States. This has maintained the pressure on the US dollar, as the market starts to question its commitment to the concept of continued Fed tapering of its quantitative easing (QE) program. Weak retail sales, industrial production and employment numbers have eased the way for the markets wavering commitment. It seems likely that this week will produce few surprises, and we can expect further range trading on most pairings. Of note from the weekend was the release of data on Chinese credit growth. The explosion of “shadow bank lending” is the dark side to the Chinese loan data which puts big question marks over their economy in the long run. Rapid credit expansion is unsustainable as a source of growth in the long term. Massive imbalances build and it usually ends badly. The world has seen it before, very recently. The statistics on the amount of credit created in the Chinese economy over the last five years are mind boggling and any shock to the world’s second largest economy would materially impact global financial stability.

Last week’s key employment data was a very disappointing result for Australia and the currency suffered in the wake of the release. Yesterday’s new motor vehicle sales data was also on the soft side coming in at -3.5%, but there was little market impact. We did get some positive news over the weekend from China which has helped the Australian dollar in the early part of this week. Chinese credit expanded at a record pace in January which will help the economy maintain momentum in the near term. These numbers combine with recent better than expected trade data suggesting only a limited slow down from last year’s 7.7% growth for the world's second largest economy. In the last few hours we have seen the minutes from the RBA’s most recent meeting. The central bank expects a period of stability in interest rates and they believe the weaker Australian dollar, if sustained, would be expansionary for the economy.

New Zealand
There hasn’t been a lot in the way of economic data from New Zealand recently. Last week’s manufacturing index remained solid but the market impact was negligible. Yesterday we did get retail sales data for the fourth quarter of 2013. Expectations were for a relatively strong +1.7% gain, but the actual result was substantially less than that coming in at +1.2%. If you exclude the automotive sector the ‘core retail sales’ figure was a rather more modest +0.7%. These numbers do suggest there could be a small downside risk to GDP for the fourth quarter expected to come in at 1.4%. The only other data out this week is Producer Price Index (PPI) set for release on Thursday.

United States
The run of disappointing data that is being blamed on the severe winter weather in the US continued late last week. Industrial production figures released on Friday showed a decline of -0.3% against an expectation of a +0.2% gain. This comes on top of the soft retail sales data released the night before, and the key employment data from the week previous, both of which have been weather affected. At the end of last week we did also get consumer confidence data and this doesn't seem to have seem impacted by the tough winter. Confidence held steady at a very respectable 81.2 against expectations of a small pull back to 80.6. The recent soft patch of data hasn’t yet materially impacted tapering expectations from the Fed who are still expected to reduce quantitative easing purchases by $10 bn at the next meeting. A US holiday yesterday means it has been a slow start to the week, however we do have some data to digest over the coming days. Building permits, producer prices, the FOMC minutes, inflation, and manufacturing PMI are all set for release.

Europe produced some disappointing industrial production data early last week, but this was countered by a raft of better than expected GDP results on Friday. Germany, France, and the Eurozone as a whole produced GDP results that came in a touch above forecasts and this will make pleasant reading for the ECB. As usual we have had a number of comments from officials. Coeure, who last week suggested negative rates were been seriously looked at, was again on the wires this time saying the central bank was ready to take decisive action if required. This was followed by the ECB’s Nowotny who stressed the bank hasn’t yet decided on negative deposit rates. The Italian government has seen a change with PM Letta being removed, and it looks like centre-left leader Matteo Renzi will now form a new government. There has been little reaction in the market to date as most expect the new government to continue with fiscal consolidation and debt reduction. Still to come this week we have German economic sentiment, manufacturing and service PMI’s, and Eurozone consumer confidence.

United Kingdom
Last week was all about the Bank of England’s inflation report and Governor Carney’s ‘refocusing’ of forward guidance away from the unemployment rate. Interest rate hikes are now very much on the radar, albeit a year or so away. Those expectations could well get brought forward if strength in the economy continues to surprise. This helped to support the UK Pound and assuming there are no major shocks we should continue to see gradual gains over the coming months. We have some key data to digest this week in the form of inflation, the BOE minutes, unemployment, and retail sales.  

Recent data from Japan has come in of the soft side which is a little concerning ahead of the April sales tax increase. Last week we saw readings on the current account, consumer confidence, core machinery orders, and tertiary industry activity all come in below expectation. Yesterday it was the turn of GDP data to disappoint which printed at only +0.3% against expectations for +0.7%. The last thing PM Abe want’s is the economy to be stalling leading into the sales tax hike, an event which is likely to hit demand from both business and consumers. There are now some big question marks over the ability of the economy to withstand the impact. Officials continue to talk positively saying the economy is firmly on the rise, and there are high hopes that spring wage talks will lead to higher pay, but I imagine they are a lot more cautious behind the scenes. Later today we have the Bank of Japan monetary policy statement which will be closely watched. This is followed by their monthly report on Wednesday, the trade balance on Thursday, and the BOJ minutes on Friday.

Last week Canadian budget drew some focus, but there was little overall market impact. This was followed on Friday by manufacturing sales data which see the currency take a small hit. After three months of gains manufacturing sales ended the fourth quarter on a weaker than expected result of -0.9%. The market was looking from something more around the +0.2% area. Much of the weakness came from the aerospace sector, and this sector is not used in the calculation of monthly GDP data. Forecasters remain optimistic about the future for manufacturing though, due to the improving US economy and the weaker Canadian dollar. This week we get readings on wholesale sales, inflation, and retail sales.

Major Announcements last week:
  • Australian Unemployment rate 6.0% vs 5.8% expected
  • US Retail Sales -.4% vs 0.0% expected
  • Chinese Inflation 1.0% vs .7% expected
  • European GDP +.5% vs +.4% expected
  • US Industrial Prod. -.3% vs +.3% expected
  • NZ Retail Sales +.7% vs 1.2% expected
  • Japanese GDP +.3% vs +.7% expected
  • Chinese New Loans 1,320B vs 1,100B expected