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FX Update - Surprising demand for the Australian duo

Written by Ian Dobbs on April 1st, 2014.      0 comments

Market Overview:
Every so often the financial markets behave strangely and the last week has been one of those periods. The price action left many struggling for explanations. The US dollar was under pressure in the face of some reasonable strong pieces of key economic data. The Australasian duo saw increased demand almost across the board and this in the absence of material economic news. Overnight US Fed chair Yellen stated that “the economy will need extraordinary support for some time, and that they still see considerable slack in the economy and labour market”. This “dovish” statement has seen the equity markets rise with a wave of risk appetite, further underpinning the NZ and Australian dollars. With lower levels of economic growth in Europe and concern at lowering price pressure, all eyes will be on the European Central Bank (ECB) on Thursday. So the choppy nature of markets in 2014 continues as we head into the second quarter, with the US dollar weakness the big surprise of the first quarter.

It should prove to be a very interesting week for the Australian dollar. It was one of the best performing currencies last week, although there was little in the way of fundamental data released. We did get the RBA’s Financial Stability Review along with a number of comments from Governor Steven and Deputy Governor Lowe. Their general lack of any negative comments with regard to the currency, helped support the AUD’s rise. This week could easily be a very different story. We get the RBA cash rate statement later this afternoon and if they start talking about the currency being overvalued again, we should get a downside reaction. It was back in February when they first dropped any reference to an ‘overvalued’ currency, but the AUD was trading at 0.8750 back then. In the March statement, with the currency trading 150 points higher at 0.8900, there was again a lack negative AUD comment. But with the AUD now trading around 0.9250 this could well draw negative attention from the central bank, and this would likely result some sort of correction lower. If the AUD can make it through the RBA rate statement unscathed, we are going to need to see decent results from both building approvals (Wednesday) and retails sales / trade balance (Thursday) to warrant the current level being sustained.

New Zealand
The New Zealand dollar performed well last week, particularly in the latter stages. There was very little fundamental data released, with only a better than expected trade balance number actually supporting the move. Yesterday we saw a couple of economic releases, although neither of them had much of an impact on the market. Building consents came in at -1.7% vs an expectation of +2.0%. The result was dragged lower by a drop in apartment consents, with new house consents rising +3.0% to their highest level since December 2007. This was followed by business confidence data which showed a small decline to 67.3 from the previous 70.8. The overall level however, is still very strong and consistent with positive outlook for the economy. The New Zealand Treasury released their Monthly Economic Indicators report and in it they stated the elevated level of the currency may weigh on the economy. The rest of the week looks very thin data wise with only the commodity price index set for release tomorrow.

United States
Last week’s mixed bag of data from the United States did little to support the currency. In fact the USD was under pressure for much of the week and data on Friday did nothing to alter that. Personal income and spending data came in broadly in line with expectations at +0.3%. Core PCE inflation (the Feds preferred gauge of inflation) also came in unchanged at +0.1% month on month, with the headline number printing at 0.9% year on year which is well below the Feds 2.0% target. We also go consumer sentiment data which was a touch weaker than expected at 80.0 vs forecasts of 80.6. The rest of this week should prove very interesting with some key data set for release. Authorities will want to see further confirmation that the data is recovering from the weather affected releases seen earlier in the year. Tonight’s manufacturing PMI is first up with non-manufacturing PMI, the trade balance, and employment data later in the week.

There hasn’t been a lot of positive data from the Eurozone over the past week. In fact since last Monday’s better than expected French PMI’s, the data has almost uniformly been coming in on the soft side. The only exception to that was German retail sales released last night which printed at +1.3% vs expectations of -0.3%. But this result was completely overshadowed by inflation data for March which fell to 0.5% from 0.7% previously. This is the lowest level of inflation in four years and will be ringing alarm bells at the ECB. The drop in the CPI was driven by energy and food, and when those volatile components are stripped out, the core rate was a little better printing bang on expectations of 0.8%. President Draghi believes the gradual economic recovery will eventually see inflation move back up toward their 2.0% target, but this latest result will put pressure on the central bank to act. With inflation falling and unemployment at 12.0%, where is the risk in adding more stimulus to the economy? The ECB meet on Thursday this week and not many forecasters are expecting further action. The governing council may well sit tight for now, but this data certainly make it a much closer call, and there is a good chance of further action if the data doesn’t improve over the coming months.

United Kingdom
Last week’s data was generally supportive of the economy and the UK Pound. The best result came from retail sales that printed at +1.7% against expectations of +0.5%. This was backed up by a small improvement in consumer confidence to -5 from the previous -7 result. That index is now printing at levels last seen in 2006/7 before the GFC. There is plenty more to come this week with the trifecta of PMI’s from the manufacturing, construction, and service sectors set for release. Ahead of these we have a speech from BOE Governor Carney tonight and later in the week we get the BOE Credit Conditions Survey.

Japan released a raft of data on Friday afternoon although there was little immediate market impact. Year on year household spending was well below forecast at -2.5% vs expectation of +0.2%. This was however, countered by the other releases that were either at or above expectation. Inflation was in line with forecasts at 1.3%, while retail sales and the unemployment rate were a touch better than expected both printing at 3.6%. Yesterday releases of manufacturing PMI and industrial production were both softer than expected, and suggest that output in Japan may already have peaked ahead of the sales tax increase that came into effect today. Later this afternoon we get the quarterly Tanken indexes for both manufacturing and non-manufacturing sectors which will be closely watched.

There was no data released last week from Canada but this week should prove more interesting with a number of key releases scheduled. These started last night with GDP for January which recovered Decembers decline to print at +0.5%. This was just above the forecast for a +0.4% increase. Any impact on the currency was however short lived with the CAD currently trading close to where is was before the release. The market will now turn its focus to Friday and the release of the trade balance, employment change, and Ivey PMI.

Major Announcements last week:
  • China Manufacturing PMI 48.1 vs 48.7 expected
  • European Manufacturing PMI 53.0 vs 53.0 expected
  • US Manufacturing PMI 55.5 vs 56.5 expected
  • UK Inflation 1.7% vs 1.6% expected
  • US Consumer Confidence 82.3 vs 78.6 expected
  • US Durable Goods Sales 2.2% vs 1.0% expected
  • UK Retail Sales 3.7% vs 2.5% expected
  • US GDP 2.6% vs 2.7% expected
  • UK GDP .7% as expected
  • European Inflation .5% vs .6% expected
  • Canadian GDP +.5% sv +.4% expected
  • US Chicago PMI 55.9 vs 58.5