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FX Update - Tapering expectations continue to drive markets

Written by Ian Dobbs on November 26th, 2013.      0 comments

4:15pm (NZT)
Market Overview:
The global markets continue to be dominated by expectations around the timing of a potential Fed tapering. This was highlighted last week after the release of the Fed minutes seemed to suggest that if the data warrants it, they would start to taper in the coming months. Interest rates moved higher and the USD made gains across the board on the back of this, completely reversing losses seen the previous week after Janet Yellen's testimony. We can expect more of these broad swings over the coming months which have been exaggerated by the Fed’s lack of ability to communicate a consistent tone. Exiting the extraordinary policy of quantitative easing was never going to be easy for the Fed, but they seem determined to make the timing of such a move as unpredictable as possible. All markets will continue to see increasingly wild moves until there is a lot more clarity on the issue.

The past week has been a tough one for the Australian dollar. There has been little in the way of key economic data released, but that hasn’t stopped the currency putting in one of its worst performances for months. A number of offshore factors have combined over the past week to put the AUD on the back foot. An increased risk of tapering by the US Fed in the coming months, weaker Chinese manufacturing data, a negative IMF report, and talk of intervention by RBA Governor Stevens, have all heaped pressure on the currency. The declining value of the AUD is good news for the economy as tries to transition away from the mining led growth which helped it weather the last five years in relatively good shape. Offshore factors will continue to dominate this week with the only domestic data of note being private capital expenditure data on Thursday.

New Zealand
There has been very little in the way of meaningful economic data out of New Zealand since last week’s stronger than expected Producer Price Index. That data could do little to stop a slide in the NZD against the USD, as the market priced in an increased risk of the Fed tapering quantitative easing purchases in the coming months. A much weaker AUD also helped drag the NZD lower on most crosses. The exception was against the AUD itself, which saw the NZD break to fresh cycle highs on that pairing. This week we have trade balance data, business confidence, and building consents to draw focus.

United States
Last week was dominated by the Fed minutes and the apparent increase in risk around an earlier than expected tapering of asset purchases. Although most still expect this won’t start until around March next year, the minutes suggested that economic data could warrant trimming the pace of purchases in the coming months. This view completely contrasted with the markets take on testimony from incoming Fed Chairman Janet Yellen the previous week, who seemed to support on-going ultra-easy monetary policy. Late last week we also saw a decent fall in weekly unemployment claims, although this was tempered by a softer reading on manufacturing from the Philadelphia region. The latter is considered a leading indicator for the national figure which is due to be released next week. Last night we got data on pending home sales that hit a ten month low, adding to signs of cooling in the housing market. Still to come this week we have building permits, consumer confidence, and durable goods orders which will all be closely watched.

Recent data from Germany has shown continued improvement which is in stark contrast to the majority of other nations in the region. Last week we got readings on German manufacturing, services, and business climate, which all showed gains. The same could not be said for French data, or the broader Eurozone consumer confidence figures which all declined on the previous month. This disconnect between Germany and the rest of Europe is at the core of struggles within the ECB on further action. Germany flat out won’t allow outright quantitative easing, however it’s looking more and more like the region needs to take drastic measures. At this point the most likely action would be a move to negative interest rates and we have had a number of ECB officials over the past few days suggesting that is on the table. Any such move would not be likely in the very near term however, and would probably play out in the first quarter of 2014. There is a raft of second tier data out this week which will likely continue to highlight the growing disparity between Germany and everyone else.

United Kingdom
There little in the way or market moving data from the United Kingdom over the last few days. Late last week we got figures on public sector net borrowing which showed the on-going recovery is having a positive effect on government finances. Although the drop in borrowing wasn’t as big as had been expected, it is certainly heading in the right direction and should continue to improve as the economy gains strength. Tonight we get testimony from Bank of England (BOE) officials on the inflation and economic outlook in front of a parliamentary committee. Then later in the week we get the second estimate of GDP, the BOE financial stability report, and another speech from BOE Governor Carney.

There has been little to influence the economic outlook for Japan since the central bank’s Monetary Policy Statement on Thursday last week. In that release Governor Kuroda was generally upbeat about the outlook, noting a pickup in investment by businesses, resilient private consumption, and inflation expectations that appear to be rising. He did however leave the door open for further action if the economy stopped moving in line with projections. Key releases this week come in the form of retail sales, household spending, and inflation data.

A mixed bag of data at the end of last week did little to influence the outlook for the Canadian economy. Retail sales rose more than expected, printing at +1.0%, but taking out autos, the core number was flat which was a touch worse than forecast. Core inflation data however, came in a touch better than expected at +0.2%. The Canadian Dollar has struggled in the wake of the agreement reached between the US and Iran. That caused oil prices to fall and this has weighed on the CAD do a degree. Later this week we get current account and GDP data to digest.

Major Announcements last week:
  • US Inflation 1.0% as expected
  • US Retail Sales +.4% vs +.1% expected
  • Chinese HSBC Manufacturing Index 50.4 vs 50.9 expected
  • BOJ leaves monetary policy unchanged as expected
  • Canadian Inflation +.7% vs +.9% expected
  • Canadian Retail Sales +1.0% vs +.3% expected