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FX Update - The Australasian duo trade to fresh cycle lows

Written by Ian Dobbs on January 27th, 2015.      0 comments

Market Overview:
Events in Europe over the past week have been a major focus for the markets. The ECB’s QE announcement was significant in its size and should see the Euro remain under pressure over the coming months. Greece’s election on Sunday provided the result the polls were suggesting and some interesting negotiations between the new PM and Troika (ECB, IMF and the European Commission) are set for the coming weeks. The Australasian duo have remained under pressure this past week with soft iron ore prices weighing on the AUD and expectations of a more ‘neutral’ RBNZ weighing on the NZD. Both currencies traded to fresh cycle lows against the USD. The tone of Thursday’s upcoming Fed statement will play a major part in determining if there is further downside in the near term. Volatility in the wider markets is significantly higher than last year and this is providing good opportunity, as well as risk, for those with exposure.

In the past few hours we have seen the latest reading on business confidence in Australia. The confidence indicator increased a touch to 2 from a prior reading of 1.
While the business conditions component decreased to 4 from 5 meaning the overall impact of the data was negligible. This has been the only release of significance since last Wednesday’s consumer sentiment data. The Australian dollar has remained under pressure having broken down below 0.8000 to the USD late last week. The outlook for commodity prices remains a key driver with a recent report from Goldman Sachs suggesting iron will average $66 per ton this year, which is down on the previous prediction of $80. Iron recently traded to a five year low at $63.54 a ton largely thanks to decrease in demand from China. Tomorrow from Australia we get the latest reading on inflation and then on Friday we get the Producer Prices Index.

New Zealand
The New Zealand dollar has remained under pressure since the release of last week’s weaker than expected inflation data. The only other data we have seen since then has been the Business NZ manufacturing index which improved to 57.7 from 55.6 previously, and credit card spending which was up 4.5% year on year, after increasing 5.1% prior. Neither of those two releases had much of an impact in the market. The focus is squarely on the RBNZ rate statement set for release at 9:00am on Thursday morning. It seems likely the RBNZ will signal a more neutral policy stance after surprising the market late last year with a somewhat hawkish statement. Most forecasters are expecting interest rates in NZ to remain on hold well into 2016 at this stage.

United States
A couple of weaker than expected readings late last week from manufacturing PMI and existing home sales have done little to dent appetite for the USD. However, this week is a big one, with a number of key releases. Tonight we have durable goods orders which is always closely watched and then on Thursday morning the Fed rate statement hits the wires. It will be interesting to see if the strong dollar, low inflation and a few weaker data points sways the Fed toward a more cautious outlook, or will they maintain the tone of December which suggests rate hikes are still coming in the second half of this year? The week will be rounded out with GDP data on Friday night. The market is expecting a reading of 3.0% which would represent something of a moderation from the strong 5.0% prior result.

United Kingdom
Data from the UK last week was largely supportive. Employment was stronger than expected, with the unemployment rate dropping to 5.8%, and wage growth seems to be increasing. We also saw the latest reading from retail sales which surprised forecasters coming in at +0.4%. Most in the market had been looking for a result of -0.6%, so this was a very good outcome, especially considering it comes on the back of the prior reading of +1.6%. We have seen a number of comments from BOE Governor Carny at Davos this past weekend. He said UK inflation is going through a “one off level shift” and that it’s right to look through the oil impact on CPI. He expects modest, limited, and gradual rate rises over the course of the next three years and that wages should continue to rise. Tonight we get the preliminary reading on quarterly GDP and the market is expecting a result of +0.6%. Later in the week we have the house price index, CBI realized sales and net lending to individuals data to digest.

As the dust settles in the wake of Thursday’s QE announcement by the ECB we have seen comments from a number of officials. ECB board member Benoit Coeure summed the situation up best when he spoke at Davos over the weekend. He said “we can’t do everything for Europe, we did our part on Thursday, others have to do their part. There is nothing we can do as the ECB to lift growth in a lasting way.” He went on to say the political foundation of the European project is being weakened by low growth and entrenched unemployment. He couldn’t be more accurate and nowhere is this more evident than in Greece where the fringe anti-austerity Syriza party have swept into power after the weekends election. A negotiation/showdown/confrontation now looms with Troika (EU, IMF and ECB) officials about the bailout conditions and sustainability of the current debt load. Syriza’s leader, Alexis Tsipras, has promised to end austerity and has stated he wants to default on half of Greek debt. The austerity measures were part of the bailout package Greece previously received and have been steadfastly enforced by Troika, at Germany’s insistence. Someone in these upcoming negotiations is going to have to back down and end up with egg on their face. Either that or Greece has to leave the Euro. It’s going to be very interesting indeed. Tsipras said he wants to begin talks with Greece’s creditors by the next Eurogroup finance ministers meeting on February 16th, so we may not have to wait long to get a feel for how things are going to pan out. The IMF’s Lagarde got on the front foot early saying last night that there are internal Eurozone rules to be respected and that there cannot be special categories made for certain countries. We’ll know if she’s right in the coming weeks. Data from the Eurozone has taken a back seat to recent events and this week will likely be no different. We do have inflation numbers from German and the Eurozone as a whole to draw focus, although they are likely to print very soft.

Bank of Japan (BOJ) Governor Kuroda spoke in Davos over the weekend. He said the Japanese economy was likely to grow 2% in 2015. He said he is extremely optimistic about the US economy and that China is making huge structural changes. Looking domestically, he added the Japanese government needs to make reforms as quickly as possible. Yesterday there were two releases from Japan to draw focus. The first was the BOJ monetary policy meeting minutes which were very much in line with expectations, and the second was trade balance data. The trade deficit was less than forecast for December with exports continuing to grow. This is encouraging and should contribute positively to Japanese growth. Still to come this week we have retail sales, household spending, inflation and industrial production.

There have been two key data points released since last Wednesday’s surprise rate cut from the Bank of Canada (BOC). Inflation printed negative for the second month in a row coming in on market expectation at -0.3%. But somewhat more positively retail sales beat expectations coming in +0.7% for the core reading, which excludes autos. If this number had come out ahead of the BOC decision the reaction would have been much more positive for the Canadian dollar. But as the central bank probably had both pieces of data before time and took them into account when making their decision, its impact has therefore been much more muted. The economic calendar is looking very light this week with just monthly GDP data set for release on Friday.

Major Announcements last week:
  • Chinese GDP 7.3% vs 7.2% expected
  • NZ Fonterra GDT 1.0% vs 3.6% previous
  • NZ Inflation -.2% vs 0.0% expected
  • BOJ leave monetary policy unchanged
  • BOE leave monetary policy unchanged
  • BOC cuts cash rate to .75% , unchanged was expected
  • ECB initiate QE to total 60bio per month
  • Canadian Inflation -.3% as expected
  • Canadian Retail Sales +.7% vs +.5% expected