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FX Update - The slow grind of economic recovery continues

Written by Ian Dobbs on November 11th, 2014.      0 comments

Market Overview:
The economic data releases from the last week have revealed a continuation of the theme of a slow economic recovery in the global sense. With Europe and Japan in economic respective quagmire’s, eyes are closely on the news from the UK and the US for inspiration. Both economies continue to improve, albeit not plain sailing for either economy. Wage growth remains the sticky indicator across the board and until wages start to climb, the full benefits of lower levels of unemployment will not be seen. The Chinese economy continues to represent a significant risk with the property and credit markets remaining vulnerable. The economic resilience in China is of primary importance to both the Australian and New Zealand economies. 2015 looks to be a crucial year for China as it looks to continue to develop its economy, in the face of the pressures created by the extraordinary global monetary conditions of the last six or so years.

The Australian dollar struggled last week despite some better than expected data from retail sales and October employment change. However, prior employment numbers were revised lower which will only serve to reinforce the RBA’s view that jobs growth is moderate and unemployment is likely to stay elevated for some time. That outlook was repeated in the Reserve Bank of Australia’s (RBA) Statement on Monetary Policy published on Friday. This statement is released four times a year and it largely reflected what the central bank said earlier in the week after their rate meeting. Inflation is expected to remain in line with the 2-3 per cent target and the most prudent course is a period of stability in rates. The bank added that the slowing Chinese property market is one key risk to global growth. Chinese trade figures released on Monday were better than expected, although they do show export growth slowed to 11.6% in October from 15.3% the prior month. Australian home loans data also hit the wires yesterday and it won’t have done anything to relax the Reserve Bank’s position that imbalances in the housing market are also a potential threat. Investor loans reached a new high in September at 41.4% of all mortgage lending. Still to come this week we have business confidence, consumer sentiment, the wage price index and inflation expectations.

New Zealand
There has been no data of significance from New Zealand since last Wednesday’s strong employment figures. Tomorrow we do get the RBNZ’s Financial Stability Report and we will also hear from Governor Wheeler when he appears before a parliamentary select committee. There has been lots of speculation in the media that he could signal a relaxing of LVR restrictions that were introduced back in October 2013. Although the property market has cooled somewhat I not sure Wheeler will want to risk sparking a surge of first home buyer demand just yet.

United States
Aside from the US mid-term elections, which saw Republicans take control of both the Senate and House of Representatives, the main focus last week was on Friday’s employment report. A range of indicators had all pointed to a very strong result and the markets were primed for a number in excess of 235k. Unfortunately the actual result didn’t live up to expectations coming in at just 214k. While jobs growth of above 200k is still very respectable and raises no concerns about the ongoing recovery, the markets disappointment was evidenced in the reaction of the USD which immediately came under pressure. Although the headline number didn’t live up to expectations, there were positive revisions of +31k to the prior two months results and the unemployment rate dropped to 5.8% from 5.9% which is the lowest reading in six years. These factors have helped the USD to slowly regain most of the ground lost in the immediate aftermath of the data. A US holiday today has meant it has been a very quiet start to this week data wise. Things should get more interesting later in the week with retail sales and consumer sentiment numbers set for release.

United Kingdom
Last week saw some mixed data from the United Kingdom, but nothing that should raise concerns about the ongoing economic recovery. While manufacturing PMI came in better than expected, the construction and service sector readings were lower than forecast. They are both still at healthy levels overall, but perhaps not strong enough to put any pressure on the Bank of England (BOE) to raise rates. The BOE meeting last week came and went with little market impact and that could well be the case until late next year now. Trade balance data on Friday showed a bigger than forecast trade deficit. This was however, driven by increasing domestic demand as imports increased at a faster pace than exports. This week we have claimant count change (unemployment claims) and average cash earnings data to digest ahead of the BOE’s inflation report on Wednesday.

Last week’s ECB meeting and resulting press conference seems to have quashed speculation in the media of a rift within the governing council. There was talk that leader Mario Draghi’s communication style had upset other council members and his leadership could be challenged. Draghi certainly came across and a man in control at his press conference and there has been nothing printed on the topic since. Datawise over the past week there has been little to suggest any meaningful recovery in the Euro area is just around the corner. German data continues to mostly disappoint with weaker than expected readings from factory orders and industrial production. Eurozone retail sales were also very soft last week and comments from the ECB’s Mersch last night summed the situation up correctly when he said “the Eurozone recovery has lost momentum”. He added that unemployment is still unacceptably high and that governments must boost competitiveness for sustained growth. This week we have Eurozone industrial production, GDP and the final reading of inflation to draw focus.

Largely second tier data from Japan last week had little market impact. Of particular note however, were the average cash earnings figures that came in below expectations at +0.8%. PM Abe is keen to see wages grow in order to create a “virtuous cycle” of growth in the economy. Unfortunately the economy seems to have struggled to recover from the sales tax hike back in April and all indications are growth in the third quarter could be flat or even negative. A decision on another sales tax increase is due to be made soon and the issue is being hotly debated, at least in the media. The economy doesn’t seem anywhere near strong enough to withstand another hike, but it is critical for confidence in the government’s ability to address high public debt and establish a record of fiscal discipline. Japan is in a very tough situation with one of the highest government debt levels in the world and an aging population that will only put further pressure on public finances. The Japanese Centre for Economic Research recently said that without further consumption tax hikes, sovereign default cannot be avoided. Focus this week turns to tertiary industry activity data along with core machinery orders.

The majority of data out of Canada last week was very supportive. The only exception was the Ivey PMI which saw a big drop to 51.2 from 58.6 previously. This was countered however, by better than expected readings from the trade balance, building permits and then employment change on Friday. The market was expecting a small drop in employment of -4k, but the economy actually added jobs to the tune of +43.1K. The unemployment rate also saw a big fall to 6.5% from 6.8% previously and now stands at a six year low. This was all round good data and the Canadian dollar responded positively. However, against this solid data is a backdrop of declining oil prices which will create some headwinds for a resource rich country like Canada. This week is relatively quiet on the data front with only the new house price index and manufacturing sales of any note.

Major Announcements last week:
  • Chinese HSBC Manufacturing 50.4 as expected
  • UK Manufacturing 53.2 vs 51.5 expected
  • US ISM Manufacturing 59.0 vs 56.5 expected
  • Australian Retail Sales 1.2% vs +.3% expected
  • RBA leaves monetary policy unchanged
  • NZ Fonterra GDT Price Index -.3% vs +1.4% previous
  • NZ Unemployment rate 5.4% vs 5.5% expected
  • Australian Unemployment rate 6.2% as expected
  • BOE leave monetary policy unchanged
  • ECB leave monetary policy unchanged
  • Canadian Unemployment rate 6.5% vs 6.8% expected
  • US Unemployment rate 5.8% vs 5.9% expected