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FX Update - The stand-off in Washington continues

Written by Ian Dobbs on October 8th, 2013.      0 comments

2:00pm (NZT)
Market Overview:
Over the last week the financial markets have been dominated by the debacle of the US Government shutdown. As the stand-off between President Obama and Congress continues, the potential economic impact worsens. Both the fragile US and wider global economic recoveries do not need this type of variable. It seems likely that an agreement will be made at some point in the coming week. Until such time, US governmental economic indicators have been suspended as part of the wide reaching shutdown. The markets will likely see lower levels of liquidity as a result, and a corresponding lack of direction. The potential for volatility increases the longer the situation remains unresolved, and as expected debt ceiling is reached on the 17th of October.

With a bank holiday yesterday it has been a quiet start to the week for Australia. The only data that has been released since last Wednesday’s weaker than expected building approvals and trade balance has been business confidence figures. They came out in the last couple of hours and showed a solid gain to the best level since March 2011. Tomorrow we get consumer sentiment figures and on Thursday the more important employment data is set for release.

New Zealand
Yesterday’s release of the Crown’s year-end financial statements made pleasant reading. The operating deficit of $4.4 bln was lower than the budget forecasts, and Bill English said the government remains on track to return to surplus in 2015. He also said the New Zealand dollar was too high and is hampering exports. He may be right, but his comments had little impact. What could have an impact was his revelation that the government is set to make a significant announcement on housing later this week. It remains to be seen just what the government is going to come up with, but if it is ‘significant’ and helps to cool the property market then that could well have implications for the future path of interest rates. That would then undermine some of the support the NZD has gained since RBNZ governor Wheeler’s comments last week. Earlier this morning we got the Quarterly Survey of Business Opinion (QSBO) data. It showed that business confidence and activity are improving and this is slowly being realised into more jobs and better profits. The survey is consistent with around 3% annual GDP growth. The only other data this week is the Business NZ manufacturing index out on Thursday.

United States
All the focus in the US continues to be on the stalemate in Washington. Key US employment data that was due out on Friday has been delayed as a result of the Government shut down and there has been little else in the way of market moving data released. But with Democrats and Republicans voting together to retroactively pay the 800,000 furloughed workers it’s now more of a forced paid holiday than a real shutdown. There is no end in sight with both sides digging their toes in and things won’t get really serious for another nine days when the debt ceiling is reached. The longer this debacle goes on the less chance there is of any Fed tapering in the near term. As far as I am aware we are still going to get the minutes from the last Fed meeting on Thursday, and Friday see consumer sentiment hit the wires.

With political instability in Italy out of the way, thanks to the demise of Berlusconi, Europe has fallen from the headlines. The ECB are cautiously optimistic and last week’s retail sales data showed some strength. The only other data released has been Sentix Investor Confidence out last night. It came in below expectations and a touch lower than last month, but it’s not a huge market moving number. Some positive news from Greece with the 2014 budget forecast seeing a return to growth. That will be a welcome relief, as will the current talk of resurrecting the bailout loans to a 50 year maturity. Still to come this week we have German factory orders, industrial production from both France and Germany, the ECB monthly bulletin. Draghi is also scheduled to make a couple of speeches on Wednesday and Thursday which will be closely watched.

United Kingdom
There have been no economic data releases to materially change the current outlook for the United Kingdom. Last week’s readings from the manufacturing, construction, and service sectors pretty much all told the same story. Although they came in a touch under expectations they were all still strong numbers and confirm the economy is well and truly on the recovery path. This week we have the Bank of England (BOE) monetary policy decision which should hold no surprises. The central bank will be happy to sit tight and reaffirm their commitment to keeping rates low for as long as possible. Ahead of that we get manufacturing and industrial production numbers, the trade balance, and the BOE credit conditions survey.

We have heard a fair bit from the Bank of Japan (BOJ) over the last few days. On Friday we had their Monetary Policy Statement, and then yesterday we got their Monthly report. There has been no significant change in the current stance, but we had some insight into their thinking. The BOJ believes PM Abe made the correct decision on raising the sales tax as it is important in gaining market confidence in Japan’s debt management. The accompanying stimulus package makes and further action by the BOJ a lot less likely. The BOJ is concerned that a protracted political stalemate in Washington could have a serious impact on the US and world economies. The BOJ would respond in the event that it starts to hurt the Japanese economy. Later this week we get the minutes from the BOJ meeting, core machinery orders, and consumer confidence data.

Late last week we saw the release of the Purchasing Managers Index from Canada. It is a survey that covers both the manufacturing and service sectors. The result came in a touch under expectation, but still showed improvement over the previous month. We have seen some negative forecasts for Canadian auto production with warnings that it could fall as much as 25% by 2020, thanks in large part to strength in the Canadian dollar. This was offset however by an announcement from Petronas that they plan to build an LNG plant and pipeline in Canada to the tune of $36 bln. Building permits data out last night showed a big fall printing at -21.2%. This is a volatile series however and the previous month was an increase of 20.7%. The positive takeaway was that within the data residential permits fell by only 5.4%. The housing market does provide some risk for the Canadian economy so data like this will be a little concerning. Key data for the rest of the week comes in the form of the trade balance and employment figures.

Major Announcements last week:
  • Canadian GDP +.6% as expected
  • Chinese Manufacturing PMI 51.1 vs 51.6 expected
  • Australian Retail Sales +.4% vs +.3% expected
  • UK Manufacturing PMI 56.7 vs 57.5 expected
  • US Manufacturing PMI 56.2 vs 55.3 expected
  • UK Construction PMI 58.9 vs 60.1 expected
  • NZIER Business Confidence 38 vs 32 previous
  • RBA leave monetary policy unchanged as expected
  • ECB leave monetary policy unchanged as expected