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FX Update - The US dollar dominates despite jobs data

Written by Ian Dobbs on September 9th, 2014.      0 comments

Market Overview:
The dominant demand for US dollars has been a central theme in markets throughout the last week. The demand has been driven by a number of influences. The necessary monetary policy initiatives from the ECB, coupled with a shift in the polling ahead of the Scottish Independence referendum has kept the European currencies under pressure. An increasingly soft outlook for Japan has seen the YEN under fire also. With the mostly positive news in the US pointing towards improving prospects, the way has been easily paved for the rise of the US dollar. Stuck in the middle of these influences have been the Australasian duo who have seen mixed performance’s by underperforming the USD, but increasing against the other majors. This week will see Thursday provide the focus with the RBNZ Monetary Policy Statement being released ahead of the latest Australian employment numbers.

The past week has seen largely positive data from Australia and as such the Australian dollar has been a solid performer. Better than expected results from building approvals, GDP and the trade balance helped to support the economic outlook and the currency. Yesterday’s release of monthly job ads data showed the third consecutive gain printing at +1.5%. Year to date job ads are up 8% and this would seem to suggest last month’s jump in unemployment was an aberration. Business confidence data hits the wires in the next couple of hours and we then get the latest employment data on Thursday. It will be very interesting to see if there is a recovery in the unemployment numbers.

New Zealand
Aside from another fall in dairy prices there was little in the way of key economic data released last week in New Zealand. Yesterday we saw manufacturing sales figures for the second quarter and after adjusting for seasonal effects, the total volume of manufacturing sales fell 0.7%. This was led by a 1.4% fall in meat and dairy product manufacturing. The data had little impact on the value of the New Zealand dollar that is more focused on what the RBNZ might have to say in Thursday mornings Monetary Policy Statement (MPS). At the central banks last MPS in July they signalled there would be a period of assessment before any further rate increases. At the time the market took that to mean the bank would be on hold until December. However, developments since then have seen many push back their expectations for the next hike to March 2015. The market has also significantly reduced what they see as the peak of this tightening cycle and they will need to see confirmation that these expectations are in line with the central banks forecasts.

United States
Friday evening saw the first real hiccup in what has been a prolonged run of positive US data. The market was expecting non-farm payrolls numbers to print around +226k continuing its run of +200k results. But to the surprise of many the actual figure came in at just +142k with the unemployment rate remaining steady at 6.1%. This was the smallest gain in employment since December 2013. The knee jerk reaction was to sell US dollars, but this move has not been sustained and rightly so. Data can be volatile and the broad trend in employment is still very positive. Other indicators are also very supportive of the economic outlook, including good results last week from both manufacturing and non-manufacturing PMI’s and the trade balance. Last night we also saw a big jump in consumer credit for July. The increase of $26 billion was much higher than the forecast of $17.40 billion, and also the second largest gain on record. This would indicate consumers are confident enough about the economy to take on more debt, and also that banks are banks are comfortable to increase lending. This week the focus now turns to retail sales and consumer sentiment data which are both set to hit the wires on Friday evening.

United Kingdom
Data from the UK last week was generally supportive of the economic recovery. Although manufacturing PMI missed expectation, both the construction and service sector PMI’s we much better than forecast. As widely expected the Bank of England (BOE) also left monetary policy unchanged at their regular meeting on Thursday. The key focus for the market has been the upcoming Scottish independence vote set for September 18th. Only a month ago the polls were showing big margin in favour of the status quo, i.e a ‘no’ vote for independence. But this has now turned into a much closer call with the latest poll released on the weekend showing 51% to 49% vote in favour of Scotland breaking away. The UK Pound has come under all sorts of pressure as a result and has now suffered its worst week in more than a year. The markets don’t like uncertainty and with estimates that Scottish independence could wipe anywhere between 5% and 10% off the value of the GBP, we can expect the currency to remain on the back foot heading into Sept 18. Economic data between now and then will be side-lined with the market focusing almost solely on poll results leading into that vote.

The big news of the past week came from the European Central Bank (ECB) after their rate meeting on Thursday evening. With dangerously low inflation and growth struggling to gain any real traction, the ECB threw caution to the wind in an attempt to turn around economic prospects for the region. Along with further rate cuts which have now taken the deposit rate to -0.2%, the central bank announced a quantitative easing programme to buy asset backed securities (ABS) and covered bonds. This is brave stuff from the ECB which is unlikely to have universal support in Germany, or even within the central bank’s governing council itself. But ECB President Draghi has made it very clear previously that he will do whatever it takes to save the region and he is certainly going to use all the tools at his disposal to try and do just that. The real question is will it be enough? Draghi himself believes it will take more just easy monetary policy to turn the region around and he has made numerous call for governments to do their part with more growth friendly fiscal policy. So far that has fallen on deaf ears with German led austerity policies prevailing. The Euro has however lost substantial ground recently, which will help growth prospects, and this trend is likely to continue for the foreseeable future. Highlights for this week include the ECB monthly bulletin, a speech by President Draghi and industrial production data.

Japanese economic data continues to highlight the larger than expected negative impact from April’s sales tax hike. There was one bright spot last week when wages data surprised on the strong side. But a good portion of the +2.6% jump in average earnings was as a result of overtime and this took some of the shine off the report. Yesterday we saw current account data that missed expectation and a soft final reading of GDP for the second quarter. On an annualized basis the economy contracted by 7.1% in Q2 instead of the 6.8% previously estimated. The Bank of Japan is facing an uphill battle with subdued consumer spending and production making their 2% inflation target tough to achieve. Later this week we have consumer confidence and core machinery orders data to digest along with a speech from Governor Kuroda.

The Bank of Canada affirmed their ‘neutral’ stance last week after their regular rate meeting and the tone of their statement was slightly more optimistic. They will however have been disappointed by data released on Friday evening that showed a drop in the Ivey purchasing managers index and a fall in employment of 11k. The market was expecting employment to have gained by around 10k, but even more puzzling was the big swing away from private sector jobs. This has raised some concerns about the validity of the data especially in light of last month’s admission of calculation errors from Statistics Canada. As a result the impact of the unexpectedly weak data has been somewhat less than normal. Yesterday we also saw a strong reading from building permits which came in at +11.8% against expectations of -4.2%.Tonight we get housing starts data to digest and the week is rounded out on Friday with the New House Price Index.

Major Announcements last week:
  • Chinese Manufacturing PMI 51.1 vs 51.2 expected
  • UK Manufacturing PMI 52.5 vs 55.1 expected
  • NZ GDT auction prices down 6%
  • RBA leave monetary policy unchanged as expected
  • US Manufacturing PMI 59.0 vs 57.0 expected
  • Australian Q2 GDP +.5% vs +.4% expected
  • UK Services PMI 60.5 vs 58.5 expected
  • BOC leave monetary policy unchanged as expected
  • Australian Retail Sales +.4% as expected
  • BOE leave monetary policy unchanged as expected
  • ECB cut interest rates and introduce ABS QE
  • US Employment growth 142k vs 226k expected