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FX Update - The US dollar gains as geo-political events draw attention

Written by Ian Dobbs on July 22nd, 2014.      0 comments

Market Overview:
Throughout the last week the main theme emerging from the markets has been one of caution. The medley of the escalating situation around the Gaza strip and the inconceivable shooting down of Malaysian flight MH17 has provided the safe haven appetite. For the most part the move has seen many pairings remain in what are increasingly familiar ranges. Expect the geo-political tensions to continue to temper any market enthusiasm in the short term at least, with the US dollar and the Japanese Yen being the primary beneficiaries in such environments. The exception to the range trading, has been the NZ dollar that saw a determined reversal of the hefty demand that has been apparent for most of 2014. A further plunge in the  important global dairy prices were joined by lower than expected Q2 inflation numbers. This saw pressure build on the NZ dollar across the board ahead of this week’s Reserve Bank of New Zealand (RBNZ) monetary policy announcement.

Last Tuesday’s RBA minutes provided the main focus for the Australian dollar, although they were very much in line with previous releases from the central bank. As such, there was little overall market impact. At this point the RBA are on hold through to the end of the year. Other second tier data released last week will have failed to impact that expectation, with strong motor vehicle sales offset to a degree by a fall in business confidence. This week we have inflation data that will be closely watched. The market is expecting a reading of 0.5% which would mark a small decrease from the prior result of 0.6%. This sort of outcome should have no impact on the RBA current policy and allow them the ability to maintain ‘a period of stability’ in interest rates. We are also expecting to hear from both the RBA Deputy and Governor today, and if history is anything to go by they won’t miss a chance to try and jawbone the Australian dollar lower.

New Zealand
This week should prove to be very interesting for the New Zealand economic outlook. The main event is Thursday’s RBNZ monetary policy announcement where the central bank is still expected to hike another 25 points taking the cash rate to 3.50%. Data over the past week will certainly give the bank something to think about and the decision is not a foregone conclusion. A very high New Zealand dollar, falling dairy prices and weaker than expected inflation are all reasons to suggest if the bank does hike again, they may well signal a pause for the rest of the year. This is probably the base case scenario that is now baked into the market. Yesterday we saw the latest migration data for June which showed 4,300 net migrants arrived in June. This is the second highest number on record behind February’s 4,700 and it will only serve to add to the RBNZ’s case for higher rates. Strong migration puts upward pressure on demand and inflation and is one of the reasons the central bank has sighted in justifying this tightening cycle. Other data this week in the form of the trade balance and business confidence will take a back seat to the central bank decision on Thursday morning.

United States
The main focus in the United States last week was Fed Chair Janet Yellen’s semi-annual testimony to a congressional committee. Although she did suggest if the employment market continues to improve faster than expected rate hike could come soon than forecast, she was very cautious and her review of the economy was carefully hedged at every turn. On the data front we saw some regional manufacturing surveys that came in above expectation and suggest the recovery from the shocking first quarter is continuing. We also saw weekly jobless claims fall a touch and if maintained at this level it is consistent with another good monthly payrolls figure. There were some disappointments however, and these came in the form of retail sales, building permits, housing starts and consumer confidence. The USD has seen increased demand on the back of developments in Gaza and the Ukraine, and long term interest rates have dropped recently with ten year Treasuries now trading back under 2.50%. This week we get the latest readings on inflation, existing home sales, new home sales and durable goods orders.

United Kingdom
There were two key releases from the UK last week that will no doubt cause some debate within the Bank of England’s (BOE) Monetary Policy Committee. The first was inflation that came in at 1.9%. This was much stronger than the expectation of 1.6% and is only just below the BOE’s 2% target. The second was the claimant count change (unemployment claims) which saw a significant drop of -36.3k. Again this was much stronger than expectations which centred around a -27.1k fall. The UK employment market has surprised many, not least the BOE, with its strength throughout the GFC and these were again good numbers. The problem however, is that although overall employment is solid, wage growth has failed to find much traction. Average earnings at only +0.3% are running well below the level of inflation and this has been another feature of the UK since late 2007. The market chose to focus on this aspect when the data hit the wires and as a result the GBP failed to make gains in the wake of the release. Yesterday saw the release of the Rightmove House Price Index which actually decline in July. The -0.8% was the first fall this year and it takes the annual rate of growth to 6.5% from 7.7% previously. The housing market remains very strong however and one month’s data is not enough to signal a change in trend. The average time to sell actually fell from 75 days this time last year to 65 days now and this would suggest there is still plenty of heat in the market. Still to come this week we get the BOE minutes, retail sales, GDP and a speech from Governor Carney.

Last week saw continued disappointing data from the Eurozone with declines in industrial production, German economic sentiment, the trade balance and the current account. To add to this there were concerns around the Portuguese banking sector and although they have moderated, it just goes to show how fragile the entire situation still remains throughout large parts of Europe. In recent days the Bank of Italy have slashed GDP forecasts for 2014 to just 0.2% from 0.7% previously. These factors have seen the Euro weaken a touch over the course of the week. Geopolitical concerns remain heightened in the wake of the downed Malaysia Airline flight, however posturing from Europe will likely amount to nothing. They are too reliant on Russian gas supplies to instigate any meaningful sanctions.

There have been no releases of significance from Japan since last Tuesday’s BOJ monetary policy statement. To be fair even that release was very much as expected with the bank maintaining its current policy stance and economic outlook. The big question at the moment is just how quickly will the economy recover from the impact of April's sales tax increase. The negative impact has been significant and officials are hoping for a gradual recovery but only time will tell. A bank holiday in Japan yesterday means it has been a very quiet start to the week although we do have the trade balance, manufacturing PMI and inflation data to digest over the coming days.

The Bank of Canada (BOC) were very direct in their monetary policy statement last week specifically stating they are ‘neutral’ with regard to the outlook for rates. The timing and direction of the next change will depend on how new information influences the economic outlook. They also acknowledged that the “temporary” rise in inflation may be stronger and more persistent than expected. This certainly seems to be the case with Friday’s CPI data coming in at +2.4% vs the +2.3% expected. The monthly figure of +0.1% marks the eighth gain in the last nine months and one starts to wonder just how “temporary” the rise will be. Also last week we saw better than forecast readings from manufacturing sales and wholesales sales. The only data this week comes in the form of retail sales on Wednesday.

Major Announcements last week:
  • BOJ leaves monetary policy unchanged as expected
  • UK Inflation 1.9% vs 1.6% expected
  • German Economic Sentiment 27.1 vs 28.9 expected
  • US Retail Sales +.4% vs +.5% expected
  • NZ Inflation .3% vs .4% expected
  • Chinese GDP 7.5% vs 7.4% expected
  • UK Unemployment rate 6.5% as expected
  • BOC leave monetary policy unchanged as expected
  • European Inflation +.5% as expected
  • Canadian Inflation  (monthly) +.1% as expected