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FX Update - The US recovery starts to look shaky

Written by Ian Dobbs on August 27th, 2013.      0 comments

3:54pm (NZT)
Market Overview:
Some broad ranges seem to be establishing themselves in many markets at the moment. Contradictory forces are seeing swings back and forth within these ranges and this looks set to continue in the near term. The consensus outlook for the Fed to start tapering quantitative easing (QE) in the coming weeks is supportive of the USD, however very recent data has surprised to the downside and puts a question mark on the strength of the US recovery heading into the third quarter. A mild recovery in the Euro-zone is about to run into the headwinds of Italian political uncertainty and another Greek bailout. While in the United Kingdom the economic momentum continues to build, however the market is very wary of pricing in too much of a recovery with new Governor Carney desperate to keep rates low and the GBP weak for as long as possible. There was little of note to come out of the central banker’s symposium at Jackson Hole over the weekend apart from some research downplaying the positive effects of QE.

There has been very little of note on the economic front for Australia over the past week. A slightly better outlook on China has helped to alleviate pressure on the AUD recently. This was reinforced by comments from the chief of Chinese statistics yesterday who said there are clear signs of growth stabilisation. We certainly saw a welcome bounce in Chinese manufacturing data last week, but there is little other data scheduled over the coming days to back that up. Later this week from Australia we get data on construction output, capital expenditure, and private sector credit.

New Zealand
The New Zealand dollar has remained under pressure for much of past week. Yesterday’s trade balance data didn’t help the situation either coming in well below expectations. The deficit of 774.4 million was the worst result in 10 months and well below the -18 million forecast. These numbers can be volatile though and it seems some large one-off factors affected the result. Standard and Poors were on the wires not long after the result predicting the deficit to grow to 6% of GDP by 2015. The only other data out this week comes in the form of business confidence on Thursday and building consents on Friday.

United States
Friday evening saw some surprisingly weak data out of the US. New home sales data for July saw a fall of 13.4% coming in way below expectation. It was the softest number in nine months, and to make matters worse the three previous months were all revised lower as well. The USD quickly lost ground across the board after the result. This data is all the more concerning as it’s the housing market that has been the big driver of the recovery so far. There is talk that higher mortgage rates caused the soft result, but the only thing that’s certain is that it caught everyone off guard. The trend for new home sales has definitely been up, so we will need to wait for next month's data before getting too worried. Last night however we got data on durable goods orders. This is closely watched and again it was a very disappointing result. The drop of 7.3% was the biggest decline in a year, and snapped 3 consecutive months of gains. Economic growth for the third quarter is starting off a lot softer than most expected and we are starting to see economists revise down GDP forecasts. Even with this softer data, the market is still expecting a tapering of quantitative easing (QE) in September. This expectation was reinforced by research presented at the Jackson Hole Central Bankers symposium over the weekend. That research showed the effect of QE on the wider economy is much less than central bankers had thought. QE policy comes with big risks and if the benefit is limited it would only make sense to wind it down. US treasury secretary Lewis was out last night saying the US will reach its debt limit by mid October. This issue is going to start coming to the forefront of the coming weeks and could start to weigh on the USD as the political battle begins.

Data out last week was largely supportive of the Euro-zone printing bang on or slightly better than expectation. Over the weekend we have had an admission from the Greek finance minister that they will need some more aid. The figure mentioned so far is around EUR 10 billion. The finance minister did have some fighting words saying they will not accept any further austerity. Fair enough too with their economy now 25% smaller than it was before the crises. Political uncertainty in Italy, as usual thanks to Berlusconi, is causing a few waves. The Italian stock market was down 2.4% overnight and their long term interest rates moved higher. The most accurate comment from any European official recently came from the head of the German Central Bank, Jens Weidmann. He was quoted as saying ‘the structural problems in the crisis countries have built up over a long period of time and they can’t be solved in a few quarters, but will rather need years’. It’s going to be a long slow journey for Europe with many ups and downs. There is plenty of data out over the rest of this week. The highlights being German business climate tonight, and Euro-zone inflation and unemployment on Friday.

United Kingdom
After the recent run of very good data out of the United Kingdom there was plenty of talk that GDP could get revised higher. On Friday night we got the second estimate of GDP for quarter two and it has indeed been revised higher from 0.6% to 0.7%. This lent support to the GBP although a lot of the impact had already been priced in. This week has seen a quiet start with a UK bank holiday yesterday. However there is potential for some action over the remainder of the week starting with a speech by Governor Carney tomorrow night. He is likely to be very cautious on the outlook and stress the need for low rates for the foreseeable future. The market is expecting him to try and talk down both the GBP and long term rates which have moved higher in tandem recently. Then on Friday we get consumer confidence, house price, and lending data.

The last week has been a relatively quiet one for Japanese economic data. The only release of note was a survey of the manufacturing and service industries that showed solid improvement. We have to wait until Thursday this week to get any real data of note when retail sales figures are released. Then on Friday we get a rash of data including inflation, industrial production, household spending, and unemployment. Yesterday we were told by an official that Japan will decide on the sales tax increase by October 7. This issue has been getting a lot of coverage as there is wide debate around whether the economy is strong enough to withstand it.

After a string of poor economic data that has kept the Canadian dollar under pressure, Friday’s release of inflation figures was a non-event. Coming in bang on expectation and flat for the month there was little impact on the currency. There has been little in the way of inflationary pressure in Canada over the last year and the current yearly rate of 1.3% is certainly at the lower end of the Bank of Canada’s target. Key events over the rest of this week are current account data out on Thursday night, and GDP data released Friday night.

Major Announcements last week:
  • RBNZ announces loan-value-ratios for the banking sector
  • Chinese manufacturing PMI 50.1 vs 48.3 exp
  • French manufacturing PMI 49.7 vs 50.4 exp
  • German manufacturing PMI 52.0 vs 51.1 exp
  • Canadian retail sales -0.8% vs 0.1% exp
  • UK Q2 GDP revised to 0.7% from 0.6%
  • US new home sales 394k vs 487k exp
  • US durable goods orders -0.6% vs +0.6% exp
  • NZD trade deficit -774m vs -18m exp