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FX Update - The USD fails to gain on solid data.

Written by Ian Dobbs on May 6th, 2014.      0 comments

Market Overview:
The US dollar has dominated the focus in the foreign exchange markets over the last week. The materially weak demand has seen the Australasian duo remain at elevated levels, and the likes of the Great British Pound and the Euro not far behind. Whilst last week’s US GDP number was materially weaker than expected at just .1% growth for the first quarter, the subsequent, and more recently collected data points to a marked improvement in economic conditions. However, the market remains very downbeat US dollars and the US longer end interest rates remain at very low levels. The impact on the Australasian currencies will be a lower level of inflation pressure if the situation persists. Lower inflationary pressure will give the respective central banks a little more breathing room in terms of not having to raise the cash rate, and this is particularly pertinent in New Zealand. The previously expected June hike to 3.25% is now finely balanced as the higher dollar impacts as a pseudo cash rate increase. Of particular note in Australasia this week are the respective employment numbers and the impact they will have on the monetary policy outlooks.

The Reserve Bank of Australia’s rate decision gets released later this afternoon and the market will be interest to see what, if any, changes there are to the accompanying statement. Rates are universally expected to remain unchanged. At the end of last week we saw producer prices data that printed stronger than expected at +0.9%. There was little market impact however, after the previous weeks soft inflation reading was still firmly in the forefront of traders’ minds. If there are pipeline inflation pressures, they are not getting passed on to the consumer at this point. Yesterday saw the release of building approvals data that disappointed printing at -3.5% vs +1.5% expected. This was quickly followed by Chinese manufacturing PMI that also disappointed coming in at 48.1. That marks the fourth consecutive reading in contraction territory below the 50 level. So the outlook remains subdued at best for the Australian economy and for this reason the central bank are likely to remain ‘on hold’ for some time yet. Later in the week attention will turn to retail sales and employment data set for release on Wednesday and Thursday respectively.

New Zealand
Data out of New Zealand last week was supportive of the current positive economic outlook. We saw strong trade balance and building consents numbers, and while business confidence did decrease a touch from the previous month, it is still at very good levels overall. The NZ treasury were on the wires yesterday suggesting April data points to inflation pressures. The believe the RBNZ’s loan-to-value restrictions (LVR) have had a bigger impact than initially thought, and that further tightening by the central bank will merely constrain the strong pace of growth. They believe the 2015 outlook is slightly stronger than expected. The only data to digest this week comes in the form of employment change tomorrow. The market is looking for employment growth of +0.6% and an unemployment rate of 5.8%.

United States
After a very disappointing result for first quarter GDP early last week the market was keenly awaiting the other big release in the form of Friday’s non-farm payrolls data. Expectations were centred around +210k so when the actual figure printed at +288k the market initially cheered. Previous month’s figures were also revised higher and the unemployment rate fell from 6.7% to 6.3%. This looked like a very strong report on the face of it, and as a result the USD rallied and interest rates moved higher, at least temporarily. But in one of the more brutal moves markets have seen in a while, those initial reactions were short lived and a couple of hours later the USD had retraced all it gains to trade on the lows of the session. It wasn’t just currency markets that snapped back either, interest rates turned around sharply to trade backward their recent lows. It really is hard to explain the markets moves in the wake of the data. Certainly when you dig into the detail of the release there are some concerning aspects such as the fall in the participation rate, and the very anemic wage growth. But the reality is those aspects wouldn’t be getting much airplay at all if the USD was rallying strongly as most would have expected. A lot of people were left scratching their heads and it will be interesting to see how market trade over the coming days. Last night we also saw the latest non-manufacturing PMI data which was better than expected at 55.2. Tonight we get the trade balance and later in the week Fed Chair Yellen is speaking.

The European Central Bank meet this week on Thursday and it will be interesting to get their reading on the current economic situation. There is a complete lack of inflationary pressure in the region and although President maintains deflation is not a risk, inflation could easily moderate further. The level of the Euro will also likely be discussed. The ECB cannot be happy with the 10.3% increase on a trade weighted bases that the Euro has seen since July 2012. It remains a lot higher than many had forecast so far in 2014 and so far the central banks response has been to try and talk it down. This has had almost no impact. Although the central bank is not expected to undertake any further action after this week’s meeting, the time must be drawing closer when further stimulus is required. On Friday we got the latest reading of unemployment and it has remained steady at 11.8%. That is a touch better than expectation which was for a result of 11.9%. Ahead of the ECB meeting we have retail sales, German factory orders, and industrial production data to digest.

United Kingdom
Last week saw largely supportive data from the UK economy. Solid first quarter GDP of +0.8% was backed up by an improvement in manufacturing PMI to 57.3 from 55.8 previously. We did get a weaker than expected construction PMI reading on Friday which came in at 60.8 vs the 62.2 forecast. But the current level is still consistent with strong growth in the sector, so the impact was muted. The UK housing market remains a big focus. Talk over the weekend is that the Bank of England (BOE) will look for alternative measures to try and cool the property market, so they can maintain the current low interest rate. We could be in for some interesting times at the BOE, with views diverging on how to tackle the problem. Governor Carney has had a dream run so far but surely some of the more conservative members of the Monetary Policy committee (MPC) will begin to ask just how appropriate 0.5% interest rates are in an economy that’s growing strongly, has falling unemployment, and is seeing double digit house price growth. The MPC meets on Thursday for the latest rate review but with no change expected we will have to wait a couple of weeks for the minutes to get released to gain insight into any debate. Tonight we get a reading on the service sector with services PMI expected to show a small improvement to 57.9.

The Bank of Japan (BOJ) took no action at their meeting last week, although we did find out they have downgraded their GDP forecast for 2014 to 1.1% from 1.4% previously. The bank has repeatedly said recently that there is no need for further stimulation and that the economy will weather the effects of the sales tax increase. They will have been pleased with data released late last week in the form of household spending and unemployment. Household spending increased 7.2% from a year earlier, thanks in large part to demand ahead of the tax increase. The market was only expecting an increase of around 1.0%. Unemployment has held near a seven year low at 3.6%, and job conditions are improving steadily. Broad based wage growth is now key for the economy going forward and PM Abe is working hard to try and encourage that. Data over the coming couple of months is going to be very closely watched to see just how the economy performs in this post tax hike period. Unfortunately there is little to draw focus this week with only the monetary policy meeting minutes of any note.

There was little of economic significance released from Canada last week. GDP data came in bang on expectation at +0.2% and had no market impact. The only other data released was the Raw Material Price Index (RMPI) which fell to just 0.6% from 5.7% previously. Governor Poloz said the value of the Canadian dollar is closely tied to the price of natural resources, and that rate cuts could be a possibility if the outlook for inflation diminished. This week should prove more interesting with the trade balance, Ivey PMI, building permits and employment change all set for release.

Major Announcements last week:
  • UK Q1 prelim. GDP 3.1% vs 3.2% expected
  • NZ Business Confidence 64.8% vs 67.3% previous
  • BOJ leave monetary policy unchanged as expected
  • European April Inflation .7% vs .8% expected
  • US Advanced Q1 GDP .1% vs 1.2% expected
  • US FED taper QE at FOMC meeting as expected
  • US ISM Manufacturing ISM 54.9 vs 54.3 expected
  • European Manufacturing 53.4 vs 53.3 expected
  • US Employment growth 288k vs 210k expected
  • US Unemployment rate 6.3% vs 6.6% expected
  • Chinese Manufacturing 48.1 vs 48.4 expected
  • RBA leave monetary policy unchanged as expected
  • US Non-manufacturing ISM 55.2 vs 54.1 expected