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FX Update - The USD remains under intense pressure

Written by Sam Coxhead on July 1st, 2014.      0 comments

2:15 PM (NZT)
Market Overview:
It was an interesting period in the foreign exchange markets last week. The US dollar was widely vulnerable, with all the focus on any negative news. Yield chasing investors again pushed the NZ dollar and to the lessor extent the AUD, higher as a result. However, in the last few sessions the momentum has turned a little. Certainly the NZ dollar looks lethargic, having set post float highs on a trade weighted basis, and the AUD has struggled to make higher ground on a number of pairings. Geopolitical concerns still require weary observation, but the impact has been limited for the time being.

There has been little in the way of economic news for Australia throughout the course of the last week. The improved Chinese manufacturing data was positive for sentiment, but the majority of the lead came from the wider market. The Reserve Bank of Australia’s (RBA) monetary policy statement later today offers the primary focus for this week. Expect the bias to remain steadfastly neutral for the time being. Of primary concern is the threat of increased credit tensions in China, and the capital expenditure transition from the mining sector to the wider economy.  Also of note will be the trade balance on Wednesday, and retail sales and building permit data on Thursday.

New Zealand
Last week saw a New Zealand Trade Balance released at 285m against a market expectation of a 250m number. The impact from this was limited, but the NZ dollar saw solid demand following the weak US Q1 GDP. This increased demand pushed the NZD higher across the board as investors chased higher yielding currencies.  However, there was an inability for the momentum to continue and this has seen a pullback in the last 24 hours. Yesterday saw the NZ data focus for the week in the form of the latest ANZ Business Confidence Survey result. Whilst coming off extremely elevated levels, the index saw a material pullback from 53.5% to 42.8%. Whilst this should be regarded as a healthy correction from overly energetic levels, the NZ dollar has suffered as a result. Material price reactions to this survey are rare, so this points to the NZ dollar “bulls” starting to get a little lethargic. This was highlighted as the NZD underperformed both the EURO and GBP following weaker than expected US regional manufacturing numbers.

United States
The economic data in the United States remained mixed last week. Taking the primary focus were the final Q1 GDP numbers that revealed the materially worse than expect fall in activity of 2.9%. This coupled with weak Durable Goods Sales data to undermine the US dollar and push longer term US interest rates lower. When the pressure is on a currency, the market seems to focus on any negative news. This happened again overnight, as the market focused on the under expectation Chicago PMI number, whilst ignoring strong new home sales news. However, This may well prove just to be a build up to the focus of the week in the form on Thursdays employment numbers. The expectation is for 211k worth of jobs growth and unchanged unemployment rate of 6.3%.

Manufacturing weakness in the core European member economies of Germany and France fed through to underperforming European manufacturing numbers last week. Last night revealed the European inflation numbers, with the core number of +.8% coming in a touch ahead of the .7% expectation. This will be of mild encouragement to the European Central Bank (ECB) as they prepare to make their monetary policy statement on Thursday. Ahead of then the employment and retail sales numbers are due, in what should be an interesting week. The pressure on the EURO has eased a touch over the last week, which will not be pleasing the ECB, as the strength of the EURO remains a material barrier to competitiveness for many member states.

United Kingdom
Last week was a relatively quiet one for news in the UK. New macro-prudential restrictions for residential lending were of note, albeit their impact to be limited in the short term unless further price appreciation is seen. Friday’s final Q1 GDP reading was uneventful, with the .8% result right on market expectations. This week’s focus comes from the monthly manufacturing, construction and services indexes. With the Bank of England poised to initiate a move away from the emergency low interest rates over the coming year, expect the Pound Sterling to remain supported on any softness.

In slightly contradictory evidence from Japan last week, a sharp fall in household spending of 8.0% was balanced by a less than anticipated fall in retail sales activity (-.4%). This week sees the primary focus come from the important BOJ “Tankan” survey results. These follow yesterday’s weaker than expected preliminary industrial production results. The Tankan results showed lower levels of activity for both larger manufacturers and non-manufacturers. These lower than expected numbers were somewhat balanced by the highest “capital expenditure intentions” number since June 2007.

There was nothing in the way of top tier economic data from Canada last week. The Canadian dollar has enjoyed its resurgence for the most part, maintaining its recent gains. Last night saw the monthly GDP numbers reveal .1% growth against an expectation of a .2% rise in activity. The lower than expected activity was attributable to lower levels of oil and gas output. Some analysts have suggested 2nd quarter growth of 2-2.2% and this may see BOC Governor revise down the current Q2 growth estimate of 2.5%, when he publishes the monetary policy report on July 16th.