The wider financial markets have seen weak economic indicators recently with the overall theme being one of very tame inflation, and continued central bank support. This should be underlined this week with meetings by the ECB and the US Fed. There is growing expectation that ECB President Draghi will announce a 25 point cut on Thursday, and a broad consensus that the FED will continue quantitative easing (QE) at the current levels over the coming months. Stock markets have seen solid gains with Wall Street approaching record highs. The US dollar is weaker against most currencies and bond markets have generally been well supported. This theme of ongoing central bank support will provide underlying demand for the New Zealand and Australian dollars in the coming months. After the soft start to 2013, the prospect of a closing of the interest rate gap between the larger economies and that of Australasia has diminished. This is central to the prolonged demand for the Australasian currencies and the continuation of their trade at elevated levels with attractive interest rate yield driving demand.
Last week’s materially weaker than expected Australian inflation number continues be felt through the Australian markets. There is a lot second tier data out of Australia this week, and probably nothing to change the markets view that a rate cut by the RBA in the second half of the year, is looking increasingly likely. AIG’s manufacturing index released on Wednesday and service index on Friday will be watched along with new home sale and producer prices. Key releases from offshore will most likely steal the focus and drive the AUD in the later part of the week.
The NZ economy remains on a firm footing with strong reading’s from both the BNZ business confidence and the ANZ business confidence surveys. Exports to China continue to grow and it has now overtaken Australia as our number one export market, with forecasts of further growth ahead. The latest projection for the cost of the Christchurch rebuild has been pushed up to NZD 40 billion. With a good chunk of that coming from overseas reinsurance, periodic re-insurance will continue to underpin the currency. The rest of the week is very quiet on the data front for NZ, leaving demand for the NZ dollar to be driven by events in the wider market.
The end of last week saw more disappointing data for the US with key GDP figures coming in well below expectation at 2.5%. Forecasts had focused on a result around the 3.0%, so the undershoot will only serve to bolster the FED’s commitment to ongoing quantitative easing at the current rate of $85 billion a month. This week has kicked off with a mixed bag for personal income and consumption data which was largely overshadowed by stronger pending home sales. The wider markets positive reaction to the forming of a government in Italy has seen the US stock market perform strongly with the S&P nearing record highs. The rest of this week sees a full economic calendar of releases for the US with consumer confidence, manufacturing and the FED’s monetary policy meeting all scheduled ahead of important employment numbers at the end of the week. After the FED policy statement, the primary focus comes from the non farm payrolls on Friday. The market expectation is for a number around 170k, after a disappointing result last month with only 95k new jobs created.
Europe’s focus this week will be on the ECB rate decision on Thursday. The weak data of late combined with some “dovish” talk from officials has seen a growing number of commentators expecting a 25 point cut from the central bank. The impact of any cut is a very debatable point, but what is clear is that with partial repayment by banks of previous long term refinancing operations (LTRO’s), the ECB is the only major Central bank this year with a declining balance sheet. The BOE has increased its funding for lending scheme, the BOJ is undertaking massive monetary easing, and the Fed continues to buy $85 billion a month in bonds and securities. Europe is arguably in greater need for stimulus at the moment than some of the other countries and weather that will see a cut from President Draghi or some other creative measures remains to be seen. There have been some positive developments this week with the announcement of a new coalition government in Italy, while Spain has pushed out it’s target for budget deficit reduction by two years in an effort to ease austerity. This can only be a good thing with unemployment above 27% and recent downward revisions to growth forecasts. Other key data for this week includes Euro zone consumer confidence, inflation, and unemployment.
Improved sentiment toward the UK as a result of last weeks better than expected GDP number is likely to continue into this week with only data releases of note being nationwide house prices and PMI’s for the manufacturing, services, and construction sectors. With so much negative news being priced into the GBP of late, the jump in demand for the GBP following the positive GDP news should not have come of surprise. The GBP is holding onto it’s recent gains, but direction over the coming days will be dictated by reaction to the FED and ECB rate meetings later this week and key US employment figures Friday.
The Bank of Japan’s monetary policy statement on Friday saw no further stimulus measures announced. This was not a huge surprise after unveiling aggressive quantitative easing measures at the previous meeting. As a result of these earlier measures, they have revised higher CPI and GDP forecasts for the next 3 years. The Bank now expects growth of 2.9% in the year to March 14, and inflation to reach it’s 2% target in the latter half of 2015. History would say these forecasts could be a little optimistic, and there is no denying the enormity of the task the BOJ has in turning around 15 years of deflation. The BOJ announcement Friday, combined with the softer US GDP data, actually saw the Yen strengthen against the US dollar, albeit from reasonably weak levels. The rest of the week is relatively light for important data out of Japan, so offshore factors are likely to drive sentiment.
Supportive economic data and a recent rebound in commodity prices have helped to underpin the stable outlook for the Canadian economy. This has been reflected in the currency that has made good gains against most others over the past week. The only data release this week is GDP, but don’t expect a huge reaction as it’s the February number and is almost obsolete by the time it’s released. Events in the US later this week will be key drivers of the currency.
Major Announcements last week:
- HSBC Chinese Manufcaturing PMI 50.5 vs 51.4 expected
- Euro-zone Manufcaturing PMI 46.5 vs 46.8 expected
- Canadian Retail Sales +.7% vs +.5% expected
- US manufcaturing PMI 52.0 vs 53.8 expected
- US New Homes Sales 417k vs 416k expected
- RBNZ leaves monetary policy unchanged
- Australian Inflation +.4% vs +.7% expected
- US Durable Goods Sales +1.4% vs +.5% expected
- Preliminary UK GDP +.3% vs +.1% expected
- BOJ leaves monetary policy unchanged
- US Advanced GDP +2.5% vs +3.1% expected
- Italian finally establishes new Government