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FX Update - Trends stutter as markets consolidate

Written by Ian Dobbs on August 13th, 2013.      0 comments

3:00pm (NZT)
Market Overview:

Last week saw the wider markets broadly impacted by a weakening US dollar. The move was interesting in that there was an absence of any single primary driver. Strangely, the prospect of tapering to the quantitative easing (QE) program by the FED was a factor. Investors look to be exiting the US government bond market ahead of the largest buyer stepping down activity. This has seen the currencies benefit, enabling the recently beleaguered AUD in particular to relieve some pressure. More positive numbers from China, the UK and Europe were also a factor as the global economy slowly starts to improve after what has been a very difficult last five years. One thing is certain, the transition out of the stimulatory environment will be volatile. With opposing factors at play, it seems likely that the remainder of 2013 will see broad ranges start to be established in many markets. With a quiet global economic calendar this week, expect the positioning in the US dollar to provide the market lead.

Last week was an interesting one for the Australian economy and dollar. Weaker than expected Australian retail sales numbers came ahead of the highly anticipated RBA monetary policy decision. The RBA gave the markets its expected 25pt easing to a cash rate of 2.50%. The accompanying statement did not have a strong bias towards further easing and the Australian dollar actually reacted positively to the announcement. Thursdays weak employment numbers muddied the outlook further, but the negative reaction was very short lived as buoyant Chinese trade data again improved sentiment. This week sees a host of second tier data on offer, albeit the bulk of the news should be of limited impact.

New Zealand
There has been very little economic news on the domestic front for New Zealand since last Wednesday’s employment figures. We did get the REINZ house price index out yesterday, and although the index fell 0.5% from June, it still stands 8.6% higher than a year ago. The volume of sales was also notably stronger than June. Tomorrow we get retail sales data and on Thursday there is the manufacturing index. Aside from those releases the market will have to look offshore to gain any inspiration.

United States
We have seen largely positive economic data out of the United States recently that is supporting the view of a strengthening recovery. This has helped cement views that the FED will start tapering its quantitative easing (QE) purchases in September (or at the latest October). The question is what sort of impact is this going to have on markets in general. The most obvious impact will be a backup in longer term interest rates as the biggest buyer of US treasuries slowly steps away. Despite recent weakness, the USD should be broadly supported as well. The equity market must be a cause for concern. There is a decent correlation between equity market gains and the FED’s QE purchases over the last couple of years. With stocks near all-time highs, surely a winding down of those purchases leaves equities vulnerable. This is especially true in an environment where interest rates are heading higher. These are the risks/forces that will shape markets over the coming months. Looking at the shorter term, we have a rash of data out this week with the highlights being retail sales, inflation, building permits, and consumer confidence.

Things have been relatively quiet on the European front lately. Moderately better data points to a very mild recovery over the coming months, however structural problems remain and it is going to be a very bumpy road ahead. Late last week we got data on French industrial production that was well below expectation. The -1.4% figure was well below forecasts of a 0.3% gain, and in stark contrast to the improving trend in other European data. France faces many fiscal challenges and it wouldn’t surprise many economic commentators if the Euro-crisis spotlight was to fall on them at some point in the future. Recent articles in Germany are suggesting that Greece will require another bailout (no surprises there), but that it won’t happen until after the German elections later this year. Key data events this week include German economic sentiment out tonight, then GDP and inflation for both France and Germany later in the week.

United Kingdom
The United Kingdom has had a great run of strong data lately, almost without exception. Friday proved no different with the release of trade balance figures. The trade deficit narrowed by more than expected as exports surged to their highest levels on record. This was a good result, although looking into the detail revealed the export gains weren’t exactly broad based. Most of the gains can be accounted for by the sale of art at a few major auctions held over the period, plus some aircraft sales. A good headline figure nonetheless, and even taking into account the one-offs that boosted the result it was a solid showing. What wasn’t so great were figures released over the weekend. These show British workers have suffered a 5.5% drop in earnings, when inflation is taken into account, since 2010. That’s one of the biggest falls in real wages among European countries over the last three years. You have to wonder just how much the economy can improve when the majority of workers are going backwards in terms of real wages. The economy is coming from a very low base, so there is obviously room to improve still, but in the long run there must be a question mark. Either that’s going to cap potential growth, or workers are going to demand higher wages. I suspect the latter is very likely and that will surely feed through into inflation down the road. We actually get inflation data tonight which will be closely watched as it has been well above target for much of the past five years. Any move higher and it will bring into question the validity of Governors Carney’s new forward guidance.

At the very end of last week we got the release of the Bank of Japan’s (BOJ) monthly report. There was nothing of surprise in the release with the bank stating they see the economy starting to recover moderately. This had little impact on the currency. We also got the release of consumer confidence and this actually fell for the second month running. It seems higher electricity and energy prices in general, may have negatively impacted on the outcome. Weakness in the Yen over the past few months is starting to feed through into energy prices which is taking the gloss off the recovery for consumers. Yesterday saw the release of Japanese GDP which missed expectations to the downside. This does raise the question of whether the economy is strong enough to withstand the shock of the planned sales tax increase. There will no doubt be more discussion around this over the coming weeks. Today we saw the release core machinery orders and the BOJ minutes. The machinery orders were less weak than expected. The BOJ minutes saw limited impact, with the economy tipped to pick up, and inflation to continue its gentle rise.

Last week was a tough one for Canadian economic data with some surprisingly soft results for building permits and business activity. However, the end of the week provided a chance to turn things around and finish on a better note with key employment data released. Unfortunately that was not the case. Once again the data was a big miss from expectations of a 6.2k gain of jobs. It came in at -39.4k and the unemployment rate ticked up a notch as well. So overall a week best put behind Canada in terms of economic data. This week is very light on the data front with only the Bank of Canada (BOC) review and manufacturing sales on Thursday and Friday respectively.
Major Announcements last week:
  • Australian Retail Sales 0.0% sv +.4% expected
  • UK Services PMI 60.2 vs 57.4 expected
  • US Non-Manufacturing PMI 56.0 vs 53.2 expected
  • RBA eases cash rate to 2.50% as expected
  • UK Manufacturing +1.9% vs +.9% expected
  • US Trade Balance -34.2B vs -43.1B expected
  • NZ Unemployment rate 6.4$ vs 6.3% expected
  • Canadian PMI 48.4 vs 56.3 expected
  • Australian Unemployment rate 5.7% vs 5.8% expected
  • BOJ leaves monetary policy unchanged as expected
  • Canadian Unemployment rate 7.2% vs 7.1% expected
  • Japanese prelim. GDP +.6% vs +.9% expected