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FX Update - US dollar buying re-emerges

Written by Ian Dobbs on March 31st, 2015.      0 comments

Market Overview:
The major theme of the past week has been the resurgence of USD strength. The USD has quietly gone about regaining a significant amount of the ground lost the prior week. Increased geopolitical tensions may have helped the USD as Saudi Arabia launched a bombing campaign in Yemen. Concerns about Chinese growth prospects are again in spotlight with authorities recently announcing a relaxation of deposit rules for mortgage lending. The Chinese are trying to increase demand and lift a sagging housing market that has been in decline since 2014. The move follows comments from People Bank of China Governor Zhou who said that China’s growth rate has tumbled a bit too much and that policy makers have room to act.

There has been nothing of substance released from Australia since last Wednesday’s Financial Stability Review from the RBA. The Australian dollar has remained under pressure however, trading particularly heavily in the early stages of this week. This weakness comes on the back of further commodity price declines and concerns about Chinese growth. Iron ore recently fell to fresh six year lows and the Chinese have announced a relaxation of mortgage down payment rules in order to try and support the housing market. We do get some data to digest over the coming days with building approvals and the trade balance the main focus.

New Zealand
The only data released from New Zealand since last Wednesday’s disappointing trade balance has been building consents and business confidence. Building consents hit the wires earlier this morning and came in at -6.3%, down from the prior -3.8%. This marks the third decrease in a row and it seems that although we have seen a doubling in new dwelling consents since early 2011, the trend has now turned. Business confidence data released in the past hour was largely in line with expectations and supportive of the outlook going forward. Still to come this week we have the latest Fonterra dairy auction. The last auction saw prices tumble 8.8% and another decline here would bring into question the viability of Fonterra’s $4.70 per kg forecasted pay-out.

United States
Last week provided a mixed bag of data from the United States. On the soft side we saw durable goods orders and the final reading of fourth quarter GDP both miss expectations. While on the other side of the coin we had better than forecast results for core inflation, consumer sentiment, manufacturing PMI and services PMI. GDP for the fourth quarter of last year ended up at +2.2%, which although below expectation, is still a healthy result. The first quarter of 2015 is shaping up to be a lot worse than that however. Within the last couple of weeks forecasts have been slashed with Goldman Sachs reducing their estimate from 2.0% down to 1.2%. Other institutions see growth below 1.0%. The weather is partially to blame, but doesn’t change the fact that combined with very low inflation, it’s going to make it very hard for the Fed to increase interest rates in June. September would be a much more likely time for a lift off in rates, but even then, only if second quarter growth is showing a sold bounce back. Fed Chair Yellen spoke on Friday and although she said a rate rise may well be warranted later this year, she added the economy in an ‘underlying’ sense remains quite weak by historical standards. She also said that the Fed doesn’t have to wait for inflation to actually pick up before hiking, they just have to be confident that it will pick up. She then put a lot of emphasis on continued improvement in the labour market as key to providing that confidence. We get the latest non-farm payrolls data on Friday night, and as always they will be closely watched. Ahead of that release we have consumer confidence, ISM manufacturing and the trade balance.

United Kingdom
Although inflation in the UK printed at 0.0% last week the Bank of England’s (BOE) Broadbent said over the weekend that the “public isn’t worried about deflation and neither am I.” He added that rates are likely to rise over the next 2 - 3 years. Governor Carney was on the wires last night and he said the next rate move is likely to be up. Those comments are probably the last we will see from BOE officials for the next five weeks. The UK has now officially entered into election campaign mode and as such the BOE enter a blackout period where they refrain from making any economic or monetary policy speeches. The market will now start reacting to poll results and the first of those show PM Cameron’s Conservatives has a small four point lead over the opposition Labour Party. Expect increased volatility as we draw close to the May 7th election. The UK consumer seems in good spirits with both retail sales and CBI realized sales coming in stronger than expected last week. This week to draw focus we have the current account, the final reading of GDP, manufacturing PMI and construction PMI.

While the Greek situation is drawing the majority of headlines and focus at the moment, actual data out of Europe continues to show a gradual improvement. German inflation increased 0.5% which was a touch above the expectation of 0.4%. Spanish inflation at -0.7% was still stronger than forecast and an improvement from the prior -1.1%. Some of this improvement is likely down to the weaker Euro, but we are also seeing improving confidence readings at both the business and consumer level. We get the Eurozone flash estimate of inflation tomorrow evening and this is expected to remain steady at -0.3%. Other data to draw focus this week includes Eurozone unemployment, German retail sales and French consumer spending. The Greek government has apparently submitted a list of 18 reforms to the EU and these need approval before any further bailout funds will be released. Time is running out however, with Greece needing to make a number of significant payments over the coming weeks.

Late last week Japan released a rash of economic data and some if it won’t have made great reading for the government or Bank of Japan (BOJ). Inflation rose by 2.2% in the year to February which was lower than the 2.3% expected - but that number includes the sales tax hike imposed by the government in April last year. Stripping out that affect puts inflation back at zero. Governor Kuroda said inflation will stay low in the first half of the year and will rise from early autumn. That remains to be seen. Retail sales also disappointed printing at -1.8% versus -1.4% expected. The only encouraging result was household spending which came in at -2.9% against expectations of -3.1%. Unemployment came in as forecast at 3.5%. Yesterday we saw preliminary industrial production number which fell 3.4% against an expected fall of only 1.8%. This afternoon we get average cash earnings figures and then tomorrow we have the quarterly Tankan report.

Bank of Canada Governor Poloz spoke late last week and he said the Canadian economy still requires a considerable monetary stimulus to prevent it falling back into recession. He said when the oil shock came it was clear they would no longer be able to close the output gap by 2016 or 2017 and as they still had some firepower they took some insurance by cutting rates. He added the first quarter of 2015 will look atrocious as energy companies cut back investment. On the positive side he believes the improving US economy and weaker Canadian dollar will help exports to recover. He also made it clear the bank still has options to boost the economy if needed. Tonight we get monthly GDP data and then on Thursday night we have trade balance data to digest.

Major Announcements last week:
  • European Manufacturing PMI 51.9 vs 51.5 expected
  • European Consumer Confidence -3.70 vs -5.95 expected
  • UK Inflation +1.2% vs +1.3% expected
  • NZ Trade balance -2.18 B vs -1.82B expected
  • UK Retail Sales 5.1% vs 4.2% expected
  • Japanese Inflation 2.0% vs 2.1% expected