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FX Update - US unemployment questions Fed taper

Written by Ian Dobbs on September 10th, 2013.      0 comments

1:30pm (NZT)
Market Overview:
The patchy global recovery continued its slow grind last week. Better economic news in China, Australia and the UK has seen an improvement in sentiment, while the US labour market seems to have stalled. This stalling US labour market undermines expectations of immediate tapering from the Federal Reserve, and this has started to impact markets globally. Longer end interest rates have stalled their move higher for the most part, and the US dollar demand has lowered correspondingly. Add to the mix the intriguing international relations dance around treatment of the Syrian situation, and most markets continue to trade within their increasingly familiar recent ranges. With most central banks expected to maintain steady monetary policy in the near term, the focus will remain on the US Federal Reserve in the coming weeks.

Last week was a noticeably better one for the Australian economy and the AUD. There were a couple releases, in the form of building approvals and GDP, which beat expectation and help to support the currency. The RBA monetary policy statement also supported with a lack of reference to more direct cuts in the cash rate. This more neutral stance saw the currency make good gains across the board. On top of this the recent data out of China has shown improvement and that has helped to allay fears of a hard landing in their economy. The improved sentiment has continued to support the Australian dollar that has been under pressure for much of this year. Over the rest of this week we get readings on business confidence and consumer sentiment followed by employment data on Friday.

New Zealand
Last week was relatively quiet week for news on the New Zealand economy. The latest terms of trade index revealed a higher than expected result, which bodes well for exporter health. Also of note has been the improvement of the economic news of integral trading partner economies of Australia and China. Both seem to have stabilized after a recent run of weaker news. This week’s focus comes from the RBNZ’s monetary policy announcement on Thursday. With no change expected to the emergency low cash rate of 2.50%, the accompanying statement will be closely watched for further insight to the timing of a possible cash rate hike towards the end of the year, or early in 2014. Subsequent to the announcement on Thursday, is Governor Wheeler’s testimony before the Finance and Expenditure select committee. This offer further opportunity for Gov. Wheeler to communicate, and therefore his comments will be closely followed.

United States
Most of the data out of the United States last week was supportive of an improving recovery. Both the manufacturing and non-manufacturing sectors are expanding at levels not seen for nearly two years. But key to the recovery and the Feds monetary policy going forward, is whether this is translating into more jobs. To that extent on Friday we got the employment report for August which was a little disappointing. The headline figure of +169k was a touch below expectation, but more worryingly were the revisions to previous month’s data to the tune of -74k. The net result is that the number of jobs created over the past few months is only just keeping up with population growth. This does leave a question mark over the recovery, and the Fed will want to see better gains over the coming months as they start tapering asset purchases. This week’s data highlights all come on Friday with retail sales, producer prices, and consumer sentiment set for release.  

Data out of Europe over the last week has mostly reinforced the ever so gradual improvement in the region and the outlook for a slow recovery. ECB president warned last week that he is ‘very, very cautious’ and rightly so as there are many hurdles for the region to overcome. There have however been some improving signs from the likes of Greece and Spain that indicate their economies could be starting to turn the corner. Figures released on Friday showed the Greek economy shrank by 3.8% in the second quarter, which is significantly less than the -4.6% estimate. This is it’s smallest contraction since 2010. While in Spain it looks like the economy could stop contracting altogether in the second half of 2013, after two years of recession. Second quarter GDP shrank by only 0.1% down from -0.3% in the first quarter and -0.8% at the end of 2012. This improvement has seen the spread between Spanish and German long term interest rates fall to its lowest level in more than two years. There is a lot of second tier data out this week, the highlights of which will be industrial production and the ECB monthly bulletin.

United Kingdom
For much of last week the UK continued to release economic data that showed the economy is firing on all cylinders. The manufacturing, construction, and service sectors are all operating at levels not seen since before the crisis. However the recent run of solid data finally hit a small speed bump. On Friday night we got two data released that show there is still plenty of work to do. The first was manufacturing production that edged ahead in July by 0.2%. This was a touch below the expectation of 0.3%, but the month on month increase does build on strong growth the previous month. What was more of a concern was trade balance data that showed a worrying fall in the level of exports. Exports fell 9.3% and caused the trade deficit to increase to GBP9.9 bln. A sharp fall in exports to non-EU countries was responsible for the decrease and this does dent the recovery hopes for the manufacturing sector. This will most likely be one of many obstacles the recovery faces over the coming months and it will be anything but plain sailing for the economy going forward. That being said, there is definite momentum building which will be pleasing for both the government and the central bank. There is a much lighter calendar this week with just the unemployment data on Wednesday, and inflation report on Thursday to focus on.

Last week saw the Bank of Japan (BOJ) leave its monetary policy setting unchanged as expected. Of more focus is the lead up to a decision from Prime Minister Abe with regards to the timing of a sales tax increase to help relieve the Govt debt load. This is very important, as the previous introduction of sales tax in 1997 pushed the fragile economy back into recession and led to a decade of much maligned stagnation. Of interest has been the positive comments from BOG Governor Kuroda that the economy is now robust to withstand the added pressure of increased taxes. The Japanese economy was the best performing economy of any advanced economies in the first half of 2013, albeit the latest readings have not proved so encouraging. With mainly second tier economic data due for release this week, expect the news to be of limited impact to the price action. Of more impact will be the on-going focus on the sales tax, and the wider markets level of risk aversion with an immediate eye on developments in Syria.

Last week was an interesting one for the Canadian economy. Whilst leaving monetary policy unchanged as completely expected, Bank of Canada (BOC) Governor Poloz lamented a global economy and its negative impact on the levels of investment in Canada. This sentiment certainly points towards little prospect of increasing interest rates in the short term. However, the employment numbers on Friday were of stark contrast. They were stronger across the board, with both part and full time components stronger than expected. This saw the unemployment rate fall to 7.1% and provided a boost to demand for the Canadian dollar, albeit not materially against the NZ and Australian dollars. This week sees a quiet economic calendar, with yesterday’s building approval data of any note. This reversed the previous weakness, with a jump in activity, albeit in a notoriously volatile series of data.

Major Announcements last week:
  • Chinese Manufacturing 51.0 vs 50.6 expected
  • Australian Building Approvals 10.8% vs 4.1% expected
  • UK Manufacturing PMI 57.2 vs 55.2 expected
  • Australian Retail Sales +.1% vs +.4% expected
  • US ISM Manufacturing 55.7 vs 54.2 expected
  • Australian GDP +.6% as expected
  • UK Services PMI 60.5 vs 59.3 expected
  • US Non-Manu PMI 58.6 vs 55.2 expected
  • Canadian Unemployment rate 7.1% vs 7.2% expected
  • US Unemployment rate 7.3% vs 7.4% expected
  • RBA, BOC, ECB, BOJ and BOE leave monetary policy unchanged