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FX Update - USD appreciation losses momentum

Written by Ian Dobbs on August 5th, 2014.      0 comments

Market Overview:
Market focus last week centred largely around some key US releases and the belief that strong data could see rate hike expectations brought forward. In the end it wasn’t to be, even though GDP for the second quarter was much better than forecast. The Fed provided little reason to get excited after their rate meeting with no indication that there was any real debate around when to start hike rates. Then on Friday key US employment data also failed to raise pulses come in a touch below expectation at 209k. The rest of this week will again see central banks in focus with rate meetings in Australia, the UK, Europe and Japan. We don’t expect any policy changes to come from these meetings although there could be some excitement around the Bank of England meeting and possibly the Bank of Japan’s as well. In the UK we must be getting very close to some dissenters within the policy committee voting for a hike, while in Japan there is going talk of further stimulus from the BOJ over the coming months.

Last week saw a mixed bag of data from Australia. Building approvals were disappointing coming in at -5.0% but this was offset to a degree by private sector credit data that came in better than forecast at +0.7%. On Friday we saw producer prices data and although the quarterly figure was softer than expected at -0.1%, compared to a year earlier the PPI was up 2.3%. None of these releases had a material impact on the currency. Yesterday however, we saw retails sales data and this did give the AUD a small boost. Sales for June were up 0.6% on the month which was better than the expectation for +0.3%. The prior result was also revised up a touch adding to the positive tone of the release. There is plenty more to come this week with the trade balance and RBA statement later this afternoon and employment data on Thursday. The RBA are likely to remain relatively neutral and I don’t expect a big change in the wording of the statement when it gets released later. We can expect them to suggest a period of stability in rates is expected and that the Australian dollar is high by historical standards.

New Zealand
Last week was a quiet one data wise for New Zealand. We did get building consents figures and they came in on the strong side largely reversing the previous months decline. The impact from that data was muted, however the same cannot be said for the only other news out last week which was Fonterra’s pay-out forecast for the 2014/15 season. At NZ$6.00 it was at the very low end of expectations and it weighed heavily on the currency. This was reinforced yesterday with the release of the ANZ commodity price index which showed the price of whole milk powder is down 53% year on year. As a whole the index for July was down 2.4%. This is a drop from the prior reading of -0.9% and the fifth consecutive month of decline. This point was not lost on the NZ Treasury who released their monthly economic indicator yesterday as well. They said July’s data releases showed that confidence in the economic outlook has slipped, that export growth weakened and housing market activity slowed. They added that although inflation remained moderate in the June quarter, price pressures are expected to intensify due to a lack of spare capacity in the economy. Tomorrow we have key employment data set for release along with the labour cost index. Employment change is expected to increase 0.7% with the unemployment rate falling to 5.8%.

United States
Last week saw a number of key releases from the United States and although it felt like the USD was poised to make some gains, in the end the data just wasn’t quite strong enough. Certainly the GDP figure for the second quarter was supportive coming in above expectation at +0.4%, but this was followed by the Fed rate statement that lacked any really indication that rate hike could come soon rather than later. It was then left to Friday’s key non-farm payrolls data to try and ignite some USD buying. Expectations were for a gain in payrolls of 230k and the market was positioned for a strong number. In the end however, the actual result came in at +209k with some small positive revisions to previous numbers. Although this wasn’t a bad number at all the market wanted to see something more encouraging and their disappointment was evident in the USD selling seen after the release. Adding to the negative sentiment was a small uptick in the unemployment rate to 6.2%, and a complete lack of wages growth on the month. Data like this won’t be putting any pressure on the Fed to consider bringing forward rate hike expectations which are currently centred on the second half of next year. The Fed believes the improving job market will bring more people back into the labour force and this will act to restrain wage inflation. All in all last week, although the USD failed find the sort of support many hoped for, the economic data is consistent with a solid recovery which should continue throughout the second half of this year. Tonight we have manufacturing PMI and factory orders data and later in the week we get the trade balance, weekly unemployment claims and productivity data.

United Kingdom
The UK Pound has seen something of a correction recently, pulling back in line with slightly softer data. That trend continued on Friday with the release of manufacturing PMI which fell from 57.2 to 55.4. This is still a very healthy level and one that signals continued expansion in the industry at a robust pace. Last night we saw construction PMI data and it seems that sector has maintained the strong momentum seen in the first half of the year. The index came in at 62.4 which is only slightly below the previous 62.6 result. Services PMI data hits the wires tonight and later in the week we have the Bank of England (BOE) rate meeting. Although the last meeting failed to see any members of the committee vote for a hike, that may not be the case this time. There is plenty of talk that we will see one or two dissenters and if the result of the ‘shadow MPC’ is anything to go by rate hikes could come sooner rather than later. The Shadow MPC is a group of independent economists who meet once a quarter at the Institute for Economic Affairs (IEA) to monitor BOE committee decisions and make their own recommendations. Last night they recommended raising the bank rate by 50 basis points this month.

Eurozone data last week failed to provide any real support for the Euro. There were a number of better than expected second tier releases but the key inflation figure again disappointed by dropping from 0.5% to 0.4%. On Friday we saw manufacturing PMI data which was a touch below expectation in the Eurozone at 51.8. Comments from the IFO head were also a little worrying. He said German economic growth could shrink towards zero in the second quarter due to the Ukraine crises and the economic sanctions imposed on Russia. Growth in the Eurozone has been largely driven by Germany and this will be of concern for the ECB. Last night’s Eurozone investor sentiment index highlighted the issues after it collapsed to 2.7 from 10.1 previously on the back of the Russian sanctions. The ECB meet later this week, although they have made it clear we are unlikely to see any further action until December at the earliest. Ahead of that meeting we retail sales data, German factory orders, and Italian GDP.

The downside pressure is starting to build within the Japanese economy as it struggles to hurdle the GST increase implemented in April. Last week saw retail sales, industrial production and average cash earning data all underperform expectations. We are in a critical period for the Japanese economic recovery and at this point the signs aren’t looking too good. There is now talk in the market that the Bank of Japan may have to increase stimulus over coming months. We have the BOJ monetary policy statement later this week and a lot of attention will be paid to their assessment of the economy.

Last week was a relatively quiet one for economic news in Canada. Just the monthly GDP numbers on Thursday offered any real focus. To that end the +.4% result was positive and provided a buffer for the Canadian dollar. This week sees a busier calendar started off by the trade balance results on Wednesday, building permit and manufacturing numbers Thursday, and the important employment report on Friday. The unemployment rate is expected to drop .1% to 7.0%. Any surprise below 6.9% will be gladly received as a post GFC cycle low. The employment data coupled with the fate of the US dollar which continues to provide a central theme for the wider financial markets, will provide the lead for the Canadian dollar.

Major Announcements last week:
  • US CB Consumer Confidence 90.9 vs 85.5 expected
  • US Advanced Q2 GDP  4.0% vs 3.1% expected
  • US Federal Reserve taper QE further as expected
  • European Inflation +.4% vs +.5% expected
  • Canadian Monthly GDP +.4% vs +.3% expected
  • China HSBC Manufacturing PMI 51.7 vs 52.0 expected
  • UK Manufacturing 55.4 vs 57.2 expected
  • US Employment growth 209k vs 231k expected
  • IS ISM Manufacturing Survey 57.1 vs 56.1 expected
  • Australian Retail Sales +.6% vs +.3% expected