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FX Update - Will the USD lose momentum

Written by Sam Coxhead on July 9th, 2013.      0 comments

4:03pm (NZT)
Market Overview:
There were a number of key events that drove markets over the past week.  Announcements from the European Central Bank (ECB) and the Bank of England (BOE) had big impacts as they both did their best to talk down interest rates that moved higher in line with the US. This talk helped to weaken both the EUR and the GBP against most other currencies. Concerns over Greece and Portugal have subsided in recent days which has helped the EUR to a certain extent. Out of the US we have seen better than expected employment data. This has cemented the markets view that the first round of Fed tapering will occur at the September meeting. US dollar strength has continued for much of the past week, although a lack of momentum and follow through buying has seen a small retracement over the last two days. China is still on the radar even though the central bank has stepped in to ease funding pressures in the banking sector. The risks are there for a wider Chinese banking crisis, and they are continuing to get plenty of coverage. However it’s most likely that this issue will play out over the longer term time horizon.

The Australian dollar headed back to its recent lows after the release of the stronger than expected US employment report on Friday night. It has since recovered a little but not on the back of anything fundamental coming out of Australia. Jobs ads data on Monday had little impact and business confidence numbers today failed to excite. We have to wait for later this week to get consumer confidence and employment data, which will be closely watched. The resource/mining sector continues to slow and concerns over a potential bumpy road ahead for China are not going to help. The one bright spot of the Australian economy is the weakening AUD. This is exactly what they need to help bolster manufacturing, and improve export returns. It’s no wonder the RBA continue to talk it down as much as possible, and expect that rhetoric to continue.

New Zealand
Last week was a very quiet one on the data front for New Zealand, and this week is only marginally better. Today we had the release of the quarterly survey of business opinion which has shown business confidence continues to be optimistic, in line with last quarter’s solid increase. Credit card spending data was also positive showing growth over the last month. The NZD has recovered most of the ground it lost after Fridays better than expected US employment numbers, and further moves are likely to be led from offshore. Later in the week we get readings on the manufacturing sector and the food price index. Both of which should have limited impact.

United States
The big focus at the end of last week was on the US employment report. Markets were expecting an increase of about 165,000 but the actual number was substantially better coming in at 195,000. Although the unemployment rate stayed the same at 7.6%, there were upward revisions to the two previous reports to the tune of 70,000. So overall a pretty strong result and the markets reacted as you would expect. The USD was stronger across the board and interest rates moved higher. This data has cemented the markets view that the Fed will start the tapering they have signalled at the September meeting. Adding to this positivity, last night we saw readings on May consumer credit. It came in much stronger than expected and was the largest increase in a year. This suggests consumers are comfortable taking on debt and is a positive for growth going forward. The USD however seems to have come far enough for now. Overnight it has given back some of the gains made in the wake of the employment report. FED Chairman Ben Bernanke is speaking on Thursday and we also get the minutes from the Fed meeting. On Friday we get producer prices and consumer confidence numbers.

There has been a raft of second tier data out of Germany over the last couple of trading days that has all come in slightly below expectation. The market hasn’t reacted to it, instead choosing to focus on an easing of concerns over the Greek bailout and Portuguese government. It seems the next tranche the Greek bailout will be released after much sabre rattling from officials. The Portuguese coalition government also looks to have found its way through an internal crises after two key ministers resigned last week. This will mean the recovery plan will stay on track, at least for the time being. ECB President Draghi’s call last week to keep rates low for as long as it takes has also eased concerns about pressure on peripheral nations. Bond yields moved higher after the Fed tapering announcement increasing the cost of funding for these nations. Draghi is due to speak again tonight, where he no doubt reiterate his comments from last week’s ECB meeting. Later in the week we get readings on industrial production as well as French and German inflation.

United Kingdom
There has been no economic data, or news for that matter, to materially affect the economic outlook in the UK over the last few days. The improving data of the last few months has seen forecasters revising up projections for the economy going forward. UK analysts Capital Economics, who tend to be somewhat pessimistic, have said they now see the UK economy beating expectations and growing by 2.5% in 2015 and 4% in 2016.Mark Carney’s arrival at the Bank of England has capped the recent strength in the Pound, at least for now. The market will be eager to see what sort of forward guidance he will offer at the next monetary policy meeting. The rest of this week has manufacturing and industrial production, house price data and trade balance to focus on.

The Japanese Yen has continued to weaken in the wake of the US employment report. There has been little else in the way of market moving news relevant to Japan out in the last few days. Current account data came in bang on expectation, and bank lending figures have confirmed the improving outlook showing a strong year on year improvement. With economic forecasts improving for Japan, it seems the biggest risk to their recovery could come from China. There have been numerous articles published recently regarding the credit boom/bubble in China, and the risk of a banking crisis. There is little Japan could do to insulate itself from a sharp economic slowdown in its biggest neighbour. On Thursday we have the Bank of Japan policy meeting and press conference which will be the big focus for the week. Ahead of that we get the minutes from the previous meeting and consumer confidence, both out on Wednesday.

Along with the closely watched US employment report released Friday, Canada also published its monthly employment data. Although it came in at almost flat (actual was - 400 jobs) it was a very surprising number. That’s because it comes on the back of last month’s stellar figures that showed a 95,000 gain, the biggest in a decade. Most economists had expected a bit of payback this month, with the average forecast for loss of 7,500. So the near flat outcome was actually a very good result. But forecasters are still very sceptical of the data, pointing out it flies in the face of a number of less optimistic releases such as the record string of 17 monthly trade deficits. As a result of the data the Canadian dollar outperformed many other currencies, aided by the US dollar that rallied in the wake of their employment report. The housing market is big risk for the Canadian economy going forward, and this week we get building permits and housing starts data that will be closely watched. The business outlook survey released tonight will also get attention.

Major Announcements last week:
  • Chinese Manufacturing 50.1 as expected
  • US Manufacturing 50.9 vs 50.6 expected
  • RBA leave cash rate unchanged at 2.75%
  • Australian Retail Sales +.1% vs +.4% expected
  • UK Services PMI 56.9 vs 54.6 expected
  • BOE leave Monetary Policy unchanged as expected
  • ECB leave monetary policy unchanged as expected
  • Canadian Employment growth -.4k vs -4.2k expected
  • US Employment 195k vs 163k expected