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FX Update : A central bank focus

Written by Sam Coxhead on April 2nd, 2013.      0 comments

4:00 PM (NZT)
Market Overview:
The major themes continued throughout the shortened trade of Easter markets over the last week. Elevated Europe uncertainty has capped material appreciation of the Euro, with Cyprus and the Italian political landscape undermining sentiment. The economic data has been mixed around the globe. Softer economic data in the US providing a timely reminder to investors of the staggering nature of the economic recovery. Chinese indicators continue to recover, albeit not quite at the pace of analyst’s expectations. This week sees a return of focus on central banks. The respective central banks of Australia, Japan, the United Kingdom and Europe all make monetary policy announcements this week. The Bank of Japan (BOJ) will likely provide the most interest with the new leadership needing to make their mark immediately.

The shortened last week in the Australian economy saw the latest private sector credit numbers come in close to expectations. The stubbornly elevated nature of the AUD will provide some on going headaches for the RBA as they contemplate monetary policy over the coming months. The interest rate market is still pricing a further 25pts of easing to the cash rate by year end, but this easing bias has been steady eroded over the last few months. The adoption of a wait and see approach from the central bank comes as the Chinese economy stabilises, and the effects of previous cash rate reductions flow through the economy. Today's monetary policy statement will likely be of limited impact. The remainder of the week sees trade balance, building approvals and the important retail sales numbers provide further insight to the economies health.

New Zealand
It has been a relatively quiet period for economic news over the Easter week. The important dairy sector received a boost of an increased forecast pay out with the recent jump in auctions prices materially impacting the pressured industry. The pay out expectation was lifted to 6.12 NZD per kilo of milk fat and will cushion the blow of lower production volumes following the drought in early 2013. The latest ANZ Business Confidence survey revealed a pull back in sentiment. This is somewhat unsurprising given the elevated levels on this survey of late. This week sees little in the way of scheduled economic news, so expect demand for the NZ dollar to be driven by external factors. Certainly the ongoing uncertainty in wider Europe is benefiting the relatively stable and insulated high yielding currencies of New Zealand and Australia. This theme is likely to continue in the near term.

United States
Last week saw the US economy hit a softer patch of economic data. Lower than expected durable goods sales, consumer sentiment, housing and manufacturing numbers undermined the demand for US dollars and led to a move lower in longer term interest rates. This week sees a number of FED board members due to make on the record speeches, and this will provide further insight to the boards thinking. But the primary focus comes from the employment numbers on Friday. These provide a clear indicator of what impact the quantitative easing program is having, with around 200,000 jobs expected to have been added for the month.

Unsurprisingly the sentiment remains poor in Europe. The banking sector faces pressure as investor concerns about the safety of deposits rings loudly following the developments in Cyprus. Adding to the mix is the ongoing political stalemate in Italy, with fresh elections the likely outcome at this stage. The Europe Central Bank (ECB) monetary policy decision on Thursday will be closely watched. Whilst no change to monetary policy is expected, the insight from the ECB is always closely followed.This monetary policy statement follows the important manufacturing and employment numbers for the wider economy early in the week.

United Kingdom
Last week saw further weak data come in the UK. Fourth quarter GDP contraction was confirmed at .3% and the trade balance was slightly wider than expected. This week is a busy one for economic news. Manufacturing, house prices and construction data all come before what should be an unchanged monetary policy announcement from the BOE on Thursday. The BOE meeting minutes in a couple of week's will reveal more about the current thinking on the level of quantitative easing. Debate continues on the value of any additional policy accommodation. Whilst the GBP remains under pressure from both the Australian and New Zealand dollars, it sits off the lows despite the weak economic news. This is because the GBP sees increased capital flows when uncertainty increases in Europe. This is likely to continue in the short term at least, and helps explain any latent demand seen for the GBP.

Last week was a mixed one for economic news in Japan. Retail sales were materially weaker than expected, but household spending beat expectations. Importantly the latest inflation numbers were slightly better than expected at -.5%. These pieces of data came with a back drop of this week’s BOJ monetary policy meeting. Thursday BOJ announcement will be the first for the new leadership and expectations are for increased policy initiatives what will help foster growth. Any disappointment would be detrimental to the wider efforts to curb YEN strength and provide an easier back drop for the struggling Japanese export sector. With a 40% increase in the Japanese stock market in the last year, and a material move lower in longer term Japanese interest rates, any under delivery from Governor Kuroda will have material market impacts.

It was an interesting last week for the Canadian economy. The latest inflation numbers were materially higher than expected and will add pressure to the BOC's monetary policy decision if a trend of higher inflation is established. GDP numbers were also slightly higher than market expectations, with the month seeing +.2% growth against the expected +.1% rise. This week sees the focus now turn to Friday. The latest manufacturing, trade balance and employment numbers are all scheduled for release. The employment numbers provide the primary focus with an unemployment rate of 7.0% expected.

Major Announcements last week:
  • US Durable Goods Sales -.5% vs +.7% expected
  • US New Home Sales 411k vs 426k expected
  • ANZ NZ Business Confidence 34.6 vs 39.4 previous
  • UK Current Account -14.0B vs -12.8B expected
  • Canadian Inflation +.8% vs +.3% expected
  • Canadian GDP +.2% vs +.1% expected
  • US Manufacturing 51.3 vs 54.2 expected
  • Chinese Manufacturing 50.9 vs 51.6