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FX Update : Economic reality curbs market sentiment

Written by Sam Coxhead on March 5th, 2013.      0 comments

4:42 PM (NZT)
Last week saw the financial markets continue their plunge back into reality after a exuberant start to 2013. The political inspired uncertainty in Europe was heightened by the mostly sluggish economic data. The United Kingdom also remains under pressure as the stagnant economy teeters on the edge of a third dip back into recession in the last five years. Of some contrast to the dark mood in wider Europe, is growing, but realistic optimism in the United States. Whilst the economic data continues its slow recovery, the political stumbling blocks about the fiscal negotiations remain in place, albeit they have been discounted by the market for the time being. Asia markets remain weary of the nervous European outlook, and the latest Chinese data was of mixed results. Adding fuel to the week’s volatility was the weekends announcement in China of new policies to curb house price appreciation. This week renewed focus on the Australasian economies will be seen as the respective central banks make their latest monetary policy announcements. The RBA’s monetary policy announcement later on today should not surprise with an unchanged cash rate of 3.00%,and the wait and see approach looks to continue into the belly of 2013. In New Zealand, next week’s monetary policy statement will be an opportunity for the RBNZ to pour cold water on a market speculating on cash rate hikes coming in 2013.
Last week was a relatively quiet one for Australian economic news. Most noteworthy was the detail in the private capital expenditure number. This was materially stronger looking forward, than the backward looking headline number suggested. The decent outlook for non-mining expenditure saw the market pare back expectations of a near term interest rate cut from the RBA. Yesterday saw a disappointing building approvals number released. Today's retail sales number showing a nice +.9% jump in activity comes ahead of what should be an unchanged monetary policy decision from the RBA. Tomorrow's 4th quarter GDP number will also be closely monitored as usual. The vulnerability in demand for AUD over the coming weeks has continued to play out in a mixed fashion. Whilst lower against the resurgent US dollar, the EURO and GBP remain under pressure and have been weakening more quickly than the AUD for the most part. 
New Zealand
Last week saw second tier influences make their mark on the outlook in NZ. Lead exporter Fonterra released news that their pay out remains on target at 5.50NZD/KG. The ANZ business confidence survey saw another jump in sentiment from 22.7 to 39.4. This is the highest level since July 2011 and further indicates the momentum being created by the developing Christchurch rebuilding program. Ratings agency S&P warned the NZ banking sector is vulnerable to a pullback in the housing sector. They point out that global uncertainty in the short to medium term represents a risk that interest rates could increase and create pressure on the market. This scenario remains unlikely at this time, but is certainly something that should be kept in mind. The weekend saw reports that News Corporation are to exit their cornerstone shareholding in NZ pay TV provider SKY. This is significant because of the over 800 million NZD price tag and the potential for this to weigh on the NZD in the short term. This week sees little in the way of material economic news in NZ. All domestic focus now is on next week’s RBNZ monetary policy announcement. Over the last few weeks increasing expectations of a hike from the RBNZ in late 2013 that have developed. These may be pared back following the monetary policy statement. 
United States
Last week has been one of mostly positive news in the US. Better than expected consumer sentiment, homes sales and manufacturing numbers were slightly offset by soft GDP and durable good sales data. Rhetoric from the FED points towards the quantitative easing program remaining in place as expected into 2014, when the labour market should reach its desired 7% unemployment level. President Obama and Congress continue to battle on spending cuts and the lack of progress has seen the "sequestration" come into action. These somewhat debilitating spending cuts to the tune of 85 billion USD, will see Federal run programs wound down, but should not handicap the economic recovery beyond about .5% of GDP for 2013. This week sees the usual barrage of economic data due, but it is Friday's employment numbers that provide the primary focus.
The uncertainty in Europe remains in place. The political impasse in Italy continues to drag on, albeit the most likely scenario looks to be second election to try and find viable leadership. Positive news was the Italian funding lines remain open, with bond auctions being completed, although at higher yields than previous issuance. European inflation remains under control with last week's release coming in at 1.8% against the expected 2.0% number. This will increase the monetary policy options for the ECB in the coming months. Unemployment remains a real sticking point for the wider economy as European unemployment rates hit 11.9%. Spanish and Italian manufacturing numbers continued their slide and will undermine the wider European progress. This week sees European retail sales and German industrial production numbers provide a focus alongside the latest monetary policy announcement from the ECB.
United Kingdom
The last week has been more of the same for the under pressure UK economy. Revised GDP numbers were -.3% as the market expected. Both manufacturing and services data show contracting activity in the last month and increase the chances of the UK dipping back into technical recession for the third time in the last five years. The BOE monetary policy announcement this week has been of increasing focus. Outgoing Governor King has stated that he recommends additional quantitative easing (QE) to further stimulate the economy, but given the previous meetings minutes revealed a voter split against the move, this seems unlikely at this meeting. The monetary policy decision provides the focus for the week in the UK. The Pound Sterling has remained under pressure across the board. It is becoming more immune to weak economic data, and could well be starting to put a base in place. 
The last week saw the December GDP numbers provide the primary focus for the Canadian economy. The -.2% number was as expected and produced +.4% growth for the 4th quarter. This growth was driven by private consumption and exports, and made for positive reading. This week sees a busy economic calendar with manufacturing, building and employment numbers joining the latest BOC monetary policy decision and statement as a focus. Expect no change from the BOC, but the statement will provide valuable insight to the current outlook on the economy from the view of the central bank.
The economic data has been mixed in Japan in the last week. Better than expected retail sales numbers were balanced by soft industrial production numbers. Given the recent policy initiatives being undertaken in Japan, the economic data has been of secondary importance. Overnight the incoming BOJ Governor Kuroda hit the headlines with comments to the lower house of Parliament about policy implementation. Kuroda pledged to make massive purchases of long dated government bonds in an effort to maintain lower long term interest rates. Interestingly he qualified this stance with the comment "But the central bank also needs to scrutinise market developments at the time, as well as the potential drawbacks", according to Reuters. This does not particularly committed to the aggressive policies he is to be charged with implementing, and is something that could raise questions at some stage in the coming months.
Topics: Economic news