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FX Update – Global recovery from soft Q1?

Written by Ian Dobbs on May 5th, 2015.      0 comments

Market Overview:
Somewhat interestingly, the first quarter of this year proved to be a very disappointing one in a number of major economies. Growth has come in well below what was previously forecast in the United States, the UK, Canada, China and most likely Japan as well. Is this a result of random coincidence or is there a common driver? In the States the finger of blame has been pointed at the impact of the west coast port dispute and the severe winter weather, but that is certainly not the case in the UK. The only common theme for each economy has been the impact of low oil prices. It may well be that the negative impact of weak oil prices to the energy sector is front loaded, and the resulting benefit to consumers will take longer to flow through into each economy. Either way, what is going to be extremely interesting is how much of a recover/bounce each economy sees over the coming months. The strength of each recovery, assuming we see them at all, will be a key driver of the relative currencies going forward.

This week should prove to be very interesting for the Australian dollar, and Australian markets in general. The main focus is on the Reserve Bank of Australia’s (RBA) rate statement due out later this afternoon, but later in the week we also have retails sales and employment data to digest. The RBA may very well cut rates again today, but it’s far from a forgone conclusion. The market has moved to price in a greater chance of a cut (around an 80% chance now) since last week’s newspaper article by a well-connected reporter hit the wires. A surprise is not out of the question however, and either way we should see some good volatility in the AUD. Yesterday’s release of building permits came and went without any noticeable market impact. Approvals were stronger than expected at +2.8%, but it’s a very volatile series.

New Zealand
There has been little data of significance since last Thursday’s RBNZ official cash rate review. The New Zealand dollar has remained broadly weaker after the central bank confirmed the risks are now skewed toward a potential interest rate easing rather than tightening. In all reality the cash rate will likely stay right where it is for some time yet. Tonight we have another dairy auction from Fonterra to digest, and tomorrow we get employment data. The market is expecting a gain in employment of 0.8% with the unemployment rate dropping to 5.5%.

United States
Although recent data from the US has left a lot to be desired, the Fed still seem optimistic about the outlook going forward and they certainly haven’t ruled out an interest rate hike over the coming months. A June hike seems like a long shot at this stage, but if growth rebounds as expected in the second quarter then a September hike could well be on the cards. At the end of last week we got the ISM manufacturing PMI result and it remained steady at 51.5, which is also its lowest reading in over a year. The ISM survey Chairman was reasonably upbeat about the result saying there were lingering effects from the port strike and that factory headwinds are unlikely to persist. The final reading of University of Michigan consumer sentiment was unchanged at 95.9, while construction spending came in below expectations at -0.6%. Last night's release of factory orders came in bang on expectation at +2.1% and had little market impact. This week to draw focus we have the trade balance, ISM non-manufacturing PMI, a speech from Fed Chair Janet Yellen and the all-important non-farm payrolls report.

United Kingdom
The two key data releases from the UK last week were both softer than expected. First quarter GDP surprised many coming in well below forecast at just 0.3%, which is the slowest rate of growth in more than two years. On Friday we saw manufacturing PMI fall to 51.9 from 54.0 prior. That is a seven month low and it means manufacturers started the second quarter on the back foot. Manufacturers blamed the strength of the GBP against the EUR for dampening demand for UK goods in the Eurozone. This result will dampen hopes for a rebound in growth in the second quarter. Luckily the manufacturing sector is only a small part of the UK economy and this week construction PMI and service sector PMI could well paint a different story. These two numbers will be very closely watched. The other focus this week is on Thursday’s general election. The outcome is still too close to call and the only certainty is that neither major party looks likely to be able to govern on their own.

While data from Europe continues to be very mixed, we have seen a slightly more optimistic tone coming out of negotiations between Greece and its creditors. With Greek Finance minister Varoufakis removed from the negotiating team, there have been reports of progress made towards a deal. The question remains, is this a good thing for Greece or not? Varoufakis’ conduct and negotiating style certainly didn’t win him any friends with his EU counterparts, but his underlying message was a valid one. All the bailout packages to date have had little to do with what is right for Greece and more to do with protecting the EU banking sector. Greece's current debt pile is unsustainable the EU needs to get realistic about dealing with the situation. It would be a tragedy if this opportunity to actually resolve the situation is missed and officials again ‘kick the can down the road’ with some half measures and more crippling austerity.

Japan released a rash of economic data last Friday that contained some very mixed results. Household spending which came in -10.6% was at least better than the forecast for -11.7%. Core inflation surprised on the strong side printing at 2.2% versus expectation of 2.0%. That’s the first rise in core inflation since May 2014. Stripping out the impact of last year’s sales tax hike puts core inflation at just 0.2%. That is still a very long way from the Bank of Japan’s (BOJ) 2.0% target. The unemployment rate fell a touch to 3.4% from 3.5%, but average cash earnings failed to show much improvement printing at just 0.1%. The market was expecting 0.4%. There is very little to get excited about this week with Japan on holiday until Thursday. Friday’s release of the BOJ minutes is the only event worth noting.

Canada released GDP data for February at the end of last week and there were no prizes for guessing that weak oil prices and harsh winter conditions produced a soft result. GDP came in at 0.0%, which was a touch better than forecasts which were for a -0.1% outcome. The Bank of Canada (BOC) have long said the first quarter will be a shocker, but they will have been pleased to see that retail and financial services were able to offset the lower crude prices and at least stop the economy from contracting in February. If, as Governor Poloz believes, the worst of the oil shock is now behind them we should start to see some improving data. There are a number of key releases this week to draw focus including the trade balance, Ivey PMI, building permits and employment change.

Major Announcements last week:
  • UK GDP +.3% vs +.5% expected
  • NZ Business Confidence 30.2 vs 35.8 previous
  • US GDP +.2% vs +1.1% expected
  • RBNZ leave monetary policy unchanged as expected
  • US Fed leave monetary policy unchanged as expected
  • BOJ leave monetary policy unchanged as expected
  • European Inflation +.6% as expected
  • Japanese Inflation 2.3% vs previous 2.2%
  • Canadian GDP 0.0% vs -.1% expected
  • Chinese manufacturing PMI 50.1 vs 50.0 expected’
  • UK Manufacturing PMI 51.9 vs 54.6 expected
  • US Manufacturing PMI 51.5 vs 52.0 expected
  • European manufacturing PMI 52.0 vs 51.9 expected