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FX Update : The horizon of global recovery lengthens

Written by Sam Coxhead on April 23rd, 2013.      0 comments

6:10 PM (NZT)
Market Overview:
It has been a very interesting last few weeks for the wider financial markets. It has become more evident that earlier hopes for a flourishing recovery for the global economy in the first half of 2013 were misplaced. Expectations now build of improving activity in the second half of the year has come as global indicators have missed expectations almost across the board for the first quarter. This pushing out of the recovery horizon has come as global inflationary pressures remain benign. These benign pricing pressures have joined with the increased central bank stimulation to push longer end borrowing rates lower across the globe. With the continuing presence of these opposing forces of increased monetary stimulation, and low levels of economic activity, further directionless sideways trade in many markets in the coming months.

Last week saw the weak 1st quarter Chinese GDP numbers ensure that demand for the Australian dollar was somewhat tempered. The domestic focus of the week was the RBA monetary policy meeting minutes. These revealed little of material surprise, with the way remaining open to a lowering of the 3.00% cash rate should conditions become more difficult. This week will see passing focus on the latest Australian inflation numbers at tomorrow’s release. Today saw the latest Chinese manufacturing numbers released. These were weaker than expected, which continues recent run of soft Chinese economic data. The odds of a lower cash rate from the RBA have increased in the last couple of weeks, and now move close to a 50% chance of a cut at upcoming meetings. Domestically, of primary concern are the continuing low levels of investment in non-mining sectors.

New Zealand
Last week saw the latest Global Dairy Trade (GDT) auction results show consolidation of prices at record levels after the 9th straight increase. These came as easing drought conditions were seen in the north island, after periods of widespread rain. This should help support next season production levels for the important sector. The latest inflation numbers were on expectation with a moderate .4% increase in prices for the 1st quarter. Continuing demand for NZ Government bonds will likely provide some on-going support the NZ dollar in the coming months. The RBNZ monetary policy announcement tomorrow provides the primary focus this week. The statement accompanying the unchanged cash rate decision will be closely watched. Expect further reference to the Auckland property market, and the NZ dollar.

United States
Last week’s US inflation numbers were lower than expected, and re-iterate the importance of the FED’s monetary stimulus to the economy’s vulnerable recovery. The rest of the economic news remains mixed with housing activity consolidating around its improved levels along with industrial production, but corporate earnings have been weak as a balancing factor.  This Friday will see the first quarter GDP numbers released, and these provide the primary focus amongst various other data due for release. Expectations are for increased activity around 3% for the quarter. Also of note will be the manufacturing numbers later on today, durable goods sales numbers tomorrow, along with various corporate earnings results on Wall Street.

There has been little change to economic sentiment in Europe in the last week. The numbers continue to point towards further easing to the cash rate at some stage from the ECB, and now the debate becomes about the effectiveness of additional easing. Growth is really struggling to re-emerge and it seems likely that there will be easing of time frames to get debt to GDP ratios in order in the coming months. Lower levels of Government spending are materially impacting the recovery, and a loosing of time frames would certainly offer some assistance. Inflationary pressure remains under control, easing the way for policy accommodation from the ECB of deemed appropriate. Of interest has been the material increase in demand for European debt as cashed up Japanese pension funds chase yield following the BOJ policy initiatives. This week’s focus comes from the manufacturing and services numbers later on today. Expect pressure across the board, with Germany the only member with a chance of showing increased activity.

United Kingdom
Last week saw UK inflation released as expected at 2.8% on an annual basis. Labour market numbers remain mixed at best with the unemployment rate lifting slightly to 7.9%. The retail sales sector remains under pressure, albeit the last numbers met expectation with a .7% decline in activity on the month. An unsurprising credit down grade from ratings agency Fitch did not have a lasting effect on the GBP. This week will sees just passing domestic focus in the UK ahead of the primary focus in the form of the preliminary 1st quarter GDP numbers on Thursday. These figures are crucial to the decision making from the BOE with regards to future monetary policy stimulus. Weak numbers would further increase the chances of additional quantitative easing, placing further pressure on the GBP.

The weekend’s G20 meeting offered a chance for friction on the Japanese aggressive policy released in the last few weeks. Externally at least , there was no debate and this means a tick of approval from the international community. In the absence of any material economic news of note, the Yen saw periods of demand as wider market risk aversion increased. So with the softer global growth outlook, further YEN weakening will not come as easily as the previously ground lost. Interestingly, an externality of the BOJ’s policy will see increased Japanese investor buying of foreign bonds as they chase higher yield. This does not only mean Australia and New Zealand. This has already been seen in European peripheral member debt last week. Good support in the bond markets pushed yields lower and provided support for the EURO itself. The BOJ get another chance to voice their policy at the monetary policy meeting this Friday.

Last week was a mixed one for the Canadian economy. Better than expected manufacturing numbers were balanced by the material fall in the important raw commodity markets. The Bank of Canada maintained and unchanged cash rate as expected. Whilst they maintained the next move would be an increase from the current emergency levels, they also revised growth expectations from 2.0% to 1.5% for 2013. Monthly inflation was confirmed at .2%, and these factors mean the BOC will remain on the side lines for the coming months at least. This week sees the retail sales number later today (Tuesday) offer focus ahead of speeches by outgoing Governor Carney on today and tomorrow.

Major Announcements last week:
  • Chinese GDP 7.7% vs 8.0% expected
  • UK Inflation +2.8% as expected
  • Canadian Manufacturing Sales 2.6% vs .6% expected
  • US Inflation +.1% (mth) vs +.2% expected
  • NZ Inflation +.4% (qtr) as expected
  • UK Unemployment 7.9% vs 7.8% expected
  • BOC leave cash rate unchanged
  • UK Retail Sales -.7% as expected
  • Canadian Inflation +.2% (mth) as expected
  • US Existing Home Sales 4.92m vs 5.02m expected
  • Chinese Manufacturing 50.5 vs 51.4 expected