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FX Update : The NZD and AUD slump

Written by Sam Coxhead on April 16th, 2013.      0 comments

4:40 PM (NZT)
Market Overview:
The last week has proved to be a most interesting period for financial markets. For the most part sentiment proved enthusiastic, with stock markets pushing to record high levels as central bank monetary stimulation provided direction. However economic data has been soft as numbers for the first quarter have emerged. Fridays release of weak US retail sales and consumer sentiment numbers point towards further pressure on growth numbers to start 2013 for the world’s largest economy. These concerns further increased yesterday as lower than expected Chinese growth and industrial production numbers for the first quarter were released. With the world’s two largest economies underperforming to start 2013, a test of the markets commitment towards higher growth asset prices has ensued. Hard commodity prices have been smacked lower in the opening sessions this week (gold down around 10% yesterday), and a surge in the US dollar and Japanese YEN has ensued. Needless to say as the rapidly changing sentiment came to light, the Australian and New Zealand dollars have come under substantial pressure. In the last couple of hours the senseless bombings in Boston have further rattled market confidence. To what extent there are ongoing ramifications of this terror threat re-emergence play on the market will take time to ascertain. The terror threat to sentiment aside, it seems increasingly clear that 2013 is not going to be a year of straight forward recovery for the global economy. Similar to 2012, the opposing influences of extensive central bank stimulation, and a moribund global growth story, point toward range bound markets lacking firm direction.

The primary domestic news focus for the Australian economy in the last week was the materially weaker than expected employment numbers on Thursday. Not only was there a contraction in the number of jobs in the economy, the number of people looking for jobs also contracted, indicating that workers have given up looking for employment. These indicators certainly legitimise the wait and see approach from the RBA with regards to further easing of the cash rate. Yesterday saw the latest Chinese growth and industrial production numbers reveal lower than expected levels of activity in China. As Australia's largest trading partner this will impact the Australian economy overtime, and the Australian dollar saw immediate pressure across the board following these announcements. Adding to the pressure this week will be the tempering of stock markets, and the collapse in the precious metals markets. Today's RBA monetary policy meeting minutes revealed little of surprise with the bank remaining poised to offer further stimulation as the need arises, which for now it does not. The remainder of the week will have an external focus for the Australian economy, in the absence of any further economic data of note on the local calendar.

New Zealand
Last week saw the latest quarterly Survey of Business Opinion released from the NZIER. This survey has seen sentiment consolidate at elevated levels. It has made steady recovery from the dip seen in the middle of last year. The NZ government bond market has continued to see increased levels of interest from offshore, and this has further fuelled demand for the New Zealand dollar. Also of note is the re-emergence of re-insurance flows that we have seen periodically over the last couple of years. The weak US and Chinese economic data in the last few sessions of trade has finally undermined some of the recent NZ dollar demand, which will be of relief to the export/import substitution sectors. This week sees NZ inflation numbers on Wednesday provide the primary domestic focus.

United States
The first quarter of 2013 is looking increasing like it has been a soft patch for the US economy. The FED's monetary policy meeting minutes last week did not shed much in the way of new insight. The FED remains committed to ongoing economic stimulation until the labour market consolidates with lower levels of unemployment. Friday’s weak retail sales and consumer sentiment numbers are the latest evidence of the struggle for growth, in the face of lower government spending. The horrible events on Boston could impact market sentiment for the US dollar depending on how events play out. This week is relatively light on economic data releases. Later today sees the latest building permit and inflation numbers released, but these should be of limited impact to USD demand. Manufacturing numbers later this week provide the primary focus alongside various corporate earnings results as they come to light.

Last week was relatively quiet for economic news in Europe. Of note was a upward revision of 2013 economic forecasts from Germany's economic ministry. The ECB issued their monthly bulletin and stated they continue to monitor the economy very closely, but they do expect an increase in economic activity in the latter half of 2013. Contrary to this is the latest news from two of Europe's largest trading partners the US and China. Lower than expected activity in core export markets will be of concern. With completely moribund domestic Europe growth, foreign market activity for European exports are central to improving Europe's fortunes. The latest industrial production numbers were neutral with the current months ahead of expectation, but the previous number being revised down. This week sees German economic sentiment and European inflation numbers released later today and these will be closely watched.

United Kingdom
The UK economy was off the market radar last week, with just better than expected manufacturing numbers offering any focus. This week offers more, with the latest inflation numbers due later today. Inflation has remained at stubbornly elevated levels in the last couple of years in the UK. Lower than expected numbers would certainly make further monetary stimulation more palatable at the BOE, and this is why the number will be closely watched. Unemployment data and the BOE monetary policy meeting minutes come tomorrow, ahead of the important retail sales numbers on Thursday. Any change in the vote split for further policy accommodation will be revealed in the BOE minutes, and these will offer the primary market focus.

There was little in the way of economic news in Japan last week. New BOJ Governor Kuroda continues to take opportunities to further explain his aggressive monetary policy stance. Ahead of the Group of 20 (G20) finance ministers meetings at the end of this week, expect further rhetoric about the BOJ stimulation being aimed purely at domestic issues, and not specifically at the level of the YEN. Thursday's trade balance numbers will be closely watched as usual, but in the current environment, will likely be of limited impact. In the last couple of sessions the market has seen sentiment swing quickly back towards risk aversion. The YEN has seen a strong pickup in demand as a consequence, especially against the Australian and New Zealand dollars. This kind of corrective move was to be expected at some stage after the massive downward pressure on the YEN seen over the last month or so. The YEN has already seen a retracement from its high levels set earlier today, so expect further volatility in the coming days.

Last week was a quiet one for economic news in Canada. Following the lacklustre BOC Business Outlook survey, the volatile building numbers survey came in below the 3.7% rise in expected activity, at just 1.7%. This week offers far more in terms of domestic focus in Canada. The manufacturing numbers later today start proceedings, with expectations of a .6% increase in activity. The BOC monetary policy announcement should see the cash rate unchanged at 1.00%, but the accompanying statement will be closely watched. Friday sees the release of the latest inflation and wholesale trade numbers and these will round out the focus for the week.
Major Announcements last week:
  • Chinese Inflation 2.1% vs 2.5% expected
  • UK Manufacturing +.8% vs +.4% expected
  • Chinese trade Balance -.9B vs +15.2B expected
  • Australian Unemployment rate 5.6% vs 5.4% expected
  • US Retail Sales -.4% vs 0.0% expected
  • Preliminary US Consumer Sentiment 72.3 vs 79.1 expected
  • Chinese GDP 7.7% vs 8.0% expected
  • Terror bombings in Boston boost risk aversion