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FX Update -Will the real economy weigh on global sentiment?

Written by Sam Coxhead on February 19th, 2013.      0 comments

3:35 PM (NZT)
Market Overview:
Last week saw patchy markets as most of Asia had annual holidays of some kind for varying duration's. Lower levels of participation leads to lower levels of liquidity, and at times accentuates moves. Generally markets were mixed with stock markets ending close to starting levels, interest rates consolidating at higher levels and gold prices easing as the US dollar saw demand late in the week. The Australasian currencies were both in demand, with the NZ dollar seeing notable periods of strength. Interestingly, its gains were not to be maintained as the US dollar bounced on better news to finish the week. The much anticipated G-20 meeting of Finance Ministers produced little of note. Japan escaped any major criticism for its recent efforts to end is deflationary cycle, and members simply agreed to not to target their exchange rates in search of a competitive edge. This week's focus will be central bank based with minutes from previous monetary policy meetings expected from the Bank of Japan, Reserve Bank of Australia, Bank of England and the US Federal Reserve.

The Australian economy is entering an interesting stage. Last week saw second tier business and consumer confidence numbers jump strongly. The RBA remains poised to ease monetary conditions further if needed and they point to the elevated level of the AUD as a reason for the soft economic conditions. The interest rate market has a 30% chance of an easing to the 3.00% cash rate at the RBA's next meeting on the 5th of February. Of increasing influence with be the pending general election marked down for September 14th. Over the weekend the ruling Labor Government initiated the election lolly scramble proceedings. They announced various programs and plans aimed at supporting small to medium sized business, the blue collar labour market and the manufacturing sector. Given Australia's relatively strong fiscal position, there is potential for quite a splurge of spending as the election battle heats up.

New Zealand
The New Zealand dollar saw periods of surprising strength last week. Of most note were the highs against the GBP, and US and Canadian dollars. With only second tier economic news on offer, the market enthused on increased consumer confidence numbers. Unsurprisingly, the boost was driven by increased sentiment in the South Island. The latest services numbers were also slightly higher than expected. This week is also light on economic news with only producer price data and a speech by RBNZ Governor Wheeler on Wednesday to garner attention. Weather conditions across New Zealand remain very dry, and this will certainly impact agricultural earnings over the coming quarters, especially if the current conditions continue.

United States
Economic news was positive in the US last week. Retail sales, consumer sentiment and manufacturing numbers were all stronger than expected and the US dollar saw periods of increased demand on the back of these numbers. This week sees the FED monetary policy meeting minutes, inflation numbers and the latest home sales due for release. Interestingly, longer term US interest rates have consolidated at higher levels and this will offer further US dollar support over time. If the positive economic news continues, the focus on the FED "noise" will be of growing importance. The eventual removal of the monetary stimulus (interest rates will then start to head higher), will no doubt be some way off. But it will require a clearly communicated, and considered approach to ensure market volatility is not unduly increased.

The main feature for the European economy last week was the 4th quarter GDP number which slightly missed the weak expectations at -.6%. Of note was the weakness of core economies Germany, France and Italy. Various European officials also took time to confirm the already obvious, that whilst the structural risks in Europe had abated, the economic fragility remains real. This week sees a host of data due for release. Of note will be the manufacturing and services numbers, as well as the important German economic and business sentiment numbers. The trend weaker for the EURO seems to have abated for the time being, and it looks at more comfortable levels than in previous week's on most pairings.

United Kingdom
The GBP and UK economy both remain under pressure. Last week saw the inflation number in the UK remain stubbornly high, and in the BOE's subsequent inflation report, it is forecast to remain at elevated levels in the short term at least, whilst growth is expected to under perform. The retail sales numbers reflected that outlook, coming in materially lower than the +.5% expectation, at -.6%. The BOE monetary policy meeting minutes this week offer the BOE another opportunity to actively undermine demand for the GBP, and push it lower. The lower currency will aid efforts to re-balance the economy, and no mater what political promises are made at the G20 level, this remains an intended consequence. The unemployment numbers tomorrow will also be closely watched. With the BOE poised to continue with their stimulatory efforts, do not expect any material rebound from the GBP in the short term.

It was an interesting last week in the Japanese economy. Tensions were high ahead of the G20 meeting that Japan would come under pressure for its repeated efforts to weaken the value of the YEN. Interestingly, the subsequent statement from the G20 made no mention of Japanese policies, and this can be taken as acknowledgement of their unique economic situation. There was no change in monetary policy from the BOJ as expected, with the upcoming announcement of new BOJ leadership expected in early March, if not before. Today's BOJ minutes were closely watched, but did not surprise and the trade balance tomorrow rounds out the domestic data focus for the week.

Last week was a quiet one for Canadian economic news. Just the volatile manufacturing numbers offering focus, with a number that was well below expectations at -3.1% for the month. This week holds a little more interest, with inflation and retail sales numbers both due for release on Friday. With the BOC likely to remain on hold for the remainder of 2013, the offshore lead with probably dominate the Canadian dollar price action in the short term at least.
Major Announcements last week:
  • UK Inflation 2.7% as expected
  • AU Consumer Sentiment 7.7% vs .6% previous
  • BOE promises further stimulus if required
  • Japanese GDP -.1% vs +.1% expected
  • BOJ leave monetary policy unchanged
  • European GDP -.6% vs -.5% expected
  • NZ Retial Sales +2.1% vs +1.3% expected
  • UK Retail Sales -.6% vs +.5% expected
  • Canadian Manufacturing -3.1% vs -.4% expected
Topics: Economic news