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Is talk of scaling back QE premature?

Written by Ian Dobbs on May 21st, 2013.      0 comments

3:10pm (NZT)
Market Overview:
The broad USD strength of the past couple of weeks has finally eased, and the last 36 hours has seen a small retracement with most currencies gaining back a little of the lost ground against the US currency. The overall economic picture hasn’t changed much with a brighter outlook for the US, UK and Japan, supported by recent data. Europe however is getting left behind, and it’s hard to see where sustained growth in the Euro-zone is going to come from. The focus for all markets at the moment is the issue of the tailing off of quantitative easing (QE) measures in the US. We should get more clarity on this from FED chairman Bernanke over the coming days. A firm signal from him that the FED will start scaling back measures over the coming months would see reaction across all asset classes. Until recently it seemed improbable that there would be any tapering QE measures ahead of the end of 2014. The willingness of chairman Bernanke to provide monetary stimulation has remained unwavering until this point. With little in the way of inflation to worry about, this leaves them plenty of room to keep stimulating the economy. This is the central issue that provides increased focus this week.

Today in Australia saw the release of the RBA minutes from their last meeting. They have given a clearer picture to the thinking behind the 25 point cut they made a couple of weeks ago. It seems with inflation remaining low it has given them room to react to support growth that is forecast to be a little below trend going forward. They say the AUD remains overvalued by historical standards, and effects of earlier cuts are still working their way through the economy. The minutes certainly don’t give the impression the RBA are poised to make another cut in the near term. Tomorrow sees consumer confidence figures released which will also be closely watched.

New Zealand
The New Zealand economy remains on a firm footing with little in the way of domestic data or news flow to change that outlook. Offshore factors have been driving the currency. The broad USD strength has been the overriding theme driving the currency down from 0.8550 early in the month, to a low of 0.8060 at the end of last week. We have seen a small bounce from those lows at the start of this week. Today saw the release of inflation expectations which remain subdued, and later in the week we get trade data.

United States
The strong USD sentiment of late was given a boost with the release of consumer confidence data at the end of last week. The USD surged to its highest levels in nearly six years as Americans said they feel better about their financial and economic prospects. Hot on the heels of consumer confidence came the release of US leading indicators. This is a gauge of future US economic activity, and printed at its highest levels since June 2008. There is growing debate about just when the Federal Reserve will look to scale back asset purchases (quantitative easing). With inflation running so low they will feel no need to hurry with that decision. This week has plenty for the market to digest with FED Chairman Bernanke speaking on Wednesday ahead of the release of minutes from the last FED monetary policy meeting. Thursday sees weekly jobless claims and housing data, then on Friday there is durable goods orders.

Europe must be feeling somewhat left out in the cold recently. Over the last few weeks we have seen an improved economic outlook for the US, UK and even Japan. There is still a long way to go in all those economies, but the initial signs of recovery are there. In Europe however, winter looks to be far from over. Even Germany, the powerhouse of the region, has seen very patchy economic data lately. There will be more to digest this week in the form of consumer confidence and producer prices, along with data on the manufacturing and service sectors.  Further stimulus from the ECB over the coming months is a very real possibility. However, the real work needed to turn Europe around has to come from Governments. It seems the divide between what the dominant leader of Germany, and the rest of Europe want, is as wide as ever.

United Kingdom
This week is a big one in terms of economic data for the UK. It kicks off tonight with the important inflation numbers. Then Wednesday sees release of the Bank of England (BOE) minutes from their last monetary policy meeting, as well as the latest retail sales. Thursday sees the second release of the important GDP numbers. The general theme of the last few weeks has been one of a better outlook for the UK, and as a result the GBP has strengthened on most crosses. However it is still well below levels it was trading late last year, and that means there is plenty of room for further appreciation. Some more good figures this week will certainly help its cause.

Japanese officials have been all over the news wires the last few days. News started with the economy minister who over the weekend said “the correction of the strong yen is largely completed”. It seems the government is comfortable with the level of the yen here, as he added “if the yen keeps weakening a lot more, it will have a negative impact on people’s lives”. Given that markets rarely like to trade at levels governments are comfortable with, and the massive amount of quantitative easing recently announced, more yen weakness is a very real possibility. Yesterday saw the release of the government’s monthly report where they upgraded their assessment of the economy. They see a gradual recovery underway and recent data supports that. The question is whether or not it can be sustained. The Bank of Japan’s (BOJ) rate decision and policy statement on Wednesday will be closely watched. Japanese bond yields have also moved recently, in what has been some volatile trade.

The Canadian dollar lost ground against most of its traded pairs at the end of last week following the release of inflation data. The inflation number came in at its lowest level in more than three years, and leaves little doubt that rock bottom interest rates are here to stay for the foreseeable future. However, there is plenty of uncertainty around what impact the new governor at the Bank of Canada will have when he takes over in the next few weeks. With only retail sales to focus on this week, the market will be closely watching all the US releases.