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The volatility continues

Written by Ian Dobbs on June 11th, 2013.      0 comments

3:10pm (NZT)
Market Overview
The end of last week saw the market keenly awaiting the US employment report. Overall it was slightly better than forecast and this has helped to support the US dollar. Expectations for the Federal Reserve to start winding back asset purchases are now well cemented for the second half of this year. With this factored into the market, continued gains for the USD should prove harder to make. Globally, central banks remain on hold with no change in rates last week from the Bank of England, the European Central Bank, or the Reserve Bank of Australia. This week should see similar results from the Bank of Japan and the Reserve Bank of New Zealand. Volatility looks like it’s here to stay, with big moves in some currency pairs over past week.

The Australian dollar has had a terrible time of it lately with selling pressure being unrelenting. This selling has been driven by a softening domestic economy combined with a slowdown of growth in China. Data out over the weekend from China has only served to reinforce that view. Chinese industrial production, property investment and export data all missed expectation. This has weighed on the AUD as has a slightly better than expected US employment report released on Friday. This week however could be an interesting one for the currency. With business and consumer confidence set for release ahead of employment data on Thursday, there is potential for better numbers to trigger a decent squeeze higher. More soft data however, will likely see fresh lows tested.

New Zealand
The New Zealand dollar started the week on fresh lows after US employment data came in a little stronger than expected. This helped increase demand for USD’s across the board. A heavy AUD has also weighed on the NZD. This week we get readings on retail sales and manufacturing index, although the highlight will be the Reserve Bank’s policy meeting on Thursday. The overwhelming consensus is for no change in the cash rate. But what will be closely watched is the banks projected path for rates. The bank currently forecasts a hike in interest rate in the second half of 2014. If this projected hike is brought forward, due to property market concerns,  it will attract some buyers to the currency.

United States
The focus for the markets late last week was on US employment numbers. They came in a little better than forecast and that has raised the likelihood of the Fed starting to taper their quantitative easing programme over the coming months. This encouraged more buying of USD’s and saw long term interest rates rise.  There is a wide consensus now that asset purchases will be scaled back in the second half of this year, and be stopped altogether by mid 2014. Although this will continue to support the USD, with the consensus view now factored into the market the broad based gains of the last month, will be harder to come by. This week’s economic calendar is a little lighter in the US with the focus being on retail sales and consumer confidence.

The EURO has remained well supported since ECB’s head Draghi’s comments last week, that further stimulus measures are on the shelf for now. EURO buying was aided by German industrial production and trade balance figures on Friday that were both positive surprises. This week shouldn’t see much to change that trend with the only key releases being inflation and the ECB monthly report. The IMF recently released a report reviewing the Greek crisis in which it admitted it massively underestimated the toll austerity would have on the Greek economy. This comes on the heels of a recent article suggesting Germany is reconsidering its hard-line approach to austerity in troubled countries. This can only be positive for Europe that desperately needs growth policies to really turn things around.

United Kingdom
The UK’s recent run of better data was supported by another release on Friday. Trade balance data beat expectations and showed a solid improvement. While it didn’t have a huge impact on the currency, it does lend support to the outlook for a very robust second quarter GDP figure. This is serving to underpin demand for the GBP which is recovering a good portion of the ground it lost earlier this year. There is more data out this week that will hopefully confirm the improving outlook. Industrial and manufacturing production numbers are released on Tuesday ahead of an estimate for May GDP and employment data later in the week.

This week has started on a positive note for Japan with the release of first quarter GDP figures. They came in substantially stronger than expected and have helped the Japanese stock market recover some of the losses of the past week. Figures like this are certainly helping to build confidence in the measures taken by the government and Bank of Japan to beat deflation. Volatility in financial markets is still a big concern though, and one the BOJ might address at their policy meeting on Tuesday. They are widely expected to leave monetary policy on hold, but after recent wild swings in government bonds the markets are expecting some measures to try and reduce volatility. Other releases of note this week include consumer confidence and minutes from the May BOJ meeting.

Canada had some strong economic numbers out last week that really helped to support the CAD. The biggest of these was employment data released on Friday. It showed the biggest monthly gain in 10 years and far outperformed any expectations. The details of the report were uniformly impressive and it was only just shy of being the biggest gain since records began. This saw a material increase in demand for Canadian dollars. The currency found even more support after the new Bank of Canada governor Stephen Poloz reiterated his predecessors view that interest rates will rise as the economy grows. The focus for the week ahead will be on housing data and the release of the Bank of Canada’s semi-annual financial system review. That review previously sighted mounting consumer debt as the biggest risk.

Major Announcements last week:
US Ism manufacturing        49.0 vs 50.7 expected
RBA rate decision               unchanged
Australian GDP                   2.5% vs 2.7 expected
Euro-zone GDP                 -1.1% vs -1.0% expected
BOE rate decision               unchanged
ECB rate decision               unchanged
US non-farm payrolls         175k vs 163k expected