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Whats been happening in the economies of note this week? - 18 November 2011

Written by Sam Coxhead on November 18th, 2011.      0 comments

4:15 PM (NZT)
The Australian Economy:
The Australian economy continues on it slightly softer path. The RBA monetary policy meeting minutes released on Tuesday held few surprises. The RBA remain poised to react as necessary, with regards to cash rate changes. With lowering inflationary pressures, the likelihood is that we will see another 25pt cut to the cash rate in the coming months. The European debt crisis remains their primary concern, and for the time being they see Australia’s important Asian markets as trading as anticipated, mildly softer. Next week is quiet again for economic data, so the focus will remains on action in external economies.
The New Zealand Economy:
The economic news of the week has been the much better than expected 3rd quarter retail sales figures released on Monday. Sales for the quarter were expected to be .7%, but came out at the much better number of 2.4%. Rugby World Cup spending has been attributed to much of the welcomed increase. Interestingly the interest rate market dismissed this positive number, and have been pricing in increasing chances of a cut to the cash rate, throughout this week. This appears to be getting ahead of itself at this stage, with chances of a 25pts cut to the 2.5% cash rate priced at around 60% this morning. The obvious risk to the economy is financial contagion from the European debt crisis. Global growth forecasts have been revised lower over the last few months, but this does not explain this week’s move in the NZ market. US, Australian and Asian growth looks to be holding up at relatively good levels and until we see these economies soften again, expect the Reserve Bank of NZ to keep the cash rate steady at current levels. Next week the RBNZ releases its quarterly inflation expectations on Tuesday and these should offer some further guidance to the market. The maturing of the large Nov 2001 NZ Government Bond will be of influence, as re-investment of a portion of the 8.8 billion will have an impact of yields across the interest rate curve.
The US Economy:
The news in the US continues its improved trend for the 3rd quarter. This improved recent run of economic data has seen both the chances of another dip into recession, and the likelihood of further quantitative easing fall dramatically. Obviously there are still concerns that the debit markets in Europe will continue to implode and this provides a major hurdle as we approach the end of 2011. This week has seen better than expected retail sales figures, benign inflation numbers and better than expected capacity utilization and industrial production numbers. The housing and employment markets remain the primary concerns and officials will remain very cautious, until we see dramatic improvements from the current low levels. Manufacturing numbers on  Thursday show the volatile nature of conditions remain in place. Whilst the numbers were not as good as expected for the most part, encouragingly the employment component has picked up.
The European Economy:
The European economy remains in a heightened level of uncertainty. The actual economic numbers are steadily getting worse as the protracted debit market demise plays out. This week has seen the release of 3rd quarter GDP numbers and these came in on expectation at just .2%. Inflation remains high at 3%, but is poised to fall in the coming quarters. Of primary focus are the debt markets in Europe and in particular the Govt bond markets. Italian and Spanish debt are being watched most closely, with both volatile and Italian yields remaining elevated around levels at which Greek, Portugal and Ireland have required bailouts. The ECB remains almost the sole buyer of Italian debt and very much the supporter of Spanish debt via the secondary market. These Government bond markets will remain the key in the short term. Crucially European banks remain under pressure with credit downgrades coming thick and fast across Europe. Of note is Italy’s largest bank Unicredit, posting a 10.3 billion EUR loss for the 3rd quarter, mostly in write downs on its bond holdings. Expect more announcements like this to come, and the uncertainty to remain elevated over the coming year.
The UK Economy:
In the UK annualized inflation for the 3rd quarter came out at 5%, but this elevated level is seen as dramatically falling in 2012. Bank of England comments continue to paint a dark picture of the economy. Very low growth levels, being further damaged by the situation in Europe, have prompted another downward revision of growth forecasts. Expectations for 2011 and 2012, are now just 1% for the annual growth rates. Further quantitative easing efforts are likely if these forecasts pan out. The harsh austerity measures undertaken by the coalition government, are struggling to improve the Government finances, as its hard to pay down debt, with tax revenue levels that are now persistently lower. The final focus for the week was yesterday’s retail sales numbers, with a -.2% figure expected for the month the figure came out at +.6%. Next week sees the public sector net borrowing numbers, Monetary Policy Committee meeting minutes, and revised GDP numbers released.
The Japanese Economy:
Japanese 3rd quarter GDP jumped to 1.5% as the earthquake rebuild boosted activity when data was released on Monday. The Bank of Japan left its monetary policy unchanged at the announcement on Wednesday and re-iterated the risk of contagion from the European debt crisis, was the primary risk to economic growth in Japan in the near term. The debt crisis would impact Japan mainly by materially lowering the global growth outlook, and therefore further damaging the export sector, which is already having to deal with the significant strain of the strong YEN.
The Canadian Economy:
Wednesdays release of the latest Canadian manufacturing numbers show a 2.6% increase for the month, higher than the expected 1.1%. CPI numbers are due late on Friday and are expected to reveal a .1% rise for the month. With the US economic numbers improving, expect at least a mild pick up in the indicators in Canada over the coming months. The elevated oil price will also have a positive impact, if somewhat offset by the corresponding higher oil price.