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FX Update - Wild ride a sign of things to come

Written by Ian Dobbs on December 10th, 2013.      0 comments

1:45pm (NZT)
Market Overview:
Sentiment within the wider financial markets has shown signs of confusion over the last week. Demand for risk assets remains in place, whilst the odds of tapering from the US Federal Reserve (Fed) apparently increased in the wake of latest US employment numbers on Friday. These conflicting forces produced strange market dynamics, and these unorthodox reactions can be expected to increase in feature throughout the coming year. Increasing levels of intra-day volatility are likely and this will present as many opportunities as it does headaches for those considering their foreign exchange transactions. Adding to the volatility will be the lower levels of liquidity in the coming weeks as the holiday season approaches.


Australia
There was little to get excited about in last week’s data mix from Australia. A small improvement in retail sales was overshadowed by softer than expected GDP and a deteriorating trade balance. The only positive data has come from offshore in the form of Chinese export growth released over the weekend. The stronger than expected 12.7% year on year growth in November was in large part due to improved demand from developed economies. This gave the Australian dollar a boost in early Monday morning trade. In the last hour we have seen business confidence data and that has held steady at the same level as last month and had little market impact. Later in the week we have consumer sentiment, inflation expectations, and employment data to digest.


New Zealand
There has been very little in the way of key economic data from New Zealand since early last week. We did get manufacturing activity yesterday along with house prices, which were both strong results, but the impact on the market was very limited. Overall the currency has been very well supported and this looks likely to continue heading into the RBNZ’s monetary policy statement Thursday. This is the focus for the week, and all eyes will be on Governor Wheeler to see what clues he gives about the timing of the impending rate hike. There is some suggestion the bank could sight the strong currency as a reason to delay the rate increase, however we’re probably only talking about the difference of a month or two at best. At this point the market has priced in a 25 point hike by the end of March 2014. Anything dramatically away from this and we could get a decent reaction in the currency. In the last few hours we have just seen a release from the RBNZ stating they are cancelling the Loan-to-value (LVR) restrictions on lending for new construction. This is a very good move as the last thing the RBNZ wanted to do is hurt the supply side of the housing equation. The LVR’s were put in place to reduce demand and hopefully cool price appreciation. Any restriction on supply would have been counterproductive.  
 
 
United States
Back in June this year when Ben Bernanke signalled to the markets the Fed were looking to start tapering their quantitative easing (QE) purchases he said the following. “When asset purchases ultimately come to an end, the unemployment rate would likely be in the vicinity of 7%, with solid economic growth supporting further job gains.” On Friday evening the unemployment rate fell to 7% and far from asset purchases coming to an end, the bank hasn’t even started tapering yet! The risks of them starting this month however must have increased dramatically. At the moment it’s probably a 50/50 call. Friday night’s data was in general very strong. Payrolls came in at +203k with small upward revisions to previous data. The unemployment rate fell from 7.2% to 7.0%, a five year low. And consumer sentiment rose dramatically from 75.1 to 82.5. The only question marks in the data came from personal income, which printed at -0.1% against an expectation of 0.3%, and PCE inflation (an indicator of actual inflation) which softened to 0.7% from 0.9% previously. It may have been these last two factors that caused the brutal reversal and subsequent short squeeze seen in many markets in the wake of the release. If inflation is not showing any upside pressure, the Fed may well continue to hold off tapering until the first quarter of next year. Either way, the market’s initial reaction to the data was what you would have expected to strong numbers. The USD rallied and interest rates sold off. But this move only lasted 30 minutes before a sharp turnaround saw most markets move a long way in the opposite direction. By the end of the session the USD was dramatically weaker and interest rates had fallen substantially. This week we get have retail sales and producer prices data to draw focus.


Europe
The highlight for last week was the ECB rate decision and accompanying statement, which surprised the market with its somewhat neutral tone. The fact is the central bank is far from neutral having just cut rates the previous month. There is also continued talk about ‘further room to act’ and this was highlighted by ECB governing council member Jens Wiedmann over the weekend. In an article on Reuters he was quoted as saying “I don’t want to speculate about future monetary policy moves. But rest assured we still have other tools at our disposal. We are ready and able to act.” On Friday evening we had disappointing data on German factory orders, and this was followed last night by German trade balance and industrial production. Both these releases also came in below expectation and a question mark is now starting to appear over future German growth prospects. Germany’s performance has been the only bright spot with the wider Europe largely languishing and prospects for the region will be a lot poorer if German growth falters. Later this week we have industrial production, the ECB monthly report, and couple of speeches from President Draghi himself to draw focus.


United Kingdom
The UK economy continues to perform well. Last week we had solid readings from the manufacturing, construction, and service sectors, along with an upbeat tone from the Bank of England (BOE). On Friday evening we got further solid results from the house price index and consumer inflation expectations. Last night Governor Carney gave a speech in which he maintained his upbeat tone. He also said he was concerned about potential housing market developments, and he wants to avoid the housing market moving at ‘warp speed’. Tonight we get data on manufacturing production, industrial production, and the trade balance. Then on Wednesday we get an estimate of monthly GDP from the National Institute of Economic and Social Research (NIESR). These results should continue to highlight the increasing strength of the economic recovery.


Japan
Last week was a quiet one on the data front for Japan, but this week kicked off with a slew of economic data released yesterday. Unfortunately none of it made very good reading and it won’t take much more data like this to have the Bank of Japan (BOJ) considering further easing measures. The key releases yesterday were firstly the current account for October which showed a deficit of 60 bln Yen. In more than 10 years of data the current account has only been in deficit three times, and two of them have been the last two months. Secondly we got the final reading of third quarter GDP. This was revised down from the previous estimate by a substantial amount. On a year on year basis Japan’s growth is now only 1.1%, compared to the previous reading of 1.9%. Analysts had been expecting a downward revision to around 1.6%, so this was a very disappointing result. Big questions will now be asked about the economy's ability to withstand the planned April sales tax hike, even though the government has announced a stimulus package designed to soften the blow. There is more data to come this week with the tertiary industry activity index, consumer confidence, and core machinery orders all set for release.


Canada
The Bank of Canada (BOC) struck a very cautious tone at their rate meeting last week and rightly in light of some very mixed data recently. Last week’s Ivey PMI data showed a big drop, and as this index is a leading indicator of economic health it does raise some concerns. On the bright side we had employment data out on Friday night and that came in above expectations at 21.6k. The unemployment rate was unchanged at 6.9%. Last night we got housing starts data. Although is pulled back a touch from last month and was a little below expectation, its overall level of 192k is healthy and it seems to have stabilized around here over the last few months. Late this week we have the house price index, capacity utilization, and a speech from Governor Poloz to draw focus.


Major Announcements last week:
  • Chinese Manufacturing PMI 51.4 vs 51.1 expected
  • NZ Terms of Trade 7.5% vs 3.1% expected
  • European Manufacturing PMI 51.6 vs 51.5 expected
  • UK Manufacturing PMI 58.4 vs 56.0 expected
  • US ISM Manufacturing PMI 57.3 vs 55.0 expected
  • RBA leave monetary policy unchanged as expected
  • Australian GDP +.6% vs +.8% expected
  • European GDP -.4% as expected
  • BOC leave monetary policy unchanged as expected
  • BOE leave monetary policy unchanged as expected
  • ECB leave monetary policy unchanged as expected
  • US Unemployment rate 7.0% vs 7.2% expected
  • Chinese Trade Balance 33.8 B vs 21.7B expected
 

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