Weekly FX Update - Volatility to increase?
Last week saw relatively tame price action in the foreign exchange markets for the most part. The market has expected a positive result on the Greek funding issue, and has limited expectations for progress from the US fiscal negotiations. In the coming weeks the markets can expect lower levels of liquidity as the holiday season and end of year approaches. With the Japanese elections and the on going fiscal talks in the US, these lower levels of liquidity will likely lead to increasing levels of volatility. This week’s central bank extravaganza sees the final monetary policy announcements for the year in New Zealand, Australia, Canada, the United Kingdom and Europe. The most likely interest rate move is a 25 basis point easing from the Reserve Bank of Australia (RBA) at tomorrow’s announcement.
Last week was relatively quiet in Australia. Construction numbers were mixed, but the new home sales numbers were better than expected. The much anticipated private capital expenditure numbers were better than expected, albeit down from the 2nd quarter. Of interest were the mining investment numbers which held up reasonably well but point towards a lower than previously expected peak, and furthers debate on the possibility of the easing from the RBA at tomorrow’s monetary policy announcement. Various commentators have pointed that if the RBA waits until the next meeting to cut the official cash rate, the gap between easing’s will have been four months, and the lower risk option would be to put insurance in place now. The market pricing is marginally in favour of a move lower to a cash rate of 3.00%. Following today’s flat 3rd quarter retail sales, we have building approvals, GDP and employment all to come this week. There is potential for volatility and this should be kept in mind for those considering transfers involving Australian dollars.
There has been very little in the way of local economic news in New Zealand throughout the course of the last week. Thursday’s ANZ Business Confidence survey revealed an impressive increase to 26.4 from the previous 17.2 level. This second tier data is the last to come ahead of the RBNZ monetary policy decision this Thursday. It seems very unlikely that we will see a cut to the 2.50% cash rate at this meeting. The 3rd quarter data has been weak, but consideration of more up to date indicators point towards the 3rd quarter being a tough one for activity. The 4th quarter certainly looks and anecdotally feels like a different proposition. This will likely see the RBNZ take further time to digest the current data, and leave any prospect of easing to the cash rate for the early months of 2013, if required at all.
Volatility in the wider market is likely to increase in the coming weeks. This increased volatility will be a function of the uncertainty around the US fiscal negotiations and lower levels of liquidity over the Christmas holiday/end of quarter period. Last week saw some reasonably positive data with durable goods orders and consumer sentiment data demonstrably beating expectations. The new home sales numbers disappointed on Wednesday, but was somewhat discounted by the price action. The second read of preliminary Q3 GDP numbers overnight revealed a 2.7% rise in activity against an expectation of a 2.8%. Friday’s lower than expected personal spending numbers point towards softer than forecast GDP growth. This saw a mixed reaction, as the positive sentiment could not be maintained. The fiscal negotiations remain the underlying focus as they will be of direct impact to the level of economic growth in 2013. As the end of the year approaches the FED are likely to get increasingly uncomfortable with any lack of progress, which anecdotally sees lower business investment levels ahead of a positive outcome. FED speeches now commonly point towards the current low interest rate environment remaining in place until the unemployment rate hits a target of 6.5%. Further stimulation cannot be discounted, especially if 2013 growth is adversely affected by the inability of the President and the Republican congress to find a compromise on fiscal issues.
European finance ministers finally agreed to award the next tranche of bailout funds to Greece last week. An easing of conditions to be met will also apply to those loans to Ireland and Portugal. Lower than expected German inflationary pressure has again increased the calls for an easing from the ECB at Thursday’s monetary policy announcement. This does seem unlikely , with further policy accommodation likely to come in early 2013. European unemployment was as expected at a large 11.7%. Spanish unemployment5 on Tuesday will be of note, with the focus undoubtedly shifting back to Spain in the short term.
Revised UK GDP numbers were as expected at 1.0% for the 3rd quarter last week. Comments from Bank of England officials continue to talk of a protracted recovery, and the possibility of further quantitative easing in obvious attempts to cap any EURO inspired GBP appreciation. Of note this week was also the news that highly regarded current Bank of Canada Governor Mark Carney will take over the reins at the Bank of England (BOE) mid-way through 2013. Next week sees a busy calendar in the UK. Manufacturing, construction, services and trade balance numbers will come alongside the latest BOE monetary policy decision on Thursday. No change is expected to monetary policy at this meeting.
The frenzy of anticipation surrounding the Japanese war on deflation has increased again this past week. LDP party leader Abe openly calling for unlimited stimulation until inflation reaches 2.0%. In a Reuters article over the weekend, speculation again increased, with talk of a one off monetary injection of one trillion US dollars in an effort to weaken further the YEN. A number of different ideas are being discussed including the purchase of foreign bonds. Central to the upcoming election will be a increasingly shaky independence of the Bank of Japan (BOJ), with politicians quick to blame an apparent lack of BOJ pro activity for the current lack of economic growth and correspondingly high YEN.
Last week proved to be a mixed bag for the Canadian economy. Deputy Bank of Canada (BOC) Governor Murray commented that the economy was running close to potential and this would point toward an increased cash rate at some stage in 2013. Unfortunately the monthly GDP numbers show just .6% annualised growth for the 3rd quarter and this comes in materially lower than the expected .9% number. This week sees the BOC monetary policy statement on Tuesday, building permits and manufacturing numbers Thursday, and the latest employment numbers Friday. Expect no change from the BOC to monetary policy, but the accompanying statement will be of interest.
Major Announcements last
• Greece awarded its next tranche of bailout funds
• UK revised GDP as expected at 1.0%
• US Durable Goods 1.5% vs -.6% expected
• US Consumer Confidence 73.7 vs 73.1 expected
• ANZ NZ Business Confidence 26.4 vs 17.2 previous
• AU Private Capital Expenditure 2.8% vs 2.1% expected
• US Preliminary Q3 GDP 2.7% vs 2.8% expected
• Canadian GDP Oct 0.0 vs +.1% expected
• Chinese Manufacturing 50.6 vs 50.8 expected
• Australian Q3 Retail Sales 0.0 vs +.4% expected