Sustained period of softer US economic news not enough to halt tapering program by Federal Reserve

By Ian Dobbs*:

The last week in the wider financial markets has reiterated the patchy nature of the global growth recovery.

Soft economic news from the US, UK , Japan and Europe highlighted the issue.

The US has seen an extended period of softer than expected economic news, albeit not enough yet to suggest a halt to the tapering of the quantitative easing (QE) program by the Federal Reserve. This increases the focus on the data in the coming weeks, and in particular the latest US GDP numbers, due for release on Friday.

Obviously the Fed’s tapering program is a central theme for 2014, and any change in expectations will have far reaching implications.

The US dollar has seen increasing pressure building on it as the data has disappointed. This pressure has seen the continuation of trade in increasingly familiar ranges for most pairings.

The G20 meeting in Australia in the weekend was of interest. Whilst lacking in definitive action plans as usual, the verbal commitment to lift global growth by 2% is positive and represents increased global activity of around two trillion US dollars.

Major Announcements last week:

·  Japanese prelim. GDP (Q4) +.3% vs +.7% expected

·  BOJ leave monetary policy unchanged as expected

·  UK Inflation (mth) +.6% vs -.5% expected

·  European Econ. Sentiment 68.5 vs 73.9 expected

·  UK Unemployment rate 7.2% vs 7.1% expected

·  US Inflation (mth) 1.6% as expected

·  UK Retail Sales 4.3% vs 5.0% expected

·  Canadian Inflation (mth) +.3% vs +.1% expected

·  Canadian Retail Sales -1.8% vs -.4% expected

·  European Inflation +.8% as expected

NZD/USD

The NZD remains trapped between support around 0.8200 and resistance towards 0.8400. Those two level contained the price action over the past week and look set to do the same over the coming week. The NZD traded to the lower end of its range mid last week after poor Chinese manufacturing data, but since then we have seen a decent recovery back above 0.8300. Poor services PMI data from the US last night helped the upside extend to 0.8340 where is seems to have run out of steam for the time being. It’s hard to see any local data this week providing the spark to break the current range with inflation expectations, the trade balance, and business confidence being the highlights. From the US we have consumer confidence, new home sales, durable goods orders, and preliminary GDP, which will all be closely watched to see if it continues to be ‘weather affected’.

NZD/AUD (AUD/NZD)

With no data of significance release from either country over the past week, there has been little to drive this pair.  As such a tight range around 0.9230 (1.0834) has developed over the past few days. Looking at the bigger picture, there is good support below 0.9200 (resistance above 1.0870) and dips under there should continue to find buyers. This would suggest an eventual move up towards 0.9300 (down to 1.0753), or even 0.9400 (1.0638), is the likeliest scenario when the pair does decide to find some direction. From New Zealand this week we get inflation expectations, the trade balance, and business confidence data. While from Australia we have construction work done, private capital expenditure and private sector credit figures set for release.

NZD/GBP (GBP/NZD)

For much of the past week the New Zealand dollar was grinding lower against the UK Pound. Positive sentiment from the Bank of England (BOE)monetary policy meeting minutes and a decent fall in January unemployment claims aided the GBP. The NZD was weighed on by some poor Chinese manufacturing data and this help drive the pair to its 0.4944 low (high 2.0227). Since then however we have seen a recovery back to the 0.5000 (2.0000) level. A large part of this move came in the last 24 hours as the NZD and AUD put in some solid gains across the board. It’s hard to isolate any key driver for the overnight strength in the Australasian currencies, and this would suggest that further upside price action should be limited. If minor resistance around 0.5025 (support around 1.9900) contains the NZD topside then the pair should eventually turn back down. Any move up through 0.5025 (down through 1.9900) would open the way for another test toward 0.5100 (1.9608).

 NZD/CAD

After initial weakness to start last week, the NZ dollar staged a strong recovery over the CAD. The resistance at .9280 contained the NZD appreciation and remains the primary target for NZD strength in the near term. With the current environment of softer than expected Canadian economic news, it will be a long wait for the pairs economic focus this week, which comes in the form of the latest GDP numbers on Friday. Of passing influence could be the NZ trade numbers tomorrow and the ANZ business confidence index on Thursday. It would not surprise to see the price action again contained by the increasingly familiar .9080 - .9280 range.

NZD/EURO (EURO/NZD)

After trading lower in the early stages of last week, this pair now finds itself range bound between 0.6000 and 0.6070 (1.6667 and 1.6474). We could see some further strength towards 0.6100 (weakness toward 1.6393), but resistance around that level should cap the NZD topside in the near term. There has been little in the way of fundamental news to drive the New Zealand dollar since last week’s poor Chinese manufacturing data drove the pair its lows around 0.6000 (highs around 1.6667). European data has been less than inspiring, although last night’s German IFO business climate did show some strength. This had little impact on the pair that has seen a bout of strength in the last 24 hours thanks largely to some relative outperformance from Australasian currencies. NZ dollar gains from the current level of 0.6065 (1.6488) will be much harder to come by and the likely scenario is for a pull back toward 0.6000 (1.6667) in the near term. The key focus data wise for the week will be on the flash reading of European inflation set for release on Friday. This will be crucial in influencing any potential action from the ECB when they meet next week.

 NZD/YEN

This pair finds itself in an increasing familiar trading range. Whilst during the last week there were periods of NZ weakness, it seems to be able to recover with grinding appreciation. Certainly the resistance at 86.00 should contain any further NZD appreciation this week that sees the majority of focus provided by Japanese data. All we have to draw attention in NZ is the trade balance data on Thursday, and ANZ Business Confidence Index on Friday (expect to stay strong). In Japan the focus is all on Friday’s release of the latest inflation, employment, retail sales and housing starts data. The inflation numbers offers the highest chance of impact on the price action, as it is the primary target of the aggressive monetary policy stance currently in place.  It would surprise if the 84.00 - 86.00 recent range did not contain the price action for the week.

AUD/USD

For much of last week the focus for the Australian dollar was on the downside. Gradual losses accelerated in the wake of poor Chinese manufacturing data which took the currency down to its 0.8937 low. That level managed to contain the downside late last week and held again when retested during a period of weakness yesterday. This allowed the AUD to stage a invigorated bounce that was aided by poor data from the US service sector release overnight. The AUD rallied up towards 0.9050 and this has taken the immediate focus off the downside. A test of resistance around 0.9070/80 could well be on the cards now. That is a key level and the outcome there will likely define near term price action. It’s hard to see Australian data this week providing the impetus for a break higher with only construction work done out tomorrow, then private capital expenditure and private sector credit released on Thursday and Friday respectively. From the US however we have consumer confidence, new home sales, durable goods orders, and preliminary GDP, which will all be closely watched to see if it continues to be ‘weather affected’.

AUD/GBP (GBP/AUD)                            

There has been little overall direction for this pair for much of the past 10 days. Weakness in the Australian dollar last week, after poor Chinese manufacturing data, saw a low of 0.5360 trade and that level held again when tested yesterday. This gave the resulting bounce extra momentum and overnight some relative strength in the AUD has seen the pair briefly trade to its best level in nearly two weeks. It’s hard to get too excited about this recent bout of strength though as gains seem to have stalled at minor resistance around 0.5435 (support around 1.8399). It would take a sustained move up through there to open the way for further gains toward 0.5515 (1.8132). However the favoured scenario is for the pair to drift back towards 0.5400 (1.8519) in the near term.

AUD/EURO (EURO/AUD)

The current level of 0.6575 (1.5209) for this pairing is broadly consistent with where it was trading this time last week. Between now and then however we have seen a bout of AUD weakness that took the pair down to 0.6500 (up to 1.5385) before recovering. To be fair, the focus for this AUD remained on the downside until last night when a bout of relative strength in Australasian currencies saw good gains made on a number of crosses. This has taken the immediate pressure off the AUD downside, although gains from here should prove harder to come by. The key focus data wise for the week will be on the flash reading of European inflation set for release on Friday. This will be crucial in influencing any potential action from the ECB when they meet next week.

AUD/YEN

This pair saw some sharp moves in both directions last week. The weak Chinese manufacturing numbers placing the AUD under some intense pressure, only to recover nicely with strong demand emerging from the investigations lower. The surprising demand for the AUD in Monday’s offshore session has seen the pair look to test the resistance at 93.00 to start this week. Given the AUD is at resistance on multiple crosses, expect tough work for a break of this level at this time. Apart from a passing focus on the Australian private capital expenditure and sector credit numbers on Thursday and Friday respectively, expect the focus to come from Friday’s raft of Japanese news. Of primary attention will be the inflation numbers for Jan, also due for release are the unemployment, industrial production, retail sales and housing starts data.

AUD/CAD

After some initial Chinese data inspired weakness last week, the AUD saw periods of strong demand against the beleaguered Canadian dollar. This eventually saw a brief test of the resistance at 1.0050, albeit the break of that level proved to be a step too far. This week has started with uninspiring price action. Expect the focus to increase later in the week as the Australian private expenditure number on Thursday comes ahead of private sector credit numbers on Friday. The primary focus is provided by the monthly GDP numbers in Canada late Friday. A consolidated break of 1.0050 would open up the pair for a break higher to a new range, albeit that seems an unlikely scenario at this point in time.

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Market commentary:

The last week in the wider financial markets has reiterated the patchy nature of the global growth recovery. Soft economic news from the US, UK , Japan and Europe highlighted the issue. The US has seen an extended period of softer than expected economic news, albeit not enough yet to suggest a halt to the tapering of the quantitative easing (QE) program by the Federal Reserve. This increases the focus on the data in the coming weeks, and in particular the latest US GDP numbers, due for release on Friday. Obviously the Fed’s tapering program is a central theme for 2014, and any change in expectations will have far reaching implications. The US dollar has seen increasing pressure building on it as the data has disappointed. This pressure has seen the continuation of trade in increasingly familiar ranges for most pairings. The G20 meeting in Australia in the weekend was of interest. Whilst lacking in definitive action plans as usual, the verbal commitment to lift global growth by 2% is positive and represents increased global activity of around two trillion US dollars.

Australia

Australia has had no key economic releases since last Tuesday’s monetary policy meetings minutes. This week’s economic calendar is a little light as well with only ‘construction work done’ out tomorrow, then private capital expenditure and private sector credit released on Thursday and Friday respectively. The Australian dollar has been largely range bound around the 0.9000 level to the USD, with some weakness yesterday sharply reversed overnight.

New Zealand

Last week’s softer than expected retail sales and producer prices data had little overall impact on the positive economic outlook or the currency. Yesterday we saw very solid credit card spending figures which reflect the positive sentiment of the consumer. Spending on credit cards was up +1.0% in January from December and +9.2% on a yearly basis. Later today we get inflation expectations data then towards the end of the week we have the trade balance, building consents, and business confidence figures to digest.

United States

The recent run of soft data from the US has widely been blamed on the extreme weather seen in parts of the country over December and January. However cracks in that theory are starting to appear as the data is not telling a consistent story. Digging into the regional detail of some releases has shown weakness from west coast regions when the poor weather was an east coast event. Late last week we got the flash manufacturing PMI for February which beat expectations coming in at 56.7 up from last month’s 53.7. The improvement was signalled as a recovery from the previous weather affected data. That sounds plausible, but then why did last night’s flash services PMI for February disappoint with the weakest reading in four months? The index printed at 52.7 from last month’s 56.7. So the manufacturing sector has recovered but the service sector hasn’t? The inconsistencies in data is starting to raise eyebrows and close attention will be paid to this week’s upcoming releases of consumer confidence, new home sales, durable goods orders, and preliminary GDP. At this point the data hasn’t affected expectations for the Fed to continue to taper at the rate of $10 billion each meeting. The Fed have made it clear that it would take a lot to change the taper pace. But if recent soft data proves to be more than just weather affected, those expectations could change, and this would have an impact on the value of the USD.

Europe

For much of last week data from Europe disappointed. Soft readings on German economic sentiment, manufacturing PMI, and consumer confidence weighted on the currency. There was some slightly better news released last night in the form of German business climate and inflation. The IFO business climate survey came in at 111.3 vs an expectation of 110.7. An IFO official said this showed German companies were optimistic, and the trend in that survey has certainly been up for much of the past year. Euro area inflation for January was also revised up last night to +0.8% from the previous flash estimate of +0.7%. This didn’t have a big impact in the market which will put more weight on the flash estimate of February inflation set for release at the end of this week. A soft reading there could be the trigger for further ECB action at next week’s meeting. President Draghi was on the wires over the weekend stating the central bank is ready to act of the inflation outlook deteriorates. Although he stressed there is no evidence of deflation, he does promise the ECB will have the full set of information needed for deciding whether to act or not by next week’s meeting. Ahead of key inflation data on Friday, we get the EU economic forecasts, German unemployment, retail sales, and French consumer spending.

United Kingdom

The generally positive tone from last week’s Bank of England minutes and the bigger than expected fall for January unemployment claims have reinforced the current positive outlook for the UK economy. Even weaker than expected retail sales figures released on Friday have failed to noticeably impact current sentiment. January sales printed at -1.5% against an expectation of -0.9%, but the market has brushed it aside saying it needs to be taken in context of a strong surge in the previous month’s figures. That’s a fair call considering Decembers result at 2.5% was the biggest month on month gain since 2008. This week we get data on mortgage applications, CBI realized sales, a second estimate of GDP, and consumer confidence.

Japan

Last week’s data from Japan was unanimously weaker than expected. GDP, industrial production, industries activity, and the trade balance all came in on the soft side. This didn’t seem to impact the BOJ who maintained their current economic assessment at their regular meeting. However, they did stress they are willing to act if risks to that outlook materialize. At this point the biggest risk is the negative impact of the upcoming sales tax increase, and it’s a debatable point whether the economy is currently strong enough to withstand that. To that extent we will have to wait until Friday to get further economic data from Japan when manufacturing PMI, household spending, inflation, unemployment, industrial production, and retail sales are all set for release.

Canada

Canada released some mixed data late last week with wholesale sales and retail sales both coming in substantially below expectation. These were however offset by a stronger reading on inflation which printed at +0.3% vs expectations of +0.1%. That result helped to stem the losses for the Canadian dollar that was under some pressure in the later stages of the week. There is little to digest this week with only the current account and monthly GDP data set for release on Thursday and Friday respectively.

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Ian Dobbs is a currency analyst with Direct FX You can contact him here »