Divergent US & European growth profiles re-emerge

By Sam Coxhead*:

Throughout the course of the last week, we have seen the re-emergence of the divergent growth profiles between the US and European economies.

The US recovery from the weather affected first quarter has continued over the course of the last week for the most part.

Contrasting that is the situation in Europe, where the larger core economies continue to underperform expectations. This divergence should continue to play out in the remainder of 2014, with the impacts being seen across most markets.

Increasing odds of further policy accommodation in  Europe should mean lower EUR demand and improved stock market performance.

Contrasting that is the US, where the equity market looks to have lost momentum around the current levels, as the prospects of an eventual move away from free cash becomes more real as 2014 progresses.

Also of note has been the Chinese manufacturing data overnight, revealing expansion in the sector for the first time in six months, with the energy in the data coming from growth in new orders.

Major Announcements last week:

·  European Inflation .5% as expected

·  UK INflation 1.5% vs 1.7% expected

·  ZEW German Econ. Sent. Index 29.8 vs 35.2% expected

·  US Inflation +.3% vs +.2% expected

·  BOE leave monetary policy unchanged as expected

·  US FED adjust QE lower as expected

·  NZ Q1 GDP 1.0% vs 1.2% expected

·  UK Retail Sales +.5% as expected

·  Canadian Inflation +.5% vs +.2% expected

·  Canadian Retail Sales +.7% vs +.4% expected

·  HSBC Chinese Manufacturing 50.8 vs 49.6 expected

·  European Manufacturing 51.9 vs 52.2 expected

·  US Manufacturing 57.5 vs 56.5 expected

NZD/USD

This pair has remained contained by a relatively small range at elevated levels throughout the last week. After the sharp initial USD decline following the FED’s monetary policy announcement, trading has been moribund for the most part. Yesterday’s better Chinese manufacturing numbers did boost the NZD for a time, but the solid US numbers overnight saw the US rebound to take back that lost ground. .8750 remains the substantial resistance level on the topside, whilst initial support at .8700 remains the target for any NZD weakness. In the absence of NZ domestic economic news of note this week, the lead will predominantly come from developments in the US. Further range trading around current levels seems likely in the short term.

NZD/AUD (AUD/NZD)

This pair continues to trade in a relatively narrow band, towards the higher NZD part of the wider .9100 -.9300 (1.0750 - 1.1000) trading band. There is little economic news due in either economy to materially move rates this week, albeit the AUD mildly outperformed yesterday after the Chinese manufacturing numbers. Expect the recent ranges to persist for sometime yet, with patience required if you are looking to buy NZ dollars around the current levels.

NZD/GBP (GBP/NZD)

This pair remains locked within the relatively contained trading band that has established itself over the last two weeks. It remains close towards the middle of the wider trading range that has been in place since the end of February. With both currencies subject to periods of increased demand, expect this range trading to persist in the short term at least. Patience should pay off for those looking lock in rates towards either end of the established range. Expect any price action to be driven by news from the UK this week. Especially watch for BOE Governor Carney’s comments later on today, and again on Thursday, as a policy of verbal gamesmanship seems to be order of the day.

 NZD/CAD

Last week proved to be an interesting one for this pair. Both currencies saw periods of increased demand, but the CAD jump on Friday following the higher than expected inflation and retail sales data saw the largest move. Whether or not this serves as a turning point for the CAD, that has seen so much pressure in 2014, remains to be seen.  With little in the way of economic news due in either economy this week, expect the drivers to come from the wider market, as they have done so far. In the near term, support at .9300 remains the primary target ahead of more support in place at .9250. It seems like a stronger USD would certainly assist the CAD push the NZD lower at this time.

NZD/EURO (EURO/NZD)

This pair has seen itself consolidate around the current levels over the last couple of weeks. The ECB induced pressure that drove the pair to these levels remains in play, and expect the pressure on the EURO to appropriately remain in place as the prospect of further policy accommodation continues. With little in the way of NZ economic news of impact this week, the near term focus comes from the German business climate numbers later on today, and then German inflation numbers Friday. Those looking to buy EUR at good value levels should see the opportunity continue for sometime yet.

 NZD/YEN

This pair has traded within the expected range over the last week. Whilst the NZ dollar has seen periods of increased demand on the back of the Fed policy announcement, and yesterdays Chinese manufacturing number, certainly the boosted demand seems short lived. Its seems unlikely the pair will forge on to establish a new higher range until such time as the BOJ are forced to initiate further monetary policy accommodation to stablise prices. In the meantime expect further periods of range trading around the current levels, especially in the absence of any market moving domestic data expected from either economy this week.

AUD/USD

It has been an interesting period for this pair over the last week. Apart from two periods of increased Australian dollar demand, the price action has been moribund for the most part. The first jump in demand came following the FED’s monetary policy announcement, and the second was yesterdays Chinese manufacturing number. So the Australian dollar remains at seemingly elevated levels, albeit these level may not last if the US economic data continues to improve as it has recently. To that end the focus for the remainder of the week is provided by the US. The consumer confidence, new home sales, durable goods sales and final GDP numbers all offer opportunity for movement. Current levels can be consider to offer good value buying of US dollars.

AUD/GBP (GBP/AUD)                            

This pair has really seen some volatility in the last week, albeit within a relatively contained trading band. These moves have been driven by both currencies seeing periods of increased demand. The contained price action that has been seen over the last three weeks could continue for sometime yet. The focus for the remainder of this week comes almost entirely from developments in the UK, in the absence of material Australian economic news. Comments from BOE Governor Carney later today and then again on Thursday will draw special attention. Add to that the latest housing, retail sales and final GDP numbers, and there is room for further action in this pair. The current trading range looks to offer pretty fair value for this pair in the current environment.

AUD/EURO (EURO/AUD)

The Australian dollar saw a material boost from the improved Chinese manufacturing numbers to start this week. The follow on from that saw this pair test the resistance at .6950 (support 1.4400), before the better US data saw the AUD demand taper off in the US session. This .6950 (1.4400) level remains the key in the short term. Given the environment in Europe, it seems likely that we see another test of this level at some stage soon. To that end the focus is completely on Europe this week. With little in the way of Australian news, the German business climate survey results and German inflation data will provide the primary drivers of the price action. Current levels offer good value buying of EURO, although this opportunity is likely to be ongoing.

AUD/YEN

The Australian dollar saw periods of increased demand boost it higher over the YEN over the last week. The first boost came from the FED’s monetary policy statement and next came from yesterdays improved Chinese manufacturing numbers. The price action outside of these periods has been non-descript. The pair remains ensconced in the wider 94.50 - 96.50 trading range for the time being. Relatively quiet economic calendars in both countries point towards external forces providing the lead this week. On friday Japanese household spending and retail sales data will be of passing interest, but of limited impact.

AUD/CAD

The Canadian dollar has finally found some demand over the last week. The largest move came after the materially higher than expected inflation and retail sales data on Friday. This has been backed up with the improved US numbers, which countered the AUD’s jump following yesterdays improved Chinese manufacturing numbers. Initial resistance is now in place at 1.0150, and support at 1.0050. Expect the US data to provide the lead this week, with no material economic news due from the Australian or Canadian economies. Whether or not these latest numbers prove to be a turning point for the CAD remains to be seen, but it is encouraging to say the least. Expect the volatile nature of this pair to continue for the remainder of 2014.

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Market commentary:

Throughout the course of the last week, we have seen the re-emergence of the divergent growth profiles between the US and European economies. The US recovery from the weather affected first quarter has continued over the course of the last week for the most part. Contrasting that is the situation in Europe, where the larger core economies continue to underperform expectations. This divergence should continue to play out in the remainder of 2014, with the impacts being seen across most markets. Increasing odds of further policy accommodation in  Europe should mean lower EUR demand and improved stock market performance. Contrasting that is the US, where the equity market looks to have lost momentum around the current levels, as the prospects of an eventual move away from free cash becomes more real as 2014 progresses. Also of note has been the Chinese manufacturing data overnight, revealing expansion in the sector for the first time in six months, with the energy in the data coming from growth in new orders.

Australia

Last week saw the Reserve Bank of Australia monetary policy meeting minutes debate whether or not the current low cash rate of 2.50% was low enough to counter the negative impacts of falling mining investment and lower fiscal spend. The fate of the Australian economy in the last year or so has always been about transition away from growth reliant on mining sector expansion, so its unsurprising when the topic again becomes the focus. No doubt this will again be a topic covered in next Tuesday’s RBA monetary policy announcement. This week has no scheduled economic news of note for the Australian economy. Yesterday’s positive Chinese Manufacturing numbers did impact the Australian dollar and interest rate markets to some extent, both being pushed high after the first expansion in the sector was recorded in six months.

New Zealand

New Zealand saw yet higher nett migration numbers released yesterday, highlighting again the attractiveness of New Zealand in the current environment. The volatile credit card spending statistics also were positive, showing year on year growth of 7.5% for the month. Trade numbers on Friday provide the next economic data which will be also of passing interest for the wider market. Of more material impact yesterday were the first positive Chinese manufacturing numbers in six months. The HSBC Manufacturing Index came in at 50.8 vs a 49.7 expectation, with a number above 50.00 indicating growth in the sector. This saw the New Zealand dollar higher against most trading partners, only being outpaced by advances in the more China-correlated Australian dollar. Next week will see Monday’s building consent and business confidence data provide the data highlights.

United States

It has been a positive start for the week in the US economy, with overnight releases revealing both manufacturing and existing home sales numbers well above expectations. The continued bounce back from the weather affected first quarter is encouraging. The manufacturing number is the strongest since March 2010. Still to come this week we have consumer confidence and new home sales numbers later today, durable goods sales and final GDP data tomorrow, and inflation and personal inflation numbers on Thursday. US equity markets remain close to record levels, but lacking momentum to push on from the current elevated levels. Ironically the improved economic news could hamper the equity markets over the coming year or two, as gradual interest rate hike expectations increase. Non-farm payroll numbers Thursday next week provide the primary focus looking forward.

Europe

Last night saw the release of European wide manufacturing data. These numbers did not make particularly good reading. Core members of France and Germany both underperformed expectations and these fed through into the wider European numbers that came in at 51.9 against a 52.2 expectation. Tonight we have the important German business sentiment index, and then the preliminary German inflation numbers on Friday. Also of note were comments in the offshore session from ECB member Nowotny. He stated that the ECB has no exchange rate target, but certainly are interested in limiting any Euro strength. Next sees the European wide inflation numbers released on Monday, ahead of what will be another closely watched ECB monetary policy announcement on Thursday.

United Kingdom

Interest in the UK monetary policy settings has really increased in the last week or so. Bank of England (BOE) Governor Carney’s comments with regards to interest rate hikes potentially being closer than than the market has priced has really seen a shake up in views. Even other BOE officials, previously noted as “doves” (bias towards lower interest rates), have started to toe the Governors line. BOE member Miles wrote in the UK Telegraph that “It now seems to me much more likely that a normalisation of monetary policy starting at some point in my remaining year on the MPC will become appropriate.” This week is fairly busy in the UK with the Inflation Report hearings tomorrow, house price and retail sales numbers tomorrow, further talk from Governor Carney and the current account and final GDP numbers on Friday.

Japan

Bank of Japan (BOJ) Governor Kuroda hit the headlines overnight re-titrating many of his well known thoughts. He again has had to state that the BOJ will not hesitate to make adjustments if needed and will continue to ensure price stability irrespective of the level of potential growth rate. Many participants had pointed towards easing inflationary pressure starting to re-emerge as the effect of a weaker YEN starts to pass through the economy. Private economists expect further easing from the BOJ as a response to the falling inflationary pressure. However, Governor Kuroda continues to state that inflation will fall to around 1.0% before resuming an up trend. This matters as any required further easing would further undermine the value of the YEN, in the short term at the very least. Household spending and retail sales numbers provide a passing focus on Friday, albeit they should not impact on the price action in the foreign exchange markets.

Canada

It was an interesting end to the last week in Canada. The latest inflation and retail sales numbers both surprised on the high side and saw a material boost in demand for the Canadian dollar that has been long suffering in 2014. These are solid numbers and some that could provoke some kind of exodus of large “sold CAD positions” that accumulated in 2014. This week is relatively light on economic news, but we did have Finance Minister Joe Oliver making comments on Bloomberg overnight. He stated that he sees inflation close to the 2% target and says that interest rates are likely to move up moderately over the next 2-3 years. The US recovery is looking increasingly solid, with encouraging signs from China, albeit Europe remains a concern.

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Sam Coxhead is a currency analyst with Direct FX You can contact him here »