Why this an Important Week for New Zealand Dollar

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Daily FX Market Roundup 01-20-14

Why this an Important Week for New Zealand Dollar
AUD: Minor Deterioration in Chinese Data
CAD: Closing in on 1.10
USD: All About Earnings This Week
Euro Carried on the Shoulders of Germany
USD/JPY Follows Nikkei Lower
GBP: Housing Market Remains Strong

Why this an Important Week for New Zealand Dollar

There may not be much in the way of U.S. economic reports this week but the abundance of data expected from Europe and Asia means we could still have a busy and active week in the forex market. There are 2 major central bank meetings (Bank of Japan and Bank of Canada), the Bank of England minutes, U.K. employment and Eurozone flash PMI reports scheduled for release. A number of countries will also be releasing their inflation reports and the most important release will be tonight’s consumer price report from New Zealand. The Reserve Bank of New Zealand is widely expected to raise interest rates this year and their first chance to do so will be next week. Unlike Australia, economic data from New Zealand has been relatively good. Manufacturing activity continues to grow, consumer confidence is on the rise and the trade deficit returned to surplus in November. When the central bank last met in December, they said they would need to raise rates in 2014 to keep inflation near their 2% target. However right now, inflation is only expected to rise to 1.5% from 1.4% – well below their 2% target. The RBNZ’s concern is that above trend growth and a stubbornly strong housing market will drive up price pressures but so far, prices are running below their target, so there is no major urgency to act. If prices accelerate, the RBNZ will spring quickly into action and that is why tonight’s fourth CPI report can have a significant short-term impact on the New Zealand dollar. With CPI expected to drop by 0.1%, the market is only pricing in a 30% chance of a rate hike this month. If CPI drops by more than 0.3%, anyone who has been looking for a hike in March will push their expectations out further and this could drive NZD/USD below 82 cents. However if CPI grows by 0.1% or more, rate hike expectations will grow, driving NZD/USD towards 84 cents. Aside from inflation, the Manufacturing PMI index and consumer confidence report will also help shape expectations for next week’s RBNZ meeting. At the end of the day, it is important to remember that regardless of the timing of the rate hike, the RBNZ is expected to be the first major central bank to lift rates this year. By mid 2016, they expect rates to take rates from its current level of 2.5% to 4.75%. This makes any pullback in NZD temporary.

Meanwhile stronger than expected fourth quarter GDP numbers from China triggered another wave of short covering in AUD/USD. The Chinese economy expanded by 1.8% in the fourth quarter, which was weaker than expected but on an annualized basis, the economy slowed by only 0.1% to 7.7% against expectations for a slowdown to 7.6%. While the data shows China’s economy losing momentum towards the end of the year, the slowdown was not as large as economists feared. Most of the other highly anticipated reports were in line with expectations. Industrial production growth slowed to 9.7% from 10% while retail sales growth slowed to 13.6% from 13.7% in December. There’s no escaping the reality that China is losing its mojo but this is part of their plan to focus on domestic growth and structural reforms over the next 5 to 10 years. The only upside is that the slowdown is gradual which is apparently enough to trigger a relief rally in the AUD/USD. According to last Friday’s IMM report, speculators are still very short A$ but the number of short contracts have moderated slightly in the last 2 weeks indicating that some investors are closing their shorts in preparation for a stronger short squeeze to 90 cents.

USD: All About Earnings This Week

There is no major U.S. economic reports scheduled for release this week until Thursday and even then, existing home sales, jobless claims and leading indicators are hardly the biggest movers for the U.S. dollar. These second tier reports should elicit only a small response from the greenback because of their minimal impact on the central bank’s plans for tapering asset purchases. We also won’t hear any Federal Reserve officials speak because we are in the quiet period before next week’s FOMC meeting. This leaves traders with only have last week’s mixed retail sales and stronger inflation numbers to work off of. Instead, the focus this week will be on earnings. If U.S. corporate earnings are good, they could drive stocks to new highs and attract demand for USD/JPY along with other risk currencies. However if more companies miss than beat expectations, stocks could sell-off leading to risk aversion across the foreign exchange market. We have big names such as eBay, Delta, UPS, Coach, McDonald’s, Netflix, Johnson & Johnson, Procter & Gamble, Starbucks and Verizon reporting results. Overall, earnings this quarter are expected to up from a year ago but there have been a number of profit warnings from companies like UPS and Royal Dutch Shell. A market that has been cautious since the dismal non-farm payrolls report released on January 10th will not take declining profits easily.

Euro Carried on the Shoulders of Germany

The euro traded slightly higher against the U.S. dollar today on the back of stronger price pressures. German producer prices rose 0.1% in the month of December, easing the year over year decline in PPI to -0.5% from -0.8%. While these numbers are in no way indicative of “hot” inflation, the increase in PPI is a breath of fresh air for the European Central Bank who has grown increasingly worried about low inflation. Of course, with PPI running at an annualized rate below zero, they still have a big problem on their hands but at the very least, last month’s PPI moved in a desirable direction. As evidenced by today’s report, Germany continues to carry the region on her shoulders and we expect more evidence of this in the upcoming ZEW and Flash PMI reports. Over the past 2 weeks we have seen back to back improvements in German data including the employment, retail sales and industrial production reports which leads us to believe that investor confidence, manufacturing and service sector activity also increased. The German economy stagnated in the fourth quarter but it should be off to a good start in the beginning of the year. Other countries in the region such as France are still struggling but with Germany growing, the ECB’s motivation for more easing will be lessened.

USD/JPY Follows Nikkei Lower

The Japanese Yen traded higher against most of the major currencies today despite weaker than expected data. Industrial production was revised down to -0.1% from +0.1% in November and convenience store sales dropped 0.3% last month after rising 0.4% the previous month. Instead Japanese stocks reacted negatively to the data, driving USD/JPY lower. The victory of a leftist mayor in a tiny city in Okinawa also contributed to the weakness in stocks and strength in USD/JPY because the mayor opposed plans to relocate a U.S. military base that was crucial to rebuilding ties with the U.S. The victory of Susumu Inamine in Nago is a major embarrassment that also deals a significant blow to Prime Minister Abe who threw his support and financial resources behind Inamine’s opponent. While these political developments won’t have a major impact on Japan’s economy, the air base has been a source of tension between the U.S. and Japan for decades and is affecting Japanese assets including USD/JPY on this quiet trading day. The Bank of Japan meets this week and the central bank is widely expected to leave monetary policy unchanged, which means that the rate decision should be a nonevent for the Yen.

GBP: Housing Market Remains Strong

The British pound traded slightly higher against the U.S. dollar t on the back of stronger housing market numbers. House prices rose 1% in January according to Rightmove, the U.K.’s largest property website. What is interesting about the report however is that house prices in London grew at a slower pace which means “the average asking price of property coming to market is having a pause after a pretty hectic year of heady rises.” Of course, December and January tend to be some of the quietest months for the housing market, especially in the city. Across the country, the housing market is still holding up well with the annualized rate of house price growth reaching 6.3%, the strongest since November 2007. Since the beginning of the year, the British pound has been trading in a tight range and this week, it is prime for a breakout. The minutes from the last Bank of England meeting and the U.K. employment report will be released on the same day. We are looking for an improvement in the labor market because job growth accelerated according to the PMIs but it will be interesting to see whether policymakers were fazed by the recent slowdown in service, manufacturing and construction activity.

Kathy Lien
Managing Director

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