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Global Economic Activity Diverges |
Global Economic Activity Diverges
There was a mixed bag of data released overnight in the Asian and European
sessions. First, the market saw Kiwi Building Consents, which showed a
decline of 2.8% versus last month’s fall of 3.5%. While this data isn’t
outright positive, the readings have stabilized, showing that the New
Zealand housing market is poised for recovery. Following that, the New
Zealand dollar received a boost from the Trade Balance number, which
crushed expectations of a decline of 99M, rising fairly significantly by
269M. As New Zealand is a heavy exporter, the improved trade figures are
welcome news and, as a result, the Kiwi dollar has outperformed overnight.
Following on the heels of the New Zealand release was new Japanese
economic data. There were some positive signs in the Land of the Rising
Sun, with CPI numbers coming in slightly higher than the forecasted -1.9%
at -1.8% and Preliminary Industrial Sales up 2.5%, coupled with a 2.6%
rise in Retail Sales (much higher than the 2.6% forecasted). While I don’t
think that anyone is suggesting that the Japanese economy is on a
significant rise, there are nonetheless some positive signs of increasing
stability, and stabilization is the key going forward. Meanwhile, in
Australia, Private Sector Credit was shown to have increased 0.4% from
0.3%. According to our colleagues in Australia, the economy Down Under is
booming and, as a result, credit is once again being extended to
consumers. The RBA meets next week, and the market is pricing-in even odds
for another rate hike, which could bring their overnight cash rate to 4.0%
from the current 3.75%. They were the first bank to raise rates, and the
trend is now in place, as this is only a start, despite the fact that
timelines are still uncertain. The global effects of Europe’s problems are
not fully understood at this time, but they could have an impact on China
– and thus Australia – going forward.
In Britain, the pound struggled due to the
Nationwide HPI reading, which measures the change in selling house prices
in the UK (of Nationwide-listed houses). There was a 1.0 fall on the
month, much worse than both the 0.4% expected rise and last month’s 1.4%
increase. The UK’s housing market has been climbing steadily since the
bottom, but there is a risk of a double dip. The GDP figures were revised
slightly upward overnight in the UK, but the house prices number remained
a stronger driver of price action overnight.
Finally, we just received the first round of
North American data. The Canadian Current Account is in deficit by 9.8B,
which, while it is worse than the -8.7 projected, was nonetheless positive
in that there was a surplus in goods trade with the US. The deficit was
mainly due to a widening gap between services trade and investment income.
In the US, the Preliminary GDP number was 5.9%. This is a hearty number –
the best in six years. Due mostly to the stronger business investment and
a higher inventory level, the reading shows that the US economy is
charging through problems with unemployment (which will no doubt still
plague the economy for quite some time) and actually making some headway –
especially compared to Europe. Later on this morning we will watch for US
Existing Home Sales, and there could be some movements in the market if
sales do not meet, or overshoot, the 5.51M expected.
Currencies on the Defensive to End Week
The USD continues to outperform as we head into the week’s and month’s
close. Although many currencies saw a correction from yesterday’s lows, I
still get the feeling that it was only a correction, and that we could
still see more negativity and dollar strength, as the fundamental picture
has not changed. The GBP was the clear loser overnight, falling well into
the 1.51s. We’ve seen quite the valuation shift over the last month, with
the pound falling well over 1000pips. While we would usually be looking
for a correction at some point, the fundamentals are simply not
supportive. The lows achieved during the financial crisis and height of
flight-to-safety USD strength were under 1.40, so there is actually still
room to fall further – especially if the US signals rate hikes (although
the discount rate rise was the start). Most other currencies are trading
with a modest bid tone, but have not fully recovered the losses on the
week. The Canadian dollar, after pushing downward yesterday, has popped
back up in short order, although I get the feeling that it is still on the
defensive, if only slightly. At these levels, the CAD’s risks are fairly
balanced, but the Loonie is highly sensitive to risk appetite and the
effects on its main drivers, the USD and oil.
Have a great weekend.
Tyson Wright, Senior FX Trader
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