A Side of Dipping Sauce

Chris20 February 2013

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Brief Summary:

Markets traded thinly this week as the U.S. observed Presidents’ Day on Monday. Australian economic data was lacking, nevertheless the AUD dipped against the majors into the weekend. The sentiment driven fall quickly reversed as the U.S. returned to trading on Tuesday. AUDUSD pared losses after touching a low of 1.0275 to be 1.0360. AUDEUR gained from its recent lows to 0.7719. AUDGBP reached a 6-month high, climbing to 0.6710 from 0.6574 a week ago (all rates at time of writing).
Yesterday, the Reserve Bank of Australia (RBA) released the minutes from its February interest rate decision. The rhetoric, while continuing to show an easing bias, was more hawkish implying a preference to hold rates. The board noted improved global economic conditions and the stabilisation of China. They also reiterated the previous monetary easing steps and that the effects would continue to flow through. Mention of the high AUD was mentioned, although the RBA are unlikely to solely target the exchange rate with monetary policy.
Disappointing European GDP figures were released last Thursday, indicating negative growth in the Germany and France, the region’s major economies. The figures did not prompt a reversal of the recent Euro zone confidence however; German economic sentiment reached a three year high.

Please see below for specific currency commentary.

USD
AUDUSD dipped on sentiment before the weekend. The RBA minutes seemed to have reversed this sentiment for now and the cross returned to last week’s levels. The HSBC Flash Manufacturing Purchasing Managers’ Index will be released on Monday. The figure that measures manufacturing activity and indicates expansion when over 50.0 read 52.3 last month. A further improvement in the figure will place it at its strongest level since early 2011. The RBA noted Chinese data has been stabilising for several months now, a strong figure may give the AUD a further boost.
U.S. retail sales data was released last Thursday showing modest growth continuing. Core retail sales, the measure that excludes vehicle sales, grew by 0.2%, and total retail sales were up 0.1%. The figures were in line with expectations, and also the first piece of data sensitive to the January 1st tax increases. The continued growth in spite of tax increases will bolster support for Obama’s taxation reform agenda. The Federal Open Market Committee (FOMC) will release the minutes from its February monetary policy meeting tonight.

EUR
The AUD gained against the EUR as weak European data releases dampened renewed confidence. Several European GDP figures were released last Thursday, the Euro area posted -0.6% growth in the final quarter of 2012. It was a common theme amongst the Euro zone’s major economies Germany and France, both experiencing the sharpest quarterly declines in GDP growth since the middle of 2009 during the global financial crisis.
French Preliminary GDP read negative -0.3% placing 2012 growth at 0.0%. The figure is the first quarter of negative growth since May 2009 and may be a sign of things to come. The figure also follows the damning report on French competitiveness released in November 2012. German Preliminary GDP also turned negative last quarter reading -0.6%. The report states a decline in exports being responsible for much of the decline. Additionally from Germany, the ZEW Indicator of Economic Sentiment was released Tuesday night at 48.2. The index, derived from a survey of investors, is at its highest level since the end of 2009. The high reading seems to fly in the face of hard data such as the fore mentioned negative GDP growth. Italian Preliminary GDP was also released at -0.9%; Italy has been in recession since the fourth quarter of 2011. Purchasing Managers’ Indices (PMI) for Euro zone countries will be released on Thursday. The industry surveys quantify business conditions and have read negative (below 50.0) throughout the Euro crisis. German Manufacturing and Services PMIs are expected to tick up this month to 50.4 and 55.5, respectively.

GBP

The Pound weakened this week against the AUD, breaking back over 0.6700; a level last seen in July and August 2012.
U.K retail sales in January were -0.6% from +0.5% expected, adding to woes. Negative data out is again piling up after the Olympic Games provided a brief respite. Another quarter of negative growth will mean the U.K. enters a triple dip recession.
The Pound weakness was also due to comments made by Bank of England Governor Mervin King. He stated the BoE may be more lenient on keeping to the inflation target when setting monetary policy.

By Chris Chandler

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