Brief Summary:
- Chinese trade and minor output figures were released last week leading to a 4% turnaround in the AUD. AUDUSD touched fresh lows of 0.8848 last Monday to close at 0.9215 on Friday.
- Confidence in the Eurozone continues to build as Germany and France deliver better than expected GDP figures; aggregate Eurozone figures are released tonight.
- The Bank of England issue a forward guidance for monetary policy over the next few years, pledging to keep interest rates on hold until unemployment falls below 7.0%; though with conditions attached.
China saves the week
After last week’s interest rate cut and softer than expected employment numbers, the AUD touched a low of 0.8848 on Monday and looked to continue its downward trend; once again China surprised markets.
China released its Trade Balance on Thursday, a measure of imports and exports. Both figures beat expectations with imports up 10.9% and export up 5.1% annualised. The balance itself was slimmer than expected at 17.82 billion, though the import figure alone gave the AUD steam. The following day, Industrial Production beat expectations of 8.9%, rising 9.7% annualised. Retail Sales were slightly shy of expectations at 13.2% but failed to spoil the mood.
The data boosted commodity prices over the weekend and the AUD to a high of 0.9215 against the USD on Friday night; a weekly turnaround of over 4%. Chinese growth has been moderating since 2010 (see chart). Unlike previously, the new government have stated outright growth is no longer their primary objective. More importantly their focus is on transitioning the economy into one based on domestic consumption and sustainable growth. The data suggest that China’s thirst for materials is still strong, albeit below its peak.
Next Tuesday, the HSBC Flash Manufacturing PMI, a measure of manufacturing activity, will be released. The independent survey of industry members will offer more timely guidance of a sector where many market commentators question the reliability of official Chinese numbers.
Please see below for specific currency commentary.
USD
News out of the U.S. has been relatively quiet this week with China the main driver of AUDUSD trading. Retail Sales data for July was released last night was modest at 0.2%, dragged down by the volatile automobile sector. Excluding the sector brings the figure to 0.5%, slightly stronger than expected. On Friday, the Philly Fed Manufacturing Index will be released, a measure of manufacturing activity. The figure is currently sitting at two year highs of 19.8.
The strength of recent data sees 65% of Bloomberg surveyed economists calling for tapering to start at the September 17th Federal Reserve meeting. They predict that monthly purchases of $45 billion of Treasury bonds and $40 billion of mortgage-backed securities will be reduced to $40 and $30 billion; respectively. The next U.S. employment release, on the first Friday of every month will be a pivotal data reading, according to Atlanta Fed President Dennis Lockhart.
EUR
This afternoon, French and German GDP figures were released showing 0.5% and 0.7% growth in the second quarter. The outperformance of the two major economies lends weight to the Eurozone recovery. The Eurozone will release its wider GDP figures later tonight that will indicate how much periphery countries are dragging. The data backs up investor confidence indicated by the ZEW Indicator of Economic Sentiment which came in at 42.0 overnight. The gauge is holding at three year highs as Euro area risks subside and growth returns.
With growth levels and confidence at three year highs it makes sense that the EUR also continues to track at three year highs; AUDEUR was little change on announcement at 0.6858.
GBP
Last week, Mark Carney, Governor of the Bank of England (BoE), introduced a U.S. Fed style forward guidance for monetary policy in the U.K. He stated that the Monetary Policy Committee (MPC) would not raise interest rates or reduce the levels of asset purchases (quantitative easing), while the unemployment rate remained above 7%. However, this would be “knocked out” if inflation gets beyond their 2.5% target or if financial stability is threatened.
The unemployment rate in the U.K. currently sits at 7.8% and the BoE predicts the target will be reached no earlier than three years. After dipping in and out of recession for the last few years, the nation is reinvigorated with confidence as industry surveys indicate the economic recovery is gaining momentum.
The majority of economists see the unemployment target being reached earlier and the market reacted in turn. Subsequently, the GBP climbed over two cents against both the USD and AUD as the market priced in the prospects of an earlier than forecast interest rate rise.
Yesterday, U.K. inflation numbers for July were released showing a slight decline from June to 2.8% from 2.9% annualised. While the headline figure seems quite high, the Carney remarked that underlying inflation remains subdued and the BoE forecast inflation falling toward the 2% forecast within two years.