Data Packed but Action Lacked

Brief Summary:

• The AUD touched a nine month low against the USD of 1.0116 on Monday but has since recovered to 1.0281 at time of writing. AUDEUR traded a fairly narrow range continuing the month’s uptrend to be 0.7875 at time of writing. The Pound was volatile as more poor data out of the U.K. caused speculation on the Bank of England’s next move; AUDGBP was 0.6795 at time of writing.
• The Reserve Bank of Australia held the cash rate at 3.00%. Other Australian data releases were as expected and support the current stance of monetary policy.
• Several other central banks will set their benchmark interest rates in the coming days including the Bank of Canada, Bank of England, European Central Bank and Bank of Japan.
• The Down Jones Industrial Average, a major stock index in the U.S., advanced to a record level of 14,253.77 yesterday.
• The threat of an early wind up of quantitative easing has begun to outweigh risk sentiment driven moves in the USD. Positive U.S. data releases have become more USD supportive recently.

Maintaining the Status Quo

• This week was packed with Australian data; however, the lack of major positive surprises meant the AUD failed to break out of recent trading ranges. Overall, the numbers support the status quo regarding monetary policy.
• Yesterday, the Reserve Bank of Australia (RBA) met for its second interest rate decision of 2013. The board held the benchmark rate at 3.00%, a move widely expected by the market. The accompanying statement was almost a carbon copy of last month’s. The only point of difference, the removal of this sentence, “the demand for some categories of consumer durables has picked up; housing prices have moved higher; there are early indications of a pick-up in dwelling construction; and savers are starting to shift portfolios towards assets offering higher expected returns.”  The omission a result of the 0.2% decline in household goods sales (from retail sales), and the 2.4% decline in building approvals in January.
• Australian Private Capital Expenditure for the fourth quarter of 2012 was released last Thursday. The headline figure was -1.2% but the AUD actually reacted positively on the details; gaining a quarter of a US cent. Mining investment continued to drive the figure; climbing 2.3%, and manufacturing continued its decline; falling by 8.1%. The positive AUD reaction was mostly due to the 2013-14 forward estimates of capital expenditure. Mining, whilst showing a decline of 11.6% from a year earlier, though this was in line with market and RBA expectations of “[mining investment will] peak sometime over the next few quarters.” The forecast for other industries was also 5.3% higher, noted in the RBA minutes, “non-mining business investment was expected to pick up gradually over time.” These details support the current hold status and reduce the chance of a rate cut.
• Australian Retail Sales data for January was released on Monday showing 0.9% seasonal adjusted monthly growth. The better than expected figure comes after three months of flat readings, though it didn’t give the AUD any meaningful support.
• Australian GDP growth for the fourth quarter of 2012 was released today showing 0.6% growth for the period. The figure places annualised growth at 3.1%, as forecast by the RBA. The AUD climbed from about 1.0260 to 1.0280 against the USD on release.
• Tomorrow at 11:30am, Australia’s trade balance will be released. The figure measures the value of exports less imports and is largely influenced by commodity export volumes and prices.
• Given the rather bland Australian data, the AUD will likely be driven by Chinese releases going forward. China’s trade balance will be released on Friday, and Chinese Fixed Asset Investment, Industrial Production and Retail Sales will be released over the weekend.

Please see below for specific currency commentary.

USD

The AUD touched a nine month low of 1.0116 against the USD on Monday. Chinese Non-Manufacturing PMI, a measure of economic activity, unexpectedly declined to 54.5 over the weekend, adding to the weight of a potential week of soft Australian data. The AUD found its legs again though, climbing almost two cents from Monday’s low.

At the close of trading in New York on Tuesday, the Dow Jones Industrial Index reached an all-time high of 14,253.77. The last record was set on the 9th October 2007 before the global financial crisis. The new record high has been driven by a mixture fundamentals and stimulus measures. Corporate earnings are at record highs with respect to national income, yet high levels of unemployment have kept salaries soft. According to the New York Times, the percentage of corporate earnings to national income is the highest since 1950, and the percentage paid out in salaries is at its lowest since 1966. The Fed’s quantitative easing has also driven investors to seek out higher yielding assets like shares. On Tuesday night, the Institute of Supply Management in the U.S. released its Non-Manufacturing PMI figure. The figure beat expectations, reading 56.0 from 55.0 expected; indicating industry expansion when over 50.0. Both Manufacturing and Non-Manufacturing indices beat expectations this month as U.S. economic indicators continue to improve. On Friday, Non-Farm Employment Change, the most important employment indicator in the U.S., will be released. Expectations are for 158,000 new jobs in February after 157,000 were added in January. The PMI surveys mentioned above showed increased employment growth, a better than expected jobs figure is plausible. The unemployment rate is a defined target of the Fed’s quantitative easing program. Previously, positive U.S. data has been USD negative as risk appetite is boosted. Recently however, this has been outweighed by the threat of quantitative easing being wound up early. A stronger figure will likely support the USD, as it increases the chances of an early wind up.

EUR
The European Central Bank will meet tomorrow night to set the Euro benchmark interest rate. The current rate is 0.75% and it is expected to remain on hold. As usual, focus will be placed on the statement. The market will look for recognition of last week’s soft inflation figure and any suggestion of a future rate cut to sell the EUR. PMIs for Italian and Spanish service sectors were released last night at 43.6 and 44.7; respectively. The figures are well below the crucial 50.0 level, indicating severe industry contraction.
In Spain, 59,400 more people became unemployed in February, less severe than the 77,500 expected. While confidence may have returned to bond markets, the recession in Spain still has years to run.

GBP

The Bank of England will meet tomorrow night to set the benchmark interest rate and may increase the size of its asset purchase program. Industry performance indicators continue to point towards another recession in the U.K. with February Manufacturing and Construction PMIs reading much worse than expected. The Manufacturing PMI read 47.9 after 50.5 in January, and the Construction PMI read 46.8 from 48.7 in January, placing the figure at the lowest level since October 2009; indicating contracting when below 50.0. The Services PMI, however, broke the trend reading 51.8 from 51.1 expected. The PMI readings are a more current measure of economic conditions than the slower official measures.

 

By Chris Chandler