Chinese economic growth slows, UK unemployment rate falls to a five-year low

Chinese GDP q/y figures beat estimates, but have continued to slow from where they were a year ago. Global equity markets are up on the day because the 7.4% q/y growth out of China beat analysts’ estimates. Forecasters estimated that the Chinese economic data would come in at around 7.3%, as the economy has slowed from a year earlier, but a surprise to the upside is a welcome relief for global markets concerned about the slowing growth of China. Industrial production ytd/y and Fixed Asset Investment ytd/y slowed, but retail sales y/y accelerated in the past year. China’s current GDP growth is very high when compared to most countries in the world, but it pales in comparison to the double-digit GDP growth that it enjoyed for years. Analysts and planners maintain that the world’s most populous country needs to sustain high levels of growth because of the high number of migrant workers and young population entering the job market. This puts pressure on Beijing to strategically invest in more government stimulus to stop the slide of GDP growth.

In the United Kingdom, the unemployment rate fell to 6.9% during the last month. This is the lowest the unemployment rate has been since April 2009. The UK economy continues to surprise on the upside, as the economy looks to be doing very well and ticking back to life. Sterling received a boost against most major currencies this morning when the data was released. The Bank of England announced last year that the threshold for considering an interest rate increase would be 7.0%, however they are unlikely to rush into any definite timeline. As the unemployment rate fell more quickly than expected last autumn, the Bank of England modified their forward-guidance strategy, saying that they will now consider a broader range of economic indicators to assess the overall strength of the economy when deciding whether or not to raise interest rates. Although this does step up the pressure on the Bank of England, it is unlikely that this alone will advance the timeline for an interest rate increase.

Nicholas Ebisch

Corporate Account Manager

Caxton FX

Will the Reserve Bank of Australia cut interest rates in December?

We expected the Reserve Bank of Australia to cut interest rates at the start of November but Governor Stevens & Co decided to stay put with the 3.25% base rate. In our defence, this was pretty close to a 50:50 call. We still view the RBA as more likely than not to cut the rate by 0.25% in the early hours of next 

Tuesday morning (December 4^th). Of course, there are still clearly risks of another non-event, but in the last few days, the market appears to have come around to our way of thinking.

The minutes from the last RBA meeting were noticeably dovish, despite electing not to cut the interest rate, as indicated by the phrase “members considered that further easing may be appropriate in the period ahead.”

There have been mixed signs in terms of aussie data in the past month. Wage price growth data slowed right down, as did consumer inflation expectations, which both point to monetary easing. However, China’s manufacturing sector grew for the first in 13 months, which has made things a little more complicated.

The slowdown within the recent quarterly private capital expenditure figure has once again strengthened the case for a rate cut, as has this morning’s weak Australian private sector credit data. The decision last time was a close call; these figures should have tipped the balance in favour of a cut.

The peak in the mining boom is fast approaching, while the aussie government remains committed to fiscal tightening. The Australian economy should be in for an early Christmas present next week!

Richard Driver

Currency Analyst 

Caxton FX

What can we take from the RBA minutes?

Last night’s Reserve Bank of Australia minutes were unsurprisingly dovish given the downturn in Chinese and global growth over the past few weeks and months. The minutes explained the key drivers behind the central bank’s decision to cut interest rates at its meeting earlier this month. As well as slower growth in Asia, lower commodity prices and weaker domestic growth also topped the RBA’s list of concerns. The bank is now envisaging a peak in resource investment, sooner and lower than initially estimated.

An ongoing decline in coal coking prices is alarming the RBA and there are reports of early closures of older mines and low take-up of new resource projects. The mining boom has been a huge driver of Australian growth in recent years and these tell-tale signs of decline are bad news for the economy and the AUD as a result. Weakening demand from the eurozone is clearly taking its toll on Chinese growth and the knock-on effect is weaker demand for Australian commodities.

The RBA is also very concerned about the aussie labour market. We have had a decent Australian employment update this month but the unemployment rate has climbed up to two-year high of 5.4% and the central bank is anticipating a deterioration in the coming months, in no small more part due to projected mining sector weakness. The mining sector has masked underlying weakness in the labour market for a while now, the truth should now emerge. 

Australian Treasurer Swan indicated last month concerns over a fall in Australian tax receipts, while the Government is committed to returning to a budget surplus. The difference is being made up in budget cuts, which will also weigh on Australian growth in the coming months.

Amid all these downside risks to Australian growth and the noticeably dovish tone in these latest RBA minutes, we are expecting another interest rate cut at the RBA’s next meeting in November. October 24 brings a key quarterly Australian inflation figure but an upside surprise does seem very unlikely and the path should be clear for another rate cut. This leaves plenty of scope for AUD-weakness in the coming weeks and months. 

Richard Driver

Currency Analyst 

Caxton FX

RBA signals interest rate cuts in October

The Reserve Bank of Australia released the minutes from its September meeting last night and the Australian dollar has since weakened. This is because the minutes were probably the most dovish we have seen from the RBA in six months, suggesting a cut to its 3.50% interest rate could be just around the corner. To say the RBA has signaled a move may be an overstatement but the we are hearing the hints loud and clear.

The minutes included the assertion that "the current assessment of the inflation outlook continued to provide scope to adjust policy in response to any significant deterioration in the outlook for growth." This is a telling statement.

Australian data has not overall been particularly positive of late but it is hardly reason for the RBA to panic. Indeed, the RBA appears to be confident that domestic growth is on the right path. Investment looks to be positive for the rest of the year, consumer confidence is up and the unemployment picture is relatively stable, as shown by the recent fall to 5.1%.

Rather, evidence of renewed weakness in the Chinese economy is a major driver. Linked to this is the second issue on the RBA’s mind, which is declining commodity prices, in particular iron ore and coal prices. It’s not just China that the RBA is concerned with either; data from the eurozone and the US is also pointing to a further global slowdown.

So the bank has changed from a neutral tone to an easing bias. The comments reflect those within the RBA’s March meeting, which was followed by a 0.50% interest rate cut in April. We don’t expect a 0.50% cut in October, but we do expect a 0.25% cut, and then another in November or December. The Fed and the ECB’s recent monetary policy decisions will surely aid global growth eventually but this will take time to feed through and results won’t come soon enough for the RBA.

Richard Driver

Currency Analyst

Caxton FX

Aussie dollar is struggling but tonight’s RBA should spare it another blow tonight

The AUD has suffered a 5.0% drop against the pound in the past month, as well as a 3.6% drop against a broadly weak US dollar. Weak Chinese data added to the negative regional tone evident in the Asian markets at present. The Chinese manufacturing sector contracted in August for the first time since November 2011 and by more than was expected. All is not well with Australia’s key export partner and data has been poor on the domestic front also. Data this week has revealed that Australian retail sales contracted by an alarming 0.8% in July. Understandably, the aussie dollar has fallen further out of favour as a result.

A key factor which is adding pressure to the AUD is the fact that iron ore prices have plummeted of late, in line with the deteriorating growth and demand outlooks for China. Interestingly, the Reserve Bank of Australia’s McKibbin has commented recently that “things have changed a lot in the last month…I now have further downside risks in my forecasts for interest rates.”

So what is the Reserve Bank of Australia going decide at its monthly meeting tonight? Well, ahead of an Australian GDP figure which is likely to indicate growth of around 0.9% during the second quarter, it is hardly panic stations. This is very backward-looking data though and the truth is that economic conditions in Australia have really declined in the third quarter. Nonetheless, very few will be expecting the Reserve Bank of Australia to cut its 3.50% interest rate tonight, and we are not among them.

It seems quite clear that the central bank is very much in ‘wait and see’ mode. RBA Governor Stevens recently emphasised that is “too early…to tell how much difference the sequence of decisions to lower interest rates has made to the economy." The RBA will be concerned with the Australian economy’s recent underperformance but not overly surprised, as downside risks to near-term growth were noted in August. Another rate cut is wholly possible, if not probable in Q4 (which could be brought forward if the Eurozone crisis drastically deteriorates), but the RBA will remain on hold for tonight. However, this is unlikely to provide the AUD with much relief.

Richard Driver

Currency Analyst

Caxton FX

EUR/JPY Overview: Japanese yen to continue weakening

The yen has weakened off by around 11.5% against the euro in the past two months. This is largely attributable to the convergence of performance between the US and Japan economies and monetary easing from the Bank of Japan.

The Japanese economy remains a key underperformer among the major global economies; it contracted by 0.2% in the final quarter of 2012 (though this was revised up from an initial estimate of a 0.6% contraction). Reduced exports, caused by the yen’s excessive strength and weakening global demand, are a key factor weighing on Japanese growth. However, industrial production and the post-earthquake reconstruction project is gaining pace, which should take Japanese back into positive territory this quarter.

The market was recently dealt a scare by January’s Japanese current account data, which revealed a record deficit of $5.41bn. The yen suffered as a result - Japan’s current account surplus has been a cornerstone of the JPY’s safe-haven status. Nonetheless, it remains likely that this deficit will prove a temporary blip, though it did the yen no favours in the short-term.

The US economy, by contrast, is outperforming. It grew at an annualised pace of 3.0% in the final quarter of 2011. As shown by the Non-Farm payrolls figures so far this year, the US labour market is making some real improvements. Crucially, this has seen the US Federal Reserve remove any reference to QE3 from its messages and in a statement this week, it upgraded its economic outlook from “modest growth” to “moderate growth.” With China slowing down, the eurozone entering a recession and Japanese growth likely to be fairly flat this year; the US economy is the real outperformer at present and we are seeing considerable yen to dollar flows as a result.

Another key factor weighing on the JPY is the Bank of Japan’s commitment to yen-depreciation. The strong yen has been a huge downside factor on Japanese exports. The Bank of Japan has repeatedly failed in its attempt s to directly intervene in the currency markets but monetary easing is still a weapon that the market is wary of.

February saw the BoJ boost its quantitative easing programme by 10 trillion yen, which has fuelled much of EUR/JPY’s gains in the past month. Whilst the BoJ took no further major action at its March meeting, the dissent within the committee highlights the scope for further easing. The Bank of Japan is highly concerned with the country’s deflation problem and is likely to continue monetary easing this year in order to achieve its 1.00% inflation target.

There are a plethora of reasons why not to invest in the euro this year. Having contracted by 0.2% last quarter, the eurozone’s growth figures in the year so far are pointing quite clearly to a recession. Nonetheless, there have been some broadly positive developments out of the eurozone in recent weeks, with the Greek debt-swap deal going through and paving the way for what is likely to be a second Greek bailout. However, sentiment towards the euro has been hit hard, as shown news by the 13.5% decline in the EUR/USD pair from last summer’s high.

Greece will be granted aid for now but it is widely expected to return to bailout territory by next year. Market sentiment remains suspicious that Portugal and more alarmingly Spain and Italy may be forced to follow a similar path in having to restructure their debt. The only real factor seemingly supporting the euro at present is the constant need of Asian and Middle Eastern central banks to diversify their FX reserves away from the US dollar.

Regardless of the eurozone’s poor growth and debt dynamics, monetary policy in Japan is likely to be the dominant driver of this pair in 2012 and EUR/JPY’s rise will not be a symptom of euro strength but of yen weakness. Long positions in the yen have fallen back considerably from January’s highs and we do not view the weakening bias we have seen in the yen in the past few to be temporary.

Developments in the eurozone and the US economy have provided a boost to global stocks, including the Nikkei, and in these risk-on conditions the safe-haven yen will always weaken. Events in the eurozone are likely to put plenty of pressure on market risk appetite this year but our bet is that the BoJ will successfully demonstrate its resolve in weakening the yen through monetary easing, something it failed to do through direct intervention.

We can see the EUR/JPY rate continuing its uptrend from the current 109.00 level in the coming months. This should see April 2011’s highs above the 120.00 level revisited at some point in the second half of this year.

Richard Driver
Currency Analyst
Caxton FX