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Written by Sam Coxhead of www.directfx.co.nz -Money transfer specialists
The Australian Economy:
So far this week the focus in Australia has been on the Reserve Bank of Australia (RBA) and its decision to cut the cash rate from 4.75% to 4.5% on Tuesday. This was widely picked with the interest rate market having moved the probability from between 80 and 100% priced over the previous week. The downward revision of growth forecasts from the RBA accompanying the cut to the cash rate was expected. The view that the trade balance has peaked for Australia, is an ominous sign for the economy. The lower global growth profile will likely continue to hamper the Australian economy over the short to medium term, especially with China finally slowing thanks to efforts from Chinese authorities to get inflation under control. Today’s retail sales numbers were just below the expected .5% rise for the month at .4%. Later today the RBA release their quarterly monetary policy statement. This will give further guidance to their perception of the economy in the coming quarters.
The New Zealand Economy:
In New Zealand early in the week we saw building and labour cost numbers released. Building consents saw another dip in activity as the volatility in this depressed industry continues. The number was released at -15.5% vs a previous reading of +16% . The Labour Cost Index was lower than expected and has been backed up by the quarterly employment numbers, that show the unemployment rate has risen from 6.5% to 6.6% , against the expectation of a 6.4%. This will take yet more pressure off the RBNZ to raise rates in the short to medium term. All but one of the major lenders have reduced mortgage rates this week, which will be of welcomed relief to home owners.
The US Economy:
US economic numbers have held up reasonably well over the last month or so, and this saw the Federal Reserve (FED) make a slightly more upbeat assessment to the present economy in the US. Given the global backdrop however, growth and employment forecasts were revised down for the coming quarters, and this has seen talk about further quantitative easing (QE) increase. The FED has certainly shown they are not afraid to use extreme tools to stimulate the economy when needed. So if global indicators continue to deteriorate, expectations of further QE will again increase. The cash rate range from 0 - .25% is expected to remain in place until mid 2013 at the earliest. Later on today sees the release of the all important employment numbers, with the market expecting the unemployment rate to remain stable at 9.1%.
The European Economy:
The real European economy is inconsequential in the current environment. The financial concerns of the debt situation remain the key in Europe, if not the world. Not a week after the much heralded EU summit plan to stop the debt issues in Europe from escalating, the opposite has happened. Greek Prime Minister Papandreou really increased the global uncertainty this week by announcing a referendum that would have been held to vote on the acceptance of the new bailout package. Overnight the referendum was cancelled as the opposition party pledged its support for the bailout package. PM Papandreou now just has to pass today’s confidence vote to remain in power. Fortunately, whatever the result, the bailout package looks to be supported and Greece looks committed to staying in the Euro. No doubt the political risks will continue to flare across the Euro-zone from time to time, just adding another level to the uncertainty. Neither dominant players France or Germany are immune, as the general populace of each nations carry’s the burden of the necessary reforms. Adding to the intense focus overnight was the decision of the ECB to cut the cash rate by 25pts to 1.25%. New ECB head said at this first meeting that the chances of a recession had increased and with inflation looking like comfortably coming under the 2% target, the decision was warranted. The market now anticipates that a further cut to 1.0% will come in December. European banks are actively repatriating funds to bolster their balance sheets as capital requirements are increased to cover the pending write downs of Greek debt.
The UK Economy:
UK economic data continues to be mixed, but this week has been more on the more positive side of the ledger. Housing, construction and preliminary 3rd quarter GDP numbers all beat market expectations, with manufacturing the disappointing sector. Political pressure on the government to break away from their austerity plan continues. The underperforming economy will not be helped by the increasing unease at the European debt crisis.
The Japanese Economy:
The big news for the week has been a somewhat futile 100billion US dollar Bank of Japan (BOJ) market intervention. By buying US dollars and selling YEN, the BOJ drove the USDYEN rate from record lows at 75.54 to 79.54. Since that high the market has settled down and we have seen mostly sideways movement between 77.80 and 78.40. This aggressive move to weaken the YEN is the latest of initiatives to put the Japanese export sector back on a more even playing field. Whether or not the move has any effect over the medium term remains to be seen. A good portion of their buying of US dollars was around the 79.20 level, so there has already been a certain element of failure to my mind. The BOJ buy their US dollars by essentially printing YEN to pay for them. If the Fed starts another round of quantitative easing (prints money), it would seem logical that the BOJ’s gains will be eroded.
The Canadian Economy:
In Canada this week the GDP number on Tuesday started off proceedings. This came out at +.3% vs +.2% expected. From here the focus has been on Fridays employment numbers. The unemployment rate is expected to rise slightly to 7.2% from 7.1%, with 20,300 jobs added in October. The Bank of Canada have clearly communicated to the market the cash rate will remain on hold at 1.0%, for the foreseeable future. So any releases will have to be well away from expectation to have marked impact.
Originally produced at www.directfx.co.nz