Economies of interest this week : 20 July 2012

Friday 20 July 2012, 4:49PM
By Direct FX

By Sam Coxhead of

The Australian Economy:
The primary focus for the Australian economy this week was the release of the minutes from the last RBA monetary policy meeting. As usual these comments were accurate and measured. Whilst the wording was similar to the policy statement, the tone did not point as much towards a lower cash rate as some market participants had hoped for. The interest rate market has pared back its expectations for a lower cash rate from the current 3.50% next month. Also of interest is an article in the Wall Street Journal sighting interest from the German and Swiss central banks, to increase their foreign exchange holding diversification further into Australian dollars. This increases the importance of the AUD, and has been one of the central drivers of demand this week. Of note is the move by credit agency Moody’s, to warn of credit downgrades of various Australian States.

The US Economy:
It has been a busy and interesting week so far in the US. Of late it has been obvious that 2nd quarter growth slowed in the United States. Re-iterating that theme this week has been weaker than expected retail sales and building numbers. On the positive side of the equation a manufacturing index was a little stronger than expected and the inflationary pressure remains well contained. US Federal Reserve Chair Ben Bernanke has made an unremarkable semi-annual testimony on monetary policy and the economy on Capitol Hill. Further monetary stimulus remains an option, but is now more unlikely than previously thought in August. Given the current sluggish environment, it seems likely that further initiatives will be made before the end of the year.

The UK Economy:
In the UK the latest inflation numbers came in lower than expected. This will come as welcome relief at the BOE, who have struggled with inflationary pressure in the last few years. This paves the way for further monetary policy stimulus if needed, to carry through the already struggling economy. Employment figures were slightly more robust than expected, but the retail sales numbers again under performed. Of interest has been the release of the BOE’s monetary policy meeting minutes. They reveal that two of the nine voting members of the committee did not want the additional QE initiative to go ahead. This was a surprise given many forecasters were looking at a larger 75 billion in additional QE, when the board only actioned 50 billion.
The New Zealand Economy:
The primary focus for the NZ economy this week has been the lower than expected inflation numbers. However unlikely that it is, the RBNZ has the room to offer further policy accommodation if required. This they would do in the form of lowering the official cash rate, that currently stands at 2.50%. The latest Fonterra global diary auction produced mixed results, but the outlook must be improving as the severe growing conditions in the US for grains, will likely put upward pressure on the diary market in the coming months. Expect no change in monetary policy from the RBNZ at their meeting next week, and a cautious statement to accompany this unchanged decision.

The Canadian Economy:
The focus for this week in Canada has been the monetary policy decision from the Bank of Canada. The cash rate was left unchanged, and their statement points towards an increasing cash rate from the current 1.0%, as far out as 2014. Manufacturing numbers dipped again last month, another sign of the staggering recovery. Inflation numbers due later today should reveal tame inflationary pressure, similar to most of the world’s economies.

The Japanese Economy:
Bank of Japan monetary policy meeting minutes revealed further monetary stimulation remains possible in Japan. Unsurprisingly the very strong level of YEN remains a primary concern for policy makers and expect the rhetoric to continue to flow from both the BOJ and Ministry of Finance. This represents event risk for the YEN, should further intervention take place at any stage. Next week sees the latest trade balance, inflation and retail sales numbers released, and all of these will be closely followed by the market.

The European Economy:
In Europe progress continues within member states to formalize their commitments to further bailout contributions. Unsettling tones from Germany highlight the current political frailties at play.  Pressures in the debt markets remain. German bond yields at record lows while Spanish and Italian bond markets continue to see volatility. Moody’s cut the credit ratings of 15 Italian banks as intense pressure remains on the financial system. The IMF again have publically called for both the ECB and politicians to do more to stimulate growth as the gap between the northern and southern economies grows. Expect the economic, financial and political pressures to continue to maintain a weak EURO in the coming months.

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