There have been two main European data releases of note this morning, both were released at GMT10.00. Eurozone industrial production bounced by a further 1.0% MoM in March, following the 0.3% MoM gain recorded in February. Industrial production therefore expanded modestly by 0.2% QoQ in QI on QIV 2012 levels. The numbers raise the prospect that Eurozone GDP also stabilised or even increased marginally in QI. Advanced estimates of QI GDP will be published tomorrow morning, with consensus estimates centred on a -0.1% QoQ contraction. Risks to this number now look skewed to the upside. At the same time the German ZEW survey for May held roughly stable, the current situation balance inching lower, the forward-looking economic sentiment reading inching higher. The softening of the survey observed in March and April appears to have halted for a month. It remains to be seen whether this pattern is replicated in other top-tier European business surveys next week. Initially the EUR rallied following the releases, EUR/USD reaching a peak through the morning at 1.3029. However, the USD has generally rallied over the past hour or so, EUR/USD has dipped back down to 1.2950.
Overnight NZD/USD lifted through Asian trade, despite the softer than expected Q1 New Zealand retail sales data. The 0.5% (QoQ) lift in retail volumes was slightly below expectations centred on a 0.8% (QoQ) lift (CBA +0.6%), but builds on a solid 1.9% (QoQ) lift in volumes in Q4 2012. RBNZ balance sheet data released today was also of some interest. Our preliminary estimates, based on the changes in the size of the RBNZ balance sheet, suggest that April's "passive” RBNZ intervention was similar in size and nature to what took place in December - i.e. circa NZ$200-300mn, rather than the billions involved in the 2007 “active” RBNZ intervention. There was a large New Zealand bond maturity during the month which appears on both sides of the RBNZ balance sheet and dominates the balance sheet changes. When the RBNZ intervened in 2007 the balance sheet changes were much bigger than the April 2013 moves once this bond is netted out. We will see the actual net NZD selling undertaken by the RBNZ in April when more data is provided on 30 May. NZD/USD has dipped back lower through the morning in line with the general USD move higher and is currently trading around 0.8230.
AUD/USD has mirrored this pattern and dipped down to 0.9908 so far this morning. There is little in terms of Australian economic data flow over the remainder of the week, hence USD movements should continue to dictate the moves in the AUD. The Australian Federal Government budget has just been released.
The market reaction was mild because the broad outlines of the Budget had already been leaked to the media in the past few days and because the Australian government’s fiscal position is well understood. Following the announcement, S&P and Moodys reaffirmed Australia’s AAA credit rating and maintained a stable outlook, with Moodys stating that the ‘projected deficits are relatively small’. See three key points below for more details on the Australian budget.
Australian national budget – Three key points
1) The Australian government predicts it will deliver a string of modest budget deficits in the next few years: $19 billion (1.3% of GDP) in the current 2012/13 financial year, and $18 billion and $11 billion in the next two financial years. The $18 billion projected deficit for 2013/14 was above economists expectations of $10 billion and may have contributed to the small fall in AUD/USD. A slender budget surplus of $0.8 billion in 2015/16 and a modest surplus of $7 billion (0.4% of GDP) in 2016/17 is forecast. The gradual switch from a modest budget deficit in 2012/13 to a small surplus in 2016/17 is too small to have an impact on the Australian economy.
2) The economic forecasts underpining the Budget figuring appear reasonable. Real GDP growth in 2012/13 of 3% is the same as published in the Mid Year Economic and Fiscal Outlook (MYEFO) and is the same as the RBA. The forecast for real GDP in 2013/14 was cut from 3% to 2.75% (RBA forecast range is 2-3%). The budget forecasts assume a decline in Australian interest rates, as implied by current market interest rates, and AUD/USD at 1.03.
3) Inflation is expected to be contained in 2012/13 at 2.5%, down from 3% in the MYEFO but slightly above the RBA’s forecast of 2.25%. In 2013/14, inflation is expected to be 2.25%, just below the middle of the RBA’s 2-3% target band (RBA forecast is 2-3%).
We still expect a firm USD to remain a key theme this week. Yesterday’s better than expected US retail sales release highlights the US economy’s ongoing cyclical outperformance compared to the majority of the other G7 economies. Looking ahead, expectations are low for US industrial production (Wednesday) and CPI (Thursday). Therefore, the risk is for an upward surprise. As we have seen over the past few months, the correlation between the US economic cycle and the USD has increased. Hence, positive US data surprises have tended to be USD supportive. In addition, the US-G6 yield differential continues to suggest a firm USD. Further positive US data prints, compared with lacklustre G6 economic data, should support this yield differential.
GBP has underperformed over the past few trading sessions. As we have outlined previously, the underlying dynamics in the UK, such as negative UK real yields, a large UK current account deficit (3.7% of GDP), a relatively weak underlying UK economy and the ongoing risk of further Bank of England (BoE) policy stimulus suggest GBP should ease lower over coming months. When overlayed with the prospect of a firmer USD, a strategy of selling into GBP/USD rallies remains appropriate. The next focus for GBP will be the May BoE Inflation Report (Wednesday). We don’t anticipate any meaningful changes to the BoE’s growth or inflation profiles in May. While the UK economy has shown some improvement recently, given the underlying issues faced in the UK, we expect the BoE to present a cautious assessment of the UK economic outlook. The underlying tone of the report may suggest the door to more BoE stimulus remains open, particularly once new BoE Governor Carney takes the helm in July.