FOREX TRADING

New Zealand’s Manufacturing Sales Grew Yet It Does Not Support Growth

The manufacturing sector in New Zealand saw a rise in its annual sales for the first time in six quarters, but since many sectors continue to face challenges, the manufacturing sector improvement will not be enough to support growth in New Zealand’s economy that remains into recession during the second quarter of this year.

The overall activity of New Zealand’s manufacturing sector declined during the second quarter by – 4.8% after falling the previous month by 0.9%, on the other hand the volume of sales rose by 1.8% compared with the first quarter of this year. While the indicator that excludes meat and dairy sales fell by 2.8%.

The surge in meat and dairy sales is what supported the manufacturing sector sales during the second quarter of this year, but on the other hand, the government usually takes into consideration the indicator that excludes those parts, in order to have a better view of the manufacturing sector performance.

The index that excludes meat and dairy sales is highly important, as it contributes to the countries gross domestic product, and since it fell into the negative territory, it is now widely expected for the economy to remain in its agony and continue shrinking during the second quarter of this year.

Eight of the fifteen components of the manufacturing sector saw a decline during the second quarter, which confirms the central bank’s governor Alan Pollard expectations of a weak economic performance during the coming period in light of weak domestic spending and the slight improvement in business investment.

Another problem lies in the fact that this improvement in the manufacturing sector could be attributed to the companies trying to refill their stocks and not on an increase in demand or consumption, therefore this could contribute into weakening the economy’s outlook, that now is expected to shrink by0.1% during the second quarter of this year.

The other problem that New Zealand faces is the fall in global prices especially in commodities, raw materials and food prices. Therefore even if dairy and meat grew during the second quarter this does not mean that it will support economic growth or increase companies’ profitability.

Pollard indicated that the best way to maintain stable growth rates over the medium term is to encourage exports and be globally competitive once again, as well as support household savings and this of course will require a re-balance in payments. Regarding inflation, Pollard noted that the annual consumer price index currently exists within the target range settled by the central bank and it is expected on the medium term to remain in this comfort zone.

It is worth mentioning that New Zealand’s economy was one of the first that fell into recession because of global crisis. It started seeing contraction during the first quarter of last year, and until the first quarter of 2009, the economy continued shrinking by 1.0%. The bank’s projections indicate that the third quarter of this year will begin to show growth.

Forex Market Update: Risk Back On As US-China Trade Issues Takes A Back Seat

Important data points today – UK CPI and US retail sales

Headlines – Previous Session

• CA Q2 Capacity Utilization Rate out at 67.4% vs. 65.5% expected and revised 70.2% prior
• NZ Q2 Manufacturing Activity out at -4.8% vs. revised -1.3% prior
• UK Aug. RICS House Price Balance out at 10.7% vs. flat expected and revised -5.7% prior
• AU Q2 Dwelling Starts out at -3.7% vs. +2.0% expected and revised -2.1% prior
• SI Jul. Retail Sales out at -9.8% y/y vs. -7.5% expected and revised -8.4% prior

Themes to Watch – Upcoming Session

• Swiss Industrial production (0715)
• Denmark Wholesale Prices (0730)
• Norway Trade Balance (0800)
• UK CPI (0830)
• UK RPI (0830)
• UK BOE’s King, others to testify at UK Treasury Committee (0845)
• EU Euro-zone Labour Costs (0900)
• EU ZEW Survey (0900)
• GE ZEW Survey (0900)
• US PPI (1230)
• US Advance Retail Sales (1230)
• US Empire State Manufacturing Index (1230)
• CA New Motor Vehicle sales (1230)
• CA Labour Productivity (1230)
• CA BOC Deputy Governor to speak (1315)
• US IBD/TIPP Economic Optimism (1400)
• US Business Inventories (1400)
• US Fed’s Bernanke to speak (1400)
• EU ECB’s Stark to speak (1500)

Market Comments

The slight risk-averse bias that Asia passed onto Europe yesterday following the weekend ‘skirmish’ on US-China trade tariffs proved short-lived. The dollar’s rebound was unable to take out significant support levels in the major currency pairs and so it was soon ‘business as usual’ with risk on and the dollar back lower. It posted new year lows against the EUR and CHF but other currencies failed to keep pace. AUD was a touch hesitant ahead of today’s release of RBA minutes while GBP was a notable laggard under the weight of gloomy press and Moody’s maintaining a negative outlook for the UK banking sector.

GBP did receive a slight boost from the early morning release of RICS house price data for August. The survey showed that UK house prices rose for the first time in over 2 years, rallying 10.7% against an expected flat reading. While market players appear to have become increasingly confident that prices will keep rising, RICS warned that it was more a lack of supply underpinning the recovery in most parts of the country rather than strong demand. With the overhang of the Item Club warnings from Monday that the UK housing slump could return in 2010, the reaction in currency markets was brief and marginal, accounting for just 25 pips in Asia. 1.6685 still looks to be a key resistance level

The release of the RBA minutes had the opposite impact on the AUD. Those looking for a more hawkish tone to discussions were disappointed. The comments continued to signal its shift to a tightening bias but gave absolutely no indication of an immediate hike in rates while seeking to balance the risk of prolonging the accommodative stance too long against a premature tightening. The RBA noted that some uncertainty remained over the global and domestic economies and was keeping rates on hold pending further evaluation of upcoming data. Certainly, since September 1 the data has been a mixed bag with confidence numbers strengthening but retail sales, employment and trade data all disappointing. Today’s economic data release in the form of new dwelling starts in Q2 was also disappointing, falling 3.7% versus an expected 2% rebound. The AUD has slid back 40 pips since the minutes and data as more hawkish short-term players were forced to liquidate longs.

With the new Japanese government scheduled to be sworn in tomorrow, Asia press was abuzz with speculation on who would fill the post of finance minister. The Nikkei business daily has reported that senior party advisor Hirohisa Fujii had been chosen to man the role. The appointment would be seen as a slight positive for the JGB markets since Fujii is seen as an advocate fiscal discipline, but also a strong positive for the JPY given his agreement with the DPJ party line that a firmer JPY would be tolerated. Indeed, he was quoted recently as saying it was not right to weaken the JPY for the benefit of the nation’s exporters. Whether this was mere politicking to a) differentiate himself from the out-going finance minister b) lobby for his election to the post remains to be seen.

The data slate is a touch more full and relevant today with UK CPI and RPI data the major focus in Europe. Recall last month UK CPI remained stubbornly high at 1.8% y/y versus an expected 1.4% number, despite reports that turnover in the UK economy was still at depressed levels. This caused a near-term u-turn in GBP’s downward trend and all eyes will be on today’s release. Expectations are for a slight improvement to 1.4% from 1.8% on an annual comparison, but anything higher will likely prompt a test of key resistance at 1.6680-00.

In the North American session, advance US retail sales will garner the most attention. The impact of the ‘cash-for-clunkers’ program will make the ex-autos data more relevant and recent polls suggest economists are looking for a 0.4% increase after a 0.6% contraction in July.