Click to access our currency pair reports:NZD/USD AUD/USD GBP/USD
NZD/AUD (AUD/NZD) AUD/GBP (GBPAUD) GBP/EUR (EUR/GBP)
NZD/GBP (GBP/NZD) AUD/EUR (EUR/AUD) GBP/RAND
Major Announcements last week:
- Canadian GDP -.1% , but unemployment dips to 7.6%, a two year low
- Australian GDP and Retail Sales disappoint at +.2% and -1.1% respectively
- US unemployment rises to 9.8%, negates gains in manufacturing and housing numbers
- Fed chairman Bernanke states could use more QE if required
- Eurozone Govt debt issues remain center stage
- ECB bond purchase program alleviates short term pressure
- ECB Emergency Bank Funding scheme in extended
- UK manufacturing numbers pick up while housing continues to sag
Market Overview:Last week was action packed. With moves being accentuated by low levels of liquidity, it was a game of two halves. The first half of the week was dominated by further deterioration of the peripheral state Govt debt situation in Europe, and the US dollar strength that came with it. After the release of detail on the proposed Irish bailout, focus turned to other member states of Portugal, Spain and even Belgium. All eyes were on European Central Bank (ECB) head Jean Claude Trichet’s scheduled speeches, as he laid out the plans to extend the emergency bank funding liquidity measures. The ECB have been actively buying peripheral member state Debt also. That has seen funding costs, and spread between peripheral state and German debt, retreat from their highs. These bond purchases have proven to be a successful mechanism in the short term to contain the costs of borrowing. Debate now surrounds whether or not the ECB can extend this process into the medium term. An extension would require vast resources, the bulk being provided by the likes of Germany and France. It is easy to imagine how politically volatile this may become. Economic numbers continue to show a dislocation of fortunes between the smaller peripheral states and the power houses of Germany and France, with German numbers continuing to beat expectations.
The second half of the week was all about renewed downward pressure on the USD, as the market took stock of the large recent gains it had made. The turnaround was reasonably quick as the speculative community rushed to sell USD’s they were holding. In general US data released recently has actually been reasonably positive. Early last week we saw improved consumer confidence, manufacturing and housing numbers. However the much anticipated employment numbers released on Friday were very disappointing. Market consensus was for the addition of 145,000 jobs in November. The number came out at only 39,000. The resultant unemployment rate rose from 9.6 to 9.8%. The initially market reaction was slightly muted. Then the market grasped the possibility that even further Quantitative Easing (QE – the effective printing of money) coming from the Federal Reserve may result. This meant the appetite for “risk/growth currencies”, increasing very quickly. Equities rallied, commodities rallied and the USD was sold heavily, especially against the Australian dollar. This reaction seems odd, considering employment data is a lagging indicator, and employment capacity can easily be absorbed after a period of low economic activity, like the one the US has experienced over the last two and a half years. Interestingly the US Fed Chairman seemingly played to the market by commenting that indeed the Fed could increase on its extra 600 billion dollar QE program. This type of reaction will do nothing to stop talk of competitive devaluation of currencies.
The performance of the Australian dollar is a classic example of how markets can act irrationally in the short term. Last week we saw two very disappointing economic data releases in the form of Australian GDP (+.2% vs expected +.5%) and Retail Sales (-1.1% vs expected +.4%), and yet we saw the AUD appreciate from around .9600 to above .9900. Tomorrow sees the announcement of the RBA cash rate decision. Currently market consensus is cash rate will be just 25 points higher by December 2011. No change is expected tomorrow.
In New Zealand last week we saw broad based consumer confidence strength in the NBNZ Consumer Confidence survey, and some lower than expected Building Consents numbers. This points to a still patchy recovery as we head into the crucial Christmas season for the retailing sector. The RBNZ on Thursday is also expected to leave the cash rate unchanged. The global risk appetite will probably provide the most direction for the NZD/USD this week.
UK economic data remains patchy. Housing numbers are still depressed, with manufacturing numbers showing the odd sign of strength, after benefitting from the continued low level of the GBP. Commercial construction figures are picking up, albeit coming from a very low vase.
The Canadian economy is continuing its gradual recovery. GDP numbers disappointed (-.1% vs +.1% expected), while employment numbers were the strongest in 2yrs with the unemployment rate dipping to 7.6%.
The Japanese outlook remains weary as retail sales numbers dipped into negative territory for the first time in five months. More neutrally, unemployment remained at 5.1% and the industrial production numbers slowed less than was expected.
In South Africa, while the domestic outlook remains slow, the fortunes of the Rand will be pegged to the markets appetite for risk, and the commodity prices that go with it.
Also of note is the seemingly fragile nature of confidence in China. Last week rumors of an interest rate hike one afternoon caused a 3% dip in the Shanghai Index in no time flat. The IMF has again warned China and India they should be taking measures to make sure that asset prices do not cause bubbles, especially with regards to the property markets. Brazil’s central bank increased “reserve ratios” to reduce liquidity and put downward pressure on inflation. As long as there are no asset price corrections in these emerging markets, they remain the largest areas of global growth as internal demand, and infrastructure investment maintains the momentum.