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Direct FX Weekly Update - 17 Jan 2011

Written by Sam Coxhead on January 17th, 2011.      0 comments

Currency Commentaries:

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:

  • Australian Retail Sales as expected, Home Loans higher and Employment growth softer.
  • NZIER Quarterly Survey of Business Opinion stablises, points to growth in 3rdQTR
  • BoE leaves cash rate unchanged, House Prices softer, Manufacturing and PPI higher
  • ECB leaves cash rate unchanged but makes hawkish comments, EURO credit spreads narrow
  • US Retail Sales and  Consumer Sentiment weaker, PPI and Industrial Prod. Stronger
  • Chinese Trade Balance lower, raise “Reserve Required Ratio” by another 50bpts to slow credit growth
  • Canadian Construction numbers lower, Business Outlook stronger

Market Overview:

The past week has proven to be a very interesting one in the foreign exchange markets. The major market moving theme of the week has been the shift in focus in Europe from the Govt debt concerns, to that of the hawkish nature of the European Central Bank (ECB), and their focus on inflation. ECB head Trichet made comments citing inflationary pressure and re-iterated the old ECB attitude of keeping staunch watch on inflationary pressure. The focus coming off Govt debt in Europe was helped by talk of increasing the European Financial Stability Facility (EFSF) to around 500 billion EURO, at this week’s Finance Ministers meeting. This gave investors confidence that should a larger member state such as Spain come under pressure, that the EFSF would be able to accommodate a funding package. The talk of an increased EFSF saw debt auctions of Portugal, Spain and Italy issue their full quota’s, albeit at more expensive interest rates than their previous respective auctions. I have no doubt that increased commitment from both China and Japan to purchase various European debt has also caused the sentiment to turn.  After starting the week with the EURO under considerable pressure, the ECB comments caught the market off guard. Adding to this was talk of large “Fund currency re-allocation flows”, which means that these Funds had to sell other currencies and buy EUR, after being “underweight” EURO.  The resulting price action saw the EURO appreciate very quickly and large numbers of investors were forced to exit “sold” EURO positions. Accordingly the EURO has made up ground on almost all cross rates. Whether or not this move can be sustained remains to be seen. Fundamentally the reduction in Government spending still has to eventuate on order to get peripheral member states accounts back into health. This process will more certainly take years.
In Australia the fallout from the horrific flooding continues. There is also forecast of further rain which could see further flooding in other states such as Victoria. The Australian dollar was sluggish as a consequence, and gave up ground on most cross rates. These floods will definitely have an effect on productivity, and the forecasts for interest rate hikes from the Reserve bank of Australia (RBA) have been pushed back, with just 25pts of hikes priced currently for 2011. Employment growth numbers were also a touch softer in Australia, but the Unemployment Rate dipped to an impressive 5.0%. Also weighing will be the fact that the Chinese have again increased “Reserve Required Ratio” by 50pts in a further attempt to curb lending growth.
In New Zealand the only economic data release of note last week was the New Zealand Institute of Economic Research’s Quarterly Survey of Business Opinion. This saw a stabilising in sentiment after previous quarters had seen quite sharp drops in the outlook. The survey points towards a pick up in the 3rdquarter and an avoidance of a double dip recession in New Zealand. The NZD gained against the AUD, but gave up ground against the resurgent EURO and GBP.
In the US there was mixed data release during the course of the week. Wholesale Inventories  fell as sales increased. The “Beige Book” which is an economic activity report used by the US Fed to gauge activity across 12 major districts pointed towards increased activity, and even slightly increased employment. The latest Retail Sales numbers came out weaker than expected and survey’s of consumer sentiment were also slightly softer than expected. This patchy nature of data is typical for an economy emerging from a deep recession.
The UK saw further soft housing numbers but stronger manufacturing data released. The renewed call for tough treatment of the persistent inflationary pressure gave the GBP support as the prospect of higher interest rates in the UK over 2011 buoyed investors. Prime Minister Cameron came out with strong talk that the UK would not be contributing to any further funding packages in Europe also helped bolster investor confidence in the GBP.
Meanwhile commodity markets remained mixed and volatile. Equity markets continue to benefit from the cheap money awash around the globe, and many Indexes recorded highs not seen since the Lehman Brothers collapse as the world economy descended into the global financial crisis.