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Direct FX Weekly Update - 31 Jan 2011

Written by Sam Coxhead on January 31st, 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 CPI +.4% vs exp +.7%
  • UK GDP -.5% vs exp +.5%
  • US Consumer Sentiment 60.6 vs exp 54.4
  • RBNZ mildly more positive than previous comments, OCR 3.% as exp
  • US GDP 3.2% vs exp 3.5%

Market Overview:

The past week we have seen a few interesting developments. There was a trend to again have a the USD under some pressure , but again coming into the end of the week we see the USD rebound somewhat and take back a bit of the ground it had given up earlier. This was driven by the geo=political pressure mounting in north Africa, with particular focus on Egypt because of their control of the Suez canal.
The EURO had a mostly positive week as there was a further reduction in concerns about the debt problems, and a more positive view of the infrastructure being put in place to deal with further concerns as they arise. The European Financial Stability Facility (EFSF) is being tweaked further to ensure it has the flexibility to provide appropriate solutions when it is called on. This week also saw the first bond issuance from the EFSF , and this was very well accepted by the market. In particular with support coming from Central Banks, especially the Japanese who bought 20% of the total issue. This type of support is a sign of further diversification away from USD assets being held by central banks in their reserves.  Geo-political concerns flaring in the likes of Egypt and Tunisia on Friday and through the weekend are taking some of the gloss from the EURO’s performance. Safe haven currencies of the USD,CHF(Swiss Franc) and JPY benefit from turmoil of this nature. Further risks to the EURO in the short term could stem from the markets reaction the Greek debt restructuring initiatives currently underway.
In the US the economic data remains mostly positive, but concerns about the massive level of Govt borrowings remains a constant talking point. GDP numbers o Friday showed a quarterly growth rate of 3.2%. While it was below the expected 3.5%, the internal composition of the number was strong. Interestingly Consumer Sentiment numbers bounced, and this should improve the retail spending numbers over the coming months. Of concern to policy makers is the lagging time frame of the positive numbers to impact on the unemployment statistics. Until we start to see a rebound in the employment figures in the US, the loose fiscal and monetary efforts will remain in place.
The UK GDP figures showed a surprising -.5% GDP number. This has reduced calls for the Bank of England to raise the cash rate earlier than previously forecast. The BoE minutes complicated the debate, as the voting split changed as there were two votes for an increase in the cash rate at the last meeting, which was before the release of the GDP number. Previously just the one member had voted for a hike in the cash rate. The BoE head Mervyn King said that he expected inflation numbers to peak close to 5% before coming back into the accepted band in 2012. This all points to a lengthening of the already drawn out economic recovery in the UK.
While the Bank of Japan increased its fiscal year forecast for economic activity, S&P downgraded the Japanese Sovereign Credit Rating. This serves as a warning sign to Europe and the US that investors will remain weary of Govt. debt loads in the near term, even in the largest economies.
Australian data continues its recent softer run of form , with CPI numbers coming below the market expectations. This means that just 25pts of hikes are now priced for the cash rate for the remainder of 2011. This is keeping the AUD under a little pressure from the EUR and GBP, and in a familiar .9800-1.0100 range against the USD.
In New Zealand , the mildly more positive comments from RBNZ head Bollard at the cash rate meeting gave a bit of the boost to the NZD. The NZD’s appreciation has seen it move up towards the top end of our expected range against the AUD at .7800(1.2820), which is a level which should see gains worked harder for from here. Labour Cost and Employment numbers will be keenly watched in New Zealand this week, due for release on Tuesday and Thursday respectively.