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FX Update - A mixed global outlook continues

Written by Sam Coxhead on March 19th, 2013.      0 comments

4:05 PM (NZT)
Market Overview:
The financial markets have been full of drama throughout the past week. The dynamic mix of influences has seen the markets produce volatile price action within a relatively contained range. The faltering dominance of the US dollar, the re-emergence of fragility in Europe, and unexpected central bank posturing have all been of influence. This patchy sentiment is likely to continue in 2013. The gradual recovery of global economic health will be an undulating path. The upward momentum in global stock markets has waned, and longer term interest rates have moved lower accordingly. Expect more of the same this week with major news scheduled in all economies of note.

Last week’s news in the Australian economy was dominated by the latest employment numbers. The very strong report saw 71.5k jobs added on the month, and increased participation rate in the labour market and the unemployment rate fall to 5.4%. The jobs growth was the strongest in 13 years, and has seen the interest rate market pare back expectations for further easing of the 3% cash rate in the coming months. This has increased demand for Australian dollars across the board, after what has been a relatively soft start to 2013. Today saw the release of the RBA monetary policy meeting minutes. These provided the primary focus this week. Unsurprisingly, the minutes indicate the RBA is in data watch mode. The wait and see approach will have been fortified after last week’s employment numbers. Today’s RBA monetary policy meeting minutes further support their “wait and see” approach. They comment that the effects of previous cuts still have further to run, and the exchange rate remained high.

New Zealand
Last week saw new RBNZ Governor Wheeler further stamp his mark on his new role. The expected unchanged monetary policy decision saw the accompanying statement introduce an unlikely, but still possible new scenario to the mix. The alternative scenario presented was one where the elevated NZ dollar, coupled with drought conditions in NZ, stymied economic growth. In this outlined scenario the cash rate could fall to 2.0%, from it current emergency low of 2.5%. This week's focus comes from Thursday's release of the long awaited 4th quarter GDP numbers. Activity is expected to increase to .9% from the low .2% growth seen in the 3rd quarter.

United States
Last week saw a continuation of the recent positive economic news for the most part. Strong retail sales numbers were joined by solid weekly jobless claims and industrial production numbers. The latest inflation read was pretty much as expected and saw a continuation of consumer prices slowly move back towards average growth rates. Late in the week saw a fall in the preliminary consumer sentiment numbers, and this will be something to watch for as the revisions come to light. The political dysfunction is probably causing some consternation and hopefully this does not escalate. This week is another busy calendar of scheduled data releases. Building permits, weekly claims, home sales and manufacturing numbers all feature. Of primary focus will be the release of the minutes from the previous FED monetary policy meeting, and these are due on Wednesday.

It has been a volatile last week in Europe. The re-emergence of stability concerns has caused sentiment to soften, albeit the EURO managing to hold in at reasonable levels on most pairings. Concerns have increased of Greece's ability to meet bailout requirements in order to receive the next 3 billion EURO tranche of funds. This comes as mixed news comes from Cyprus. Initially the Cyprus bailout was viewed as positive, as the small nation indicated that it would be looking for a lower amount of funds than previously expected. However, the kicker came over the weekend with introduction of the bank deposit tax. This is widely unappealing, and would certainly not be welcomed by other nations requiring assistance. Economic data remains under pressure also, with the latest industrial production numbers underwhelming. This week will see the parliamentary bailout composition vote in Cyprus of primary focus, along with various German sentiment numbers, and European manufacturing and services data.

United Kingdom
It was an interesting last week for the UK economy and the Pound Sterling. The downside momentum for the GBP appears to have run its course. The latest industrial production and manufacturing numbers were weaker than expected, but the demand for the GBP increased. This squeeze on "sold GBP" positions saw investors scramble at times to buy GBP. Outgoing BOE Governor King made some positive comments and this further added to the resurgence in demand. After being under so much pressure in 2013, it looks like there will be some further reprieve for the GBP, especially while concerns in Europe escalate. This week sees a renewed domestic data focus. Aside from the latest BOE monetary policy meeting minutes, the latest inflation, employment and retail sales numbers are due for release.

Last week saw a smaller than expected contraction in the latest manufacturing numbers. Unfortunately this came following a materially weaker than expected monthly machinery orders number. On a more positive note was the upper house confirmation of the new BOJ leadership. Now the much anticipated aggressive stimulus program can be initiated at the BOJ. This week has just the trade balance numbers to offer as a data focus. Expect increasing headlines to come from the new BOJ leadership, as they look to stamp their mark on the pressured economy. Expect YEN volatility to remain elevated in the short term, especially as the uncertainty increases in Europe. Further instability in Europe will likely limit further YEN downside in the short term.

Last week was a very quiet one for Canadian economic news. The Canadian dollar saw some residual benefit from the strong employment report late in the week previous, but had some of its gloss tarnished as it was dragged lower by the US dollar later in the week. This week sees the latest manufacturing numbers on Tuesday, and retail sales numbers on Thursday offer focus.

Major Announcements last week:
  • UK Manufacturing -1.5% vs 0.0% expected
  • US Retail Sales 1.1% vs .5% expected
  • RBNZ unchanged as expected
  • Australian Employment growth +71.5k jobs vs 9.5k expected
  • European Inflation 1.3% as expected
  • US Inflation .2% as expected
  • US preliminary Consumer Sentiment 71.8 vs 78.2 expected
  • Cyprus announce proposed bank deposit tax