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FX Update - Australasian currencies remain vulnerable

Written by Ian Dobbs on August 6th, 2013.      0 comments

1:45pm (NZT)
Market Overview:
In the later part of last week the focus was all on the US employment report. That came in somewhat softer than the market was expecting and saw the USD lose ground against most other currencies. Those losses however were very limited against the commodity currencies such as the NZD, AUD and CAD. The early part of this week was dominated by a weak NZD after news from NZ’s biggest exporter Fonterra, that it had shipped some contaminated products to customers. Today’s rate decision from the Reserve Bank of Australia could spark some action, however the market has almost fully priced in a 25 point cut, so the biggest reaction would come from a surprise no change result. The Bank of Japan rate announcement later in the week should hold few surprises, so the focus will turn to employment data out of New Zealand, Australia, and Canada.

There has been little in the way of positive news for the Australian economy lately. Negative sentiment toward the economy and the currency was reinforced yesterday after retail sales data came in well below expectation. This result will only serve to increase the pressure on the RBA to cut rates today, a move that is widely expected and priced into markets. It’s hard to see what will turn around the current trend in the AUD at the moment. We do get more key data on Friday with the employment data set for release. But unless that surprises with some very strong numbers, it seems the pressure will remain on the downside.

New Zealand
The New Zealand dollar has had a rough start to the week thanks to the announcement from Fonterra over the weekend that some of its exported whey products were contaminated. The NZD opened the week around 130 points lower against the USD and was down on all the crosses as well. Fonterra is New Zealand's biggest company and it exports 95% of its production. That makes up 25% of NZ’s total export earnings and equates to around $14 bln a year. So when it’s biggest customer, China, halts all imports the shock waves are felt quickly. The big question now is how much time it will take to fix the situation and put export clients back at ease. If the situation is quickly overcome the impact will be limited and the currency could quickly recover a lot of the lost ground. But if this drags on then the currency could come under further pressure. The latest Fonterra Global Dairy Trade (GDT) auction results are due later on today. On Wednesday we get NZ employment data to digest as well.

United States
Friday evening saw the release of the key US employment report. All indications leading up to the event were that this could be a strong number, but as it turned out the result was less than solid. Expectations for a gain of 185k jobs were dashed as the actual result came in at only 162k. The unemployment rate did however fall a touch to 7.4%. The disappointing report caused the USD to lose a little ground against most other currencies. However, last night we got a reading on the service sector of the economy which was much better than forecast. The net result seems to be that expectations remain for the Fed to start tapering asset purchases in September. The rest of the week sees some second tier data set for release in the form of consumer credit and wholesale inventories, as well as a speech from Fed member Evans.

Recent data for the Euro-zone has shown a slight improvement and supported the outlook for very gradual recovery over the coming months. Last night’s reading on activity in the service sector come in a touch above expectation and has reinforced this view. Although the index is still below 50, which is the threshold for expansion or contraction, it still came in at the best level since January 2012. The Euro-zone still faces many headwinds and this was highlighted by a reading on investor sentiment, also released last night, which came in substantially weaker than forecast. We can expect further patchy data, albeit with a slightly improving trend, going forward. To that extent over the rest of this week we will get data on French and German industrial production, trade balance, and the ECB monthly report.

United Kingdom
The UK has had a string of sold data out over the last couple of weeks, and last night was the icing on cake. The index of activity in the service sector smashed expectations and printed at the highest level since 2006. That’s pre-crisis levels. The service sector is the biggest sector of the economy accounting for around three quarters of the overall economic activity. This comes on top of good readings last week for the manufacturing and construction sectors. This data suggest the second half of this year could well be a good one for the UK with growth outperforming expectations. While the GBP has gained some ground on the back of this and last week’s data, the gains are less than what could have been expected. This is largely because the market is waiting for tomorrow night’s Bank of England (BOE) inflation report. Along with that release, the BOE is going to give more details on the new forward guidance policy. The market expects these details to be a negative influence on the Pound. There are plenty of risks around this announcement, but the biggest move would surely come in the form of a rallying GBP if the BOE fail to deliver a strong guidance. The difficult thing for the UK in trying to tie forward guidance to something like the unemployment rate, as in the US, is that their inflation is near the top end of the targeted band. In fact inflation in the UK has remained stubbornly high over the past five years and with economic activity picking up the outlook must be for it to increase. This is not the case in the US or other countries. So tomorrow evening will be critical in dictating direction for the GBP.

There has been little to change the current outlook for the Japanese economy recently. Patchy data has only served to support the forecast of ultra-easy monetary policy for the foreseeable future. There is much debate within the government at the moment around the proposed sales tax increases planned for next year. Japan has a huge public debt and this has to be addressed at some stage. Many long term forecasters are already saying that changing population demographics make that debt unsustainable. So any delay in the tax increase would hit long term fiscal confidence. The key events for the rest of this week are the current account and the Bank of Japan monetary policy statement on Thursday, along with consumer confidence on Friday.

There has been no data of note for Canada since last week's GDP numbers. Friday nights US employment report hasn’t helped the Canadian dollar at all. It seems the weaker than expected US data has negatively impacted the CAD more than the USD. This is because expectations for a rate hike in Canada next year are closely tied to the US economy continuing to pick up. So while the USD lost ground against most other currencies after the data, it actually gained ground against the CAD. We have had a very quiet start to this week which has been compounded by a bank holiday in Canada today. So we have to wait for the second half of the week to get any fresh insight in the Canadian economy. That being said there is plenty to digest over the coming days including trade balance, building permits, and business optimism index. Then at the very end of the week we get housing starts and employment data.