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FX Update - Europe leads on improved sentiment

Written by Sam Coxhead on January 29th, 2013.      0 comments

5:32 PM (NZT)

Market Overview:

The new year looks like it is going to be a very interesting one for financial markets. It appears a paradigm shift is under way, and will likely emerge as the theme of 2013. The fear of complete implosion in Europe has passed. With this sentiment change, the unwinding of "Armageddon" protection investment strategies has started. This is a positive for the EURO as funds return to Europe from abroad. Business and consumer sentiment numbers in Europe have jumped in the recent releases. Late last week saw news that banks have initiated early re-payment of “emergency funds” to the European Central Bank (ECB), a sign of increasing financial stability. The ability of peripheral member countries to borrow is core to this sentiment recovery, and this too has been encouraging of late. It is not expected that global growth is going to increase demonstrably in 2013, but it will most likely continue its laboured recuperation. With interest rates moving higher around the globe, the attraction of Australasian interest rates will lessen and this should be reflected in exchange rates for Australian and New Zealand dollars as the year progresses.


The sole focus of note in Australia last week was the lower than expected inflation reading. This number has mirrored the latest numbers in various countries and indicates the comfortable position that the Reserve Bank of Australia (RBA) finds itself in. With the improved market sentiment in 2013, and encouraging numbers from China, its seems increasing likely that we will see the RBA maintain an unchanged 3.00% cash rate at next week’s monetary policy meeting. The data this week is mainly second tier, with Friday’s producer price survey release providing the primary focus. The push high in global interest rates has seen the Australian dollar come under some pressure in the last few sessions and this will be of welcomed relief to Australian exporters, especially if the pressure continues. The current weather events may provide some issues for agriculture and mining production in Queensland, but to what extent is unclear at this stage. Next week sees a busy economic data calendar alongside the RBA monetary policy decision on Tuesday, with the employment numbers on Thursday providing the secondary focus.

New Zealand

There was little in the way of top tier economic numbers in New Zealand last week. The latest BNZ manufacturing survey revealed a bounce to 50.1(over 50.0 indicates expansion) from a previous reading of 48.8. Of passing note has been the release from Fonterra of news about minute traces of dicyandiamide (DCD) found in milk samples. World media have run various stories on this, including the Wall Street Journal. This has helped undermine demand for the NZD in recent sessions, however inconsequential the news maybe. Given the surprising demand the NZ dollar has seen in early 2013, it was likely the market would be vulnerable ahead of this week’s Reserve Bank of NZ (RBNZ) monetary policy meeting, as investors book profits on its recent appreciation. No change is expected at the meeting, but the accompanying statement will be closely followed.

United States

Last week was a relatively quiet week for economic news in the US. Housing numbers were lower than expected, but this was balanced by better than expected manufacturing and durable goods sales results. This week is a busy one for market watchers in the US. Wednesday sees GDP numbers come slightly ahead of the Fed’s monetary policy statement, and the latest employment numbers on Friday. Of note has been the move higher in longer term US interest rates in the last week or so. Consolidation at higher interest rate levels should be of assistance to the US dollar, in performance against the Australasian currencies.


Sentiment in Europe has definitely continued to improve in the last week. The positive improvement of Portugal successfully accessing funding markets was capped off by news that banks had opted to repay the ECB  the “emergency funds” by a significantly larger amount than expected. This points to increasing sound financial structure and is a credit to the efforts from the ECB in 2012. Of note was news that deposits in Greek banks increased by 4.1% in December. Certainly the prospect of a EURO disintegration is widely being discounted now. Economic fortunes are unlikely to dramatically improve in the coming months, but more a gradual recovery is expected over the coming years. Of note this week will be the release of core member Germany’s retail sales, inflation and employment numbers on Thursday.

United Kingdom

The economic environment in the UK remains under pressure, albeit last week’s employment number slightly better than expected. The important 4th quarter GDP number disappointed at -.3% against the expected -.1% result. BOE “Governor in waiting” Carney commented in Canada that flexibility was important for central banks, and this further undermined the GBP. The prospect of increased stimulation in the form of quantitative easing would keep pressure on the GBP in the coming months. Not helping the GBP fortunes is the resurgent sentiment in Europe and the capital flow back into the continent from the UK. This can be expected to continue in the coming months and this will maintain the pressure on the GBP across the board. This week’s data highlight in the UK are the latest manufacturing numbers due on Friday.


The Bank of Japan adopted the expected changes to monetary policy last week. The increased inflation target of 2.0% was joined by an open ended commitment to maintain low longer term interest rates, and in doing so curb YEN demand to assist the export sector. The volatility around the YEN continued after the knee jerk reaction from the market was to buy back YEN that had been sold, which boosting the YEN. This did not last and with the move higher in interest rates in the US and Europe, the YEN again weakened and this looks like continuing in the coming months. The focus this week comes from retail sales on Wednesday, industrial production Thursday and household spending numbers Friday.


The recent run of depressed economic news continued in Canada last week. The latest retail sales numbers we materially lower than the +.1% expectation, when released at -.3%. The Bank of Canada (BOC) left monetary policy unchanged as expected. Interestingly, they downgraded their 2013 growth expectations from 2.3% to 2.0%. These lower growth expectations mean their expected hikes to the cash rate have become less “imminent” and are unlikely to occur in 2013. Backing up this view were the inflation numbers when released on Friday. These showed a -.6% fall for the month, against a -.2% expected number. This week sees the focus squarely on the latest GDP number due for release on Friday, with an expectation of a +.2% monthly rise for December.

Major Announcements last week:

  • BOJ introduces "ultra-easy" monetary policy
  • German Investor and Business sentiment jumps
  • Canadian Retail Sales -.3% vs +.1% expected
  • Australian Inflation +.2% vs +.4% expected
  • UK Unemployment rate 7.7% vs 7.8% expected
  • BOC leaves monetary policy unchanged as expected
  • Chinese HSBC Manufacturing 51.9 vs 51.5 previous
  • UK GDP -.3% vs -.1% expected
  • Canadian Inflation -.6% vs -.2% expected