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FX Update - Markets consolidate and seek direction

Written by Sam Coxhead on February 12th, 2013.      0 comments

5:56 PM (NZT)

Market Overview:

The wider financial markets have seen choppy and indecisive price action over the last week. The somewhat neurotic nature of the markets should continue this week with the Chinese New Year celebrations bringing Asia's input to a standstill. The lower levels of liquidity see movements accentuated for the most part, and characterised by continuing choppy and directionless trade. The turn of the year enthusiasm for the EURO has waned, as the implications on the economy of a higher value currency are digested. The issue of "currency wars" has been brewing over the last few months, prompted in no small part by the actions of Japanese authorities to devalue the YEN. The currency war debate has gathered momentum to a point where the G7 are expected to make a collaborated comment this week. Whilst globally, inflation remains low for the time being, the risk of inflation quickly returning cannot be discounted in those economies where exchange rates have been low for an extended period of time, and this is where Japan's situation is considerably different to other major economies.


Last week saw further soft economic data released in Australia. Retail sales, building approvals and the employment numbers were all on the lower side of expectations. Undoubtedly, pressure remains in the Australian economy, both in mining and non-mining sectors. The Reserve Bank of Australia (RBA) left the cash rate unchanged at 3.00%, but left the door open for further easing of the cash rate if required. This is a luxury for the RBA, and certainly the threat of a lower cash rate helps undermine the Australian dollar and they will be very aware of this. This week sees mainly second tier economic data up for release. Of note was today's NAB business confidence survey saw sentiment slightly improved at +3 which will be important for the RBA when assessing their next monetary policy decision.

New Zealand

Last week in New Zealand the focus was solely on the labour market. The employment numbers revealed the lowest participation in the labour market in over a decade. The quarterly fall in employment was a significant 1%, as the young headed towards further study, and the elderly opted for retirement. The NZ economy has a back stop in the Christchurch rebuild, and the economic outlook would be considerably different if that was not providing a cushion for activity. Expectations for monetary policy from the RBNZ are for the cash rate to remain unchanged for all of this year and for increases to be coming at some stage in the first half of 2014. This stable monetary policy outlook appears to be providing investors with confidence in the NZ dollar. This week sees the domestic focus come in the form of the 4th quarter retail sales numbers on Thursday.

United States

It was a relatively quiet week for economic news in the US last week. Factory orders were slightly lower than expected and the latest services survey numbers were right on the expected growth levels. Interestingly, the latest unit labour costs posted their highest increase since Q1 2003, and this points towards increasing consumer prices and labour costs are usually passed straight through to the consumer. Friday saw the trade balance numbers reveal a smaller than expected trade deficit. This week’s focus will come from the latest retail sales numbers and consumer sentiment numbers.


Last week started in Europe with lower than expected retail sales numbers for December. The European Central Bank (ECB) left monetary policy unchanged as expected. The increased value of the EURO has caused all kinds of consternation in Europe, and increasing friction between member nations. Germany appreciate the lower inflationary pressure that comes with a higher currency, while the remaining members simply see it as a hand brake on growth. From an international stand point, the concept of currency valuations is likely to be increasingly discussed and will likely continue to be a point of contention throughout 2013. This week sees the quarterly GDP numbers as a focus on Thursday, and the G20 meetings starting on Friday will be closely watched.

United Kingdom

Last week was a mixed one for UK economic news. Strong services numbers were balanced by a pullback in construction early in the week. The latest manufacturing numbers were also strong and this number came ahead of BOE Governor designate Carny's testimony where he warned of inflation pressures. This gave the GBP some demand that continued for a number of sessions until yesterday when the GBP again reverted to a weakening bias on the back of very little news. The Bank of England (BOE) left monetary policy unchanged as expected, but issued a rare accompanying statement that stated they were willing to look through temporarily elevated inflation if it was forecast to come back into line over the medium term. So the picture remains mixed for the GBP, and with little prospect of a sustained recovery in demand until the economies vital signs improve on a more consistent basis. This week sees the focus provided by the latest inflation numbers and subsequent BOE report, followed by the retail sales figures at the end of the week.


Political posturing ahead of the upcoming G20 meeting from Japanese authorities has started in earnest. Increasing international pressure on Japanese authorities about YEN devaluation has increased in recent weeks and expect this debate to continue in the coming months. Interestingly, the burst of YEN strength caused by Japanese Finance Minister Aso's comments that the YEN weakening had been too fast, were quickly reversed overnight. Low levels of liquidity thanks to various holidays in Asia will likely see this kind of price action continue this week. Adding to the noise will be the preliminary 4th quarter GDP numbers on Thursday, which come just ahead of the BOJ's monetary policy announcement. Japan remains in a unique economic situation, and should be viewed as such. The G20 meetings this coming weekend may provide some interesting insight for the coming months.


The mixed economic picture continues in Canada. Materially strong manufacturing numbers were tempered by softer than expected building and employment data. The employment data proved crucial to sentiment, with the CAD seeing real pressure following that release. A fall in the "participation rate" is of particular concern and will be a focused on in subsequent employment market releases. This week sees a light economic news calendar in Canada, with the bulk of the lead likely to come from the wider market sentiment.

Major Announcements last week:

  • AU Building Approvals -4.4% vs +1.1% expected
  • UK Construction 48.7 vs 49.7 expected
  • RBA leaves the cash rate unchanged at 3.00%
  • UK Services 51.5 vs 49.8 expected
  • US Services 55.2 vs 55.2 expected
  • AU Retail Sales -.2% vs +.3% expected
  • NZ Employment -1.0% vs +.4% growth expected
  • AU Employment +10.4k vs 5.8K expected (part time up and full lost ground-weak number)
  • UK Manufactruting +1.6% vs +.7% expected
  • BOE leaves monetary policy unchanged
  • ECB leaves monetary policy unchanged
  • CAD Employment change -21.9k vs +4.5k expected