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FX Update- Can the recently improved sentiment be sustained?

Written by Sam Coxhead on February 5th, 2013.      0 comments

6:06 PM (NZT)

Market Overview:

The last week proved to be yet another interesting one for market observers. The increased positive sentiment in January saw equities push through to five and a half year highs towards the end of the week. Longer term global interest rates moved accordingly higher, and the likes of the US 10 year rate significantly pushed back up through the 2.00% level. However, it was not to last and yesterday saw a significant pull back in demand for growth assets (both NZD and AUD are growth assets), as investors scrambled to lock in recent gains. This kind of correction is unsurprising given the significant moves seen in January. Whilst it remains undeniable that there has been a paradigm shift away from the European doomsday scenario, the focus should now shift to economic growth prospects. Overtime this refocusing should tame the markets current enthusiasm. Growth rates are likely to remain at subdued levels in almost all economies for some time yet. Add to this the prospect of the central bank stimulus being wound back as economic indicators slowly recover, and investors should be increasingly weary in the coming quarters if growth assets continue to rise in the short term.


There was little in the way of top tier economic data in Australia last week, but of note was the bounce in the level of the NAB business confidence survey. The RBA just released their expected unchanged monetary policy decision with the cash rate stable at 3.00%. Their outlooks is more upbeat with the improved global sentiment, but soberly they remain poised to react if conditions again worsen in the coming months. Leaving the door open to further easing to the cash rate works at a number of levels, the least of which is the intended consequence of undermining demand for the stubbornly high level of the AUD. The remainder of the week sees the latest retail sales numbers released tomorrow, employment numbers Thursday and the quarterly Monetary Policy Statement on Friday from the RBA.

New Zealand

Last week saw the latest monetary policy decision from the Reserve Bank of NZ (RBNZ) provide the primary focus for the NZ economy. No change to the emergency low 2.50% cash rate was expected by any domestic economists. The unchanged decision was accompanied by a seemingly benign, and balanced statement. Acknowledgement of softer than expected economic news in 2012, was balanced by growing momentum being driven by the increasing activity in the Christchurch rebuild. The continued high level of the NZD is causing pressure in the export and import substitute sectors, and supply constraints are causing increasing prices in certain housing markets. The RBNZ are starting to look at the possible use of ”macro-prudential” tools to curb demand until supply increases, but these would appear to be some way off from being implemented. Whilst there was little of surprise in the statement, the market’s reaction has been somewhat surprising. After being under pressure heading into the announcement, the NZD has seen periods of very strong demand in the sessions since. Demand against the Australian dollar looks to have been the primary mover, as investors repositioned ahead of the RBA monetary policy decision today. Before the decision the market had priced just a 17% chance of the cut, down from around 35% last week. Thursday sees the release of the 4th quarter employment numbers, with the market expectation of a fall in the unemployment rate to 7.1% (from 7.3%).

United States

Throughout the course of the last week the economic data in the US has been somewhat mixed. Consumer confidence, GDP and factory orders were all lower than expected, whilst durable goods sales, and manufacturing numbers were strong. Employment numbers were close to expectation. The positive numbers on Friday saw reaction across the markets. Equities pushed on higher to five and a half year highs and the interest rate markets backed up to see the 10 year yields push over 2.00%. These were very positive signs, but did have the look of overly exuberant price action and yesterday saw a reality check. Europe led sentiment lower and profit taking emerged which reversed a large portion of Friday’s surprising gains. The FED kept monetary policy stable as expected, with monthly quantitative easing at 85 billion likely to be maintained until the unemployment rate drops to around 7% from its current 7.9% level. This week sees a relatively quiet economic calendar with services numbers and the trade balance expected to dominate the focus.


Last week’s economic data in Europe produced mixed results. Data in Germany has been weak of late, and the retail sales and consumer sentiment numbers were no exception. However, these were balanced by some encouraging signs in the employment markets with 16,000 less unemployed on the month. Overall, the European unemployment rate fell from 11.9% to 11.7%, whilst inflation was 2.0% vs 2.2% expected. Sentiment in the European equity and debt markets was buoyant throughout the week. However, yesterday saw a correction and periphery debt markets pushed funding costs higher and equities were pushed lower. The EURO has had a huge lift in demand to start 2013 and there was always likely to be a pull back at some stage, and we may see a further fall in demand this week. A materially higher EURO obviously curbs economic recovery as exporters become less competitive, and it will be interesting to hear the ECB’s comments on this at their monetary policy announcement on Thursday.

United Kingdom

It was a quiet week for news in the UK, and the pressure remained on the GBP, as capital repatriation from the UK back to continental Europe continues. Interestingly, the latest consumer credit numbers showed a significant increase which is a positive sign. House prices, manufacturing and construction numbers were uninspiring. This week sees an increased focus on economic data. Services and further manufacturing numbers come ahead of the BOE monetary policy decision on Thursday, albeit no change is expected at this meeting. Certainly the BOE will be quietly pleased with the recent weakness of the GBP, which seems to be a goal for most central banks with recovering economies.


Last week in Japan saw as expected retail sales numbers at +.4%, and lower than expected activity in industrial production and household spending. This week sees the primary economic data focus on the current account numbers on Friday. The YEN remains under pressure across the board, and apart from the odd bout of profit taking such as was seen overnight, this theme should continue in the near term at least. Japanese authorities have quickly become targets for criticism over the weak YEN as the currency debasement debate again erupts. Expect these tensions to increase overtime, especially if the EURO pushes onto higher levels and Europe growth prospects are further reduced from modest levels. Next week sees preliminary 4th quarter GDP numbers released and the latest monetary policy announcement from the Bank of Japan (BOJ).


The sole economic data focus in Canada last week was a monthly GDP number. The +.3% result was a little better than expected and along with the increased market sentiment, aided demand for the Canadian dollar. This week sees the release of manufacturing, building permit, employment and trade balance numbers. Also guiding sentiment will be the wider market risk appetite after yesterday’s partial reversal of the recent gains in growth assets. If we see further corrections lower from risk assets, expect to see the Canadian dollar outperform its Australasian counterparts and push back towards more historically average levels.

Major Announcements last week:

  • US Durable Good Sales +1.3% vs +.8% expected
  • US Home Sales -4.3% vs +.5% expected
  • US Prelim. GDP -.1% vs +1.1% expected
  • FED leaves monetary policy unchanged 
  • RBNZ leaves monetary policy unchanged
  • Canadian GDP +.3% vs +.2% expected
  • Chinese Manufacturing PMI 50.4 vs 51.1 expected
  • UK Manufacturing PMI 50.8 vs 51.0 expected
  • US Unemployment rate 7.9% vs 7.8% expected
  • US Manufacturing PMI 53.1 vs 50.8 expected
Topics: Economic news