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FX Update : European concerns temper sentiment

Written by Sam Coxhead on March 26th, 2013.      0 comments

4:08 PM (NZT)

Market Overview:
Markets have seen a continuation of muddled sentiment over the last week. Stock markets have remained reasonably close to their recent highs, but uncertainty in Europe has tempered enthusiasm for further gains. The issues over the Cyprus bailout agreement have caused consternation. The proposal will see those with bank deposits of over 100,000 EURO's, forced to swap some debt for equity, in the beleaguered institutions. This proposal has far reaching implications, if it was extended to other member states. There has also been a lack of clarity from officials, and this has added further unneeded uncertainly into markets overnight. Next week's BOJ monetary policy meeting under the new leadership has also started to offer influence. Overnight, US Federal Reserve Chairman Bernanke reiterated his support for the FED's current quantitative easing initiative, and stated that the FED's policies have benefited US trading partners, as well as providing domestic economic support. Many exporters in Australia and New Zealand may not agree with Mr Bernanke, as a combination of factors including the easy US monetary policy, have continued to push the Australian and New Zealand dollars to resistance levels on a number of different currency pairings.

Australia
Last week was a relatively positive week for the Australian economy. The latest RBA monetary policy meeting minutes confirm the "wait and see" monetary policy stance from the RBA. Stimulation from the previous six cuts to the cash rate still have further to run and their opinion. The current view that the Chinese economy had stablised was backed up by the latest HSBC Chinese manufacturing numbers, that saw the index rise to 51.7 (over 50 indicates growth). A reading of 51.2 was expected. This week sees little of domestic focus in Australia. The RBA financial stability review on Wednesday should be of limited impact, whilst private sector credit numbers on Thursday will garner brief attention ahead of the Easter break.

New Zealand
Last week was a reasonably positive one for the New Zealand economy. The latest GDT auction results saw diary price leap another 14.5% on a trade weighted basis. This scramble to secure dairy product is a direct result of increasing concerns about the impact of the drought in the North Island. Ironically, some rain did eventuate last week, but conditions remain dire for the majority of farmers and the full extent of the impact will be seen later in the year. The bonanza 4th quarter GDP numbers added to the positive sentiment for the NZ dollar. The 1.5% result was materially higher than market expectations, albeit the detail revealed it to be consumer-centric growth at unsustainable levels. The current shortened week offers little in the way of domestic focus, with just the latest business confidence numbers on Wednesday of note.

United States
Last week saw the Federal Reserve release a monetary policy statement almost identical to the one previous. The current quantitative easing program will likely remain in place for all of 2013 and start to be fazed out at some stage in the middle of 2014. This is depending on how the labour market growth plays out. It appears it may have been earlier if it were not for the lower levels of Government spending. The US economy continues to show signs of relative health when compared to the other major developed economies. The latest manufacturing figures continue to show encouraging signs also. This week sees the focus on the latest durable goods sales, consumer confidence, home sales and revised 4th quarter GDP numbers.

Europe
The past week has been untidy for the European economy. The complicated issues in Cyprus have seen uncertainty remain at elevated levels. Not helping matters has been poor communication with media from officials, leading to increased volatility at times. The drama has not been helped by stubbornly weak economic data. Both manufacturing and services sectors continue to contract in Europe. Of concern has been the softening of indicators in the core economic engine room of Germany. Sentiment remains at low levels and forecast growth has again been lower for 2013, this time from .8%, to just a .3% increase in activity. This week will see continued focus on the situation in Cyprus, whist German retail sales and employment numbers will be closely watched. The EURO will likely remain vulnerable in the short term, and this will likely be the case on almost all pairings.

United Kingdom
Last week proved to be a very interesting one for the UK economy. The release of the BOE monetary policy meeting minutes revealed debate over the effectiveness of ongoing quantitative easing, and the risk that weak GBP may reflect the market's concern over the BOE's commitment to price stability (controlling inflation). The release of these minutes saw demand for the GBP materially increase. Adding to the mix were both positive employment and retail sales numbers. Tempering factors were the elevated uncertainty in Europe, and the warning from credit agency Fitch that the UK credit rating had again been placed on "negative watch". If concerns remain elevated in Europe, the prospect of capital flows coming into the UK are likely to support the GBP in the near term, although this is less of a factor on the pairings to the Australasian currencies.

Japan
In the last few weeks the focus in Japan has been around the BOJ, and their change in leadership. This looks set to continue in the short term. Last week as incoming BOJ Governor Kuroda started to speak, the market expectations were for aggressive language. Disappointment was plain to see in the price action as the YEN found support following Kuroda's initial speech. Whilst general market risk aversion has also been YEN supportive, the expectations for the BOJ monetary policy meeting next week are currently being pared back. YEN demand is evident across the board, even against the Australasian currencies. Also of note this week will be the added interest of the latest retail sales, inflation and industrial production numbers.

Canada
Last week was a mixed bag for the Canadian economy. The latest manufacturing survey saw disappointing results with a monthly contraction of .2%, against expected growth of .7%. Fortunately retail sales numbers balanced the ledger with the 1.0% result coming in against an expectation of 0.6% growth. This week top tier data due for release is the latest inflation numbers on Wednesday, ahead of the GDP numbers on Thursday. Also of note will be the release of the annual budget late on Friday.

Major Announcements last week:
  • Mixed response to Gyprus bailout proposal
  • UK Inflation 2.8% as expected
  • Canadian Manufacturing -.2% vs +.7% expected
  • UK Unemployment claims -1.5 vs -5.2k expected
  • US FED leaves monetary policy unchanged
  • NZ GDP +1.5% vs +.9% expected
  • HSBC Chinese manufacturing 51.7 vs 51.2 expected
  • UK Retail Sales +2.1% vs +.5% expected
  • Canadian Retail Sales +.5% vs +.4% expected
  • US Phila. FED Manufacturing 2.0 vs -1.6 expected
  • German Business Sentiment 106.7 vs 107.8 expected
 

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