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FX Update : Uncertainty unsettles markets.

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

3:51 PM (NZT)
Market Overview:
The wider financial markets have suffered from gaining risk aversion over the past week. Market sentiment has been struggling to deal with softer economic indicators, but coupled with the political environment in Europe and fiscal hurdles in the US, the increased uncertainty has pushed growth assets lower. Today’s indecisive election result in Italy has further pressured markets, with irrational moves seen in some cases. The Japanese YEN has seen a large bounce in demand against the EURO, and this has spilt across into other pairings. Interest rate markets have been in demand as stock markets slump, and bond interest rate yields are materially lower. The Australasian currencies remain resilient, especially the NZ dollar. The theme of  “relative economic health” provides the underlying support for both the NZ and Australian economies, and this should provide a buffer for material moves lower that would ordinarily be seen when general market risk aversion increases. This insulation should continue to be a theme in 2013, and points towards further contained ranges for the NZ and Australian dollar’s on most pairings.

It has been a mixed last week for the Australian economy. The RBA monetary policy meeting minutes were mostly unsurprising. Further easing to the 3.00% cash rate will be forth coming, if conditions require it. However, this easing is by no means a forgone conclusion and this has seen the easing expectations pared back for the coming monthly RBA  meetings. The minutes were reinforced by comments from RBA Governor Stevens in a separate speech last week. Early this week saw the latest HSBC Chinese Manufacturing numbers under perform. This release saw the Australian dollar initially come under pressure before recovering in the offshore session. The remainder of the week will see the domestic focus come from Thursday’s capital expenditure number, which the RBA follow closely.

New Zealand
It has been an interesting last week for the NZ economy. The NZ dollar remains broadly in demand, albeit back from its recent highs and comfortably within its recent range. The latest Global Dairy Trade auction results from Fonterra confirm a further increase in average prices of 3.1% to mark the fifth straight month of higher prices. This will somewhat offset the increasingly desperate situation that North Island farmers are facing from the prolonged period of dry weather. Of most impact last week was an on the record speech from RBNZ Governor Wheeler. Wheelers “verbal intervention” served as a warning shot to investors that the high NZ dollar is on the radar of the RBNZ, and they see indirect intervention as a means to tame its appreciation. Whilst the impact was immediate as it pushed the NZD back from its highs, this strategy has to be used sparingly. There is little in the way of top tier data due for release this week, although the trade balance numbers on Thursday will garner attention.

United States
The US dollar has continued to see increasing demand as the market risk aversion increased throughout the last week. This comes after equity markets have seen momentum wane at five year highs. The FED’s monetary policy meeting minutes held little of surprise, but discussions have started about what will need to be a clinical removal of stimulus when required as the economy recovers (think 2014). Housing numbers remain healthy for the most part and the latest inflation numbers confirm that pricing pressure remains a non-issue for the time being. Of note will be the collapse of the Philadelphia FED manufacturing index, and possible implications from this. This week is a busy one for economic news. FED Chairman Bernanke testifies before the Senate Banking Committee, further housing numbers, preliminary GDP numbers and further manufacturing data will dominate the focus.

It has not been a particularly positive last week in Europe. Apart from a surprise jump in German investor sentiment, the news was underwhelming. Lower than expected manufacturing and services activity reminds us that the economy remains under pressure. Adding to the uncertainly has been the build up to and results of the important Italian elections. The inconclusive result looks like the coming days will offer a messy insight to the Italian political system. This will likely weigh on the wider market sentiment in the short term at least. Expect the European unemployment and inflation numbers to be of secondary interest aside the Italian election drama.

United Kingdom
The Great British Pound has remained under pressure throughout the last week. The rumours of a credit downgrade should not have come as a surprise, as the economy struggles for growth amidst high Government debt and stubborn inflationary pressure. A downgrade Moody’s came late in the week and followed BOE monetary policy meeting minutes that point towards further stimulus to come from the BOE in the coming months. Interestingly, the employment numbers were slightly better than expectations. Given the sustained pressure over the last month or so, the Pound Sterling must be close to establishing a bottom of its range. Certainly against the Australasian pair, the momentum should slow at the very least. This week sees outgoing BOE Governor King speak later today, secondary GDP numbers on Wednesday, and manufacturing data on Friday.

The drama around the Japanese YEN has continued throughout the last week. The BOJ monetary policy meeting minutes added little to the equation, but the YEN materially weakened on news that Haruhiko Kuroda has been nominated by PM Abe to be the next BOJ Governor. After so much Japanese domestic focus, it was a very interesting offshore session overnight. The old correlation of YEN demand amid risk aversion returned in a big way, as the drama played out in Europe around the inconclusive Italian elections. Whilst the YEN saw the most demand against the EURO, it was materially higher across the board. The move was surprising to say the least, and it remains to be seen if the move will be reversed in the coming days. Expect the volatile price action to continue as the saga in Italy plays out. This week sees Japanese retail sales, industrial production, inflation and capital spending numbers due for release.

Last week saw a continuation of the recent down turn in Canadian economic data. Inflationary pressure remains a non-issue at just a .1% increase for the month, and retail sales disappointed with a contraction of -2.1%. This has been backed up overnight as outgoing BOC Governor Carney commented that downside risked to the economy have materialised and 4th quarter GDP is likely to be below the BOC forecasts. The GDP numbers are due on Friday and the current expectations for the Dec month is a .2% contraction in activity.

Major Announcements last week:
  • German Investor Sentiment 48.2 vs 35.3 expected
  • UK Unemployment rate 7.8% vs 7.7% expected
  • European Manufacturing 47.8 vs 48.4 expected
  • European Services 54.1 vs 55.5 expected
  • US Inflation 0.0 vs +.1% expected
  • US Philly FED Manufacturing -12.5 vs +1.1 expected
  • Canadian Retail Sales -.9% vs +.1% expected
  • Italian elections inconclusive
Topics: Economic news