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Interesing forces at play in the markets this week.

Written by Sam Coxhead on March 1st, 2012.      0 comments

9:40 AM (NZT) This week has proven to be as interesting as expected. Overnight the European Central Bank issued 529.5billion of 3 year loans to European banks in its latest and probably final LTRO. This was at the upper end of the expected range. The EURO, along with the antipodean currencies had rallied ahead of the announcement and after the announcement the EURO came under pressure. On the face of this it looks like a “buy the rumour, sell the fact” scenario, and we will have to wait a few days to see where things settle down. Needless to say, there should be few funding issues for European financial institutions in the near term.
In the US the more positive economic data continues to flow with consumer confidence, housing and manufacturing numbers all beating expectations. Fed Chairman Ben Bernanke made his semi-annual monetary policy testimony and his comments were less downbeat than expected. Whilst he remains very cautious, he commented that the unemployment rate had fallen more rapidly than expected. He made no mention of possible further quantitative easing initiatives at all., and this appears to be somewhat significant.
In the UK various second tier piece of economic data beat expectations, but what caused a major rethink of the GBP outlook were comments at the Bank of England’s (BOE) inflation report hearings.  Various BOE officials stated that they were comfortable with the current monetary policy and the level stimulus (QE) could move either way on the upcoming economic data. The market previously has priced a reasonable chance of further QE in May, but this is clearly not a real prospect following these remarks. Of further interest was the comment that CPI(inflation) may prompt a earlier rate rise than the market is expecting.
So taking into account that we have possibly seen the last of stimulus activities from the ECB, BOE and the Federal Reserve, could it be that we are approaching a turning point in the markets?   It will surely take time to eventuate, but US dollar strength is certainly one likely outcome is we are reaching a turning point for the global economy. Precious metals and stock markets are lower since the Bernanke testimony, the US dollar is stronger and yields on US bonds have risen relatively sharply.
Food for thought. But one thing is certain, the emergence of the global economy back towards an as semblance of normality will be a drawn out affair. The taming of inflationary pressure once it becomes clear that the stimulus led recovery is underway, will be a high priority for central banks.
    Last 24 hours trade
  Current level Low High
NZD/USD 0.8363 0.8356 0.8471
AUD/USD 1.0739 1.0738 1.0856
NZD/AUD 0.7790 0.7763 0.7806
AUD/NZD 1.2837 1.2811 1.2882
NZD/GBP 0.5255 0.5251 0.5308
NZD/EUR 0.6272 0.6209 0.6305
NZD/YEN 67.90 67.26 68.28
NZD/CAD 0.8275 0.8265 0.8381