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The resurgent US dollar provides the lead

Written by Ian Dobbs on May 14th, 2013.      0 comments

3:15 (NZT)
Market Overview:
The overriding theme that is driving the FX markets at the moment is one of broad based US dollar resurgence. The big trigger that ignited the recent moves was the USDJPY breaking above 100.00 late last week. But the pressure had been slowly building, with a run of better than expected US data over the last few weeks. Increasing focus has been on how the FED will exit its QE stimulus program, and just when this exit may commence. As a result, longer end US interest rates have moved higher, in line with the more optimistic outlook. This has underpinned the increased demand for US dollars. While commodities are somewhat heavy, and stock markets continue to find positives in any news and are currently trading near all time highs on many indexes. The G7 meeting over the weekend failed to deliver any ground breaking headlines. They are happy with Japan’s efforts to stimulate growth (read weaken demand for YEN), and there was general agreement on an ‘improved outlook’ for the global economy.

Home loans data released yesterday in Australia came in quite strong at +5.2% vs an expectation of +4.0. It was countered somewhat by slightly weaker Chinese data, and has had little effect on the generally weaker Australian dollar demand. The AUD remains under pressure against the USD holding below parity for the first time since July last year . The rest of the week sees a very light economic calendar with little to challenge the current view that the economy is under pressure, as support from Chinese demand is slowly diminishing. The federal budget tonight may be of some interest, although forecasts of a $20 billion shortfall in finances will only serve to reinforce the above view.

New Zealand
This week should be somewhat more subdued than the week previous. There is little in the way of domestic news that will be of material impact on demand for the NZD. Retail sales data released this morning was little disappointing coming in at 0.5%,  against an expectation of 0.8%. This has kept the NZD on the back foot, particularly against the stronger USD of late. Producer prices and manufacturing data are the only other releases of passing interest this week. The market will continue to be focused on the resurgent USD. This adds volatility to all the NZ dollar pairings, as it becomes a game of relative performance.

United States
The big story of the last week has been the recent bout of USD strength. This pressure had been building for a while, with slightly better data pointing to a more optimistic outlook for the US economy. Key to this has been their employment figures. With unemployment at 7.5% it is still well above the target the Fed has set at 6.5%, however it is heading in the right direction. If this trend continues we will start to see talk of the Fed scaling back their quantitative easing programme. Whilst we’re not there yet, but the market looks to be positioning itself in that direction. Last night saw the release of retail sales data that has helped to reinforce this view, coming in better than forecast. The US stock market seems to find positives in everything. Over the last couple of years equities would rally on bad economic data as it meant more QE was likely. Now they are benefiting on an improved economic outlook. You have to wonder how long these elevated levels can last, or how much higher they can go?

With a full economic calendar this week there will be plenty for the market to digest. Last night saw the Euro-zone finance ministers meeting where they agreed to release the next tranche of aid to both Cyprus and Greece. The rest of the week sees GDP and inflation data for both Germany and the Euro-zone, along with the closely watched German economic sentiment survey. We currently going through a period of relative calm in this Euro crisis, but if we have learnt anything from the last few years, it must surely be that we can expect more shocks ahead. The Euro-zone has a long way to go to overcome the structural issues they face and hopefully start to see an improvement in the southern economies.

United Kingdom
It will be interesting to see if the recent run of improved data out of the UK continues this week. The release of  latest house price and employment data provides the focus, and positive results would be of further benefit to the GBP. Whilst the GBP has recently fallen against the resurgent USD, the improved economic data has seen it perform relatively well on other pairings. The Bank of England (BOE) also releases its quarterly inflation report which will be closely watched. Inflation has been stubbornly high in the UK, and the BOE has consistently been wrong in forecasting a much lower outlook. Any admission by the BOE that inflation is unlikely to fall much over the forecast horizon will help to support the currency, by making any further stimulus measures a lot less likely.

This weekend saw a G7 meeting in the UK, which really failed to deliver anything ground breaking. As at previous international meetings, Japan escaped any censure for printing money (QE) on a scale that has pushed the yen sharply lower. The JPY has led the way in weakening against the US dollar, having never looked back after breaking above 100.00. It currently trades near 102.00 with many forecasting levels between 1.0500 and 1.1000 by the end of the year. Consumer confidence and GDP are both set for release out of Japan this week. Although these figures could well add some volatility, the outlook for a weaker currency is firmly entrenched, and there will likely be sellers on any bouts of yen strength.

The end of last week saw Canadian employment data that came in a touch weaker than expected. It printed at +12.5k against an expectation of +14.8k, and has done little to alter the stable outlook for Canada. The CAD is noticeably weaker against the USD in line with most other currencies, but has held up well on the crosses. This week we get a little more insight into how the economy is doing with the release of existing home sales and inflation data.

Major Announcements last week:
  • Australian Retail Sales -.4% vs +.2% expected
  • Canadian Manufacturing Index 52.2 vs 58.3
  • RBA eases cash rate to 2.75%
  • NZ Unemployment rate 6.2% vs 6.8% expected
  • AU Unemployment rate 5.5% vs 5.6% expected
  • UK Manufacturing +1.1% vs .4% expected
  • BOE leaves monetary policy unchanged
  • Canadian Unemployment rate 7.2% as expected