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Major Announcements last week:
Canadian GDP +.5% vs +.3% expected
Various US Manufacturing numbers stronger than expectations
Australian Retail Sales +.4% vs +.3% expected
RBA leaves cash rate unchanged, statement not as upbeat as expected
European Unemployment rate 9.9% vs 10.0% expected
US Fed Chairman Bernanke does not completely rule out further QE if required
US Fed Chari Bernanke acknowledges economic pickup in US
Australian GDP +.7% vs +.6% expected
UK Construction Index 56.6 vs 53 expected
ECB head Trichet sites inflationary pressures, opens door to rate rise at next meeting
ECB members join Trichet with their inflationary concerns
The market has been dominated by three core themes over the last week.
Firstly, the ongoing tensions in the Middle East/North African region, with headlines dominated by Libya have continued to see the oil price increase. A sustained period at current, or higher levels will hamper economic growth across the globe. Developing economies in Asia are impacted more so than the likes of the US and Europe. This has seen commodity markets spooked somewhat because Asian growth provides significant demand. With its close links to the Asian growth profile this has seen the Australian dollar give up ground against many of its trading partners. These heightened levels in oil has seen the global stock markets give up ground also. “Safe haven” demand has also seen gold set record highs once again.
Secondly, the positive run of data for the US has continued. The US Manufacturing sector is benefitting from the weak US dollar with activity increasing almost across the board. Employment numbers are improving also, with the Unemployment rate dipping to 8.9% in February. In his bi-annual testimony to the Senate Banking Committee, US Federal Reserve Chairman Ben Bernanke said that deflationary risks are now negligible and acknowledged the Fed sees the recovery as well underway. Having said that he did not want rule out further Quantitative Easing programs to drive further Employment growth. This type of remark with no doubt keep the USD at low levels for the foreseeable future which obviously benefits the US exporting sector and further aids recovery.
Thirdly, the continued rise in the EUR has been driven by comments made by European Central Bankers with regards to the growing inflationary pressures in the Euro-zone. In the statement following leaving the cash rate unchanged, ECB head talked of inflation risks moving to the topside and the need to be “vigilant” on inflation. The market took this to mean that the ECB are poised to hike rates at the next meeting. Interest rates in the Euro-zone moved higher across the board. The difference in interest rates between two currencies is a main driver in the exchange rates over time. The NZD/EUR rate is a very good example of this. It has moved sharply lower in a short period of time as the market has priced in cuts from the Reserve Bank of NZ (RBNZ) in reaction to the devastating earthquake in Christchurch. This coupled with the signals of a hike from the ECB has seen the EUR appreciate almost 4% over the NZD over the past week.
Looking forward this week we can expect that the tensions in Libya to remain in the headlines. In the absence of any kind of resolution of the unrest, expect the oil price to remain high. The buildup of Inflationary pressure will also remain topical. Last week’s signals from the ECB will make the Bank of England’s task of managing the inflationary pressure in the UK an easier task. Should they look to move closer to raising the cash rate in the UK, the impact on the Pound Sterling would be less pronounced. This week sees the Monthly cash rate review on Thursday, and this will be closely watched. No change is expected at this stage.
In Europe, the Govt debt pricing will remain under the spot light. Last Thursday Rating Agency Fitch moved Spain’s credit outlook from Stable to negative, and Portugal’s funding costs are very close to levels which may require EU/IMF assistance. Adding to this complex mix is the fact that Ireland’s newly elected coalition Govt are looking to try and renegotiate the terms of the bailout package they have already received. There is little in the way of top tier data due for release this week, so focus will be on comments from ECB head Trichet when he speaks again late Monday.
New Zealand’s week looks to be a very interesting one as the RBNZ meets on Thursday to announce the cash rate. Due to the devastating earthquake in Christchurch the market has now priced 100% chance that the RBNZ will cut the cash rate by 25pts and a good portion of a second 25pts as well. Prime Minister John Key and Finance Minister Bill English have both publically voiced their opinions that a cut would be “helpful”, and NZ’s largest bank ANZ has already cut mortgage rates. This is the most anticipated RBNZ meeting in quite some time given all the peculiar forces at play. The NZD has been understandably heavy on almost all cross rates and the only thing that could conceivably change this in the short term would be a no change call from the RBNZ. We are close to further support levels on a few different cross rates and a break down through these could open up the way for another move lower. The NZD is at the lowest level to the AUD in 20 years.
In Australia the big focus of the week will be the Employment number due for release on Thursday. The market expectation currently is for 21.5k jobs to have been added, and an Unemployment rate to remained unchanged at an impressive 5%. The risk has got to be for a worse than expected number. Prime Minister Gillard has been speak of late of a two tiered economy. The mining industry enjoying a massive boom while other parts of the domestic economy and exporting sectors struggle to deal with the strong nature of the AUD. The AUD has given up some ground against some trading partners of late as noted above. The RBA were not as inflation focused in their statement last week as the market expected, and this added to the slight softness of the AUD. Against the USD it remains in a tight band and to my mind looks poised to again test post float highs at some stage in the near future.
The Canadian economy maintained its recent good run of data last week. Similar to Australia, more talk has been made of the two tiered economy, with oil being Canada’s largest export. The high level of the CAD because of its exposure to the rising oil price is making it hard for other sectors to price competitively. This coming weeks Friday’s Employment numbers the focus, with the market expecting 31.3k jobs to be added and the Unemployment rate to drop from 7.8% to 7.7%.
In South Africa the coming week sees Mining and Manufacturing numbers on Thursday. The Rand has seen a return to form over the last week on most cross rates, as the South African Reserve Bank looks to have the cash rate on hold for the balance of 2011.