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Weekly FX update - 20th February 2012

Written by Sam Coxhead on February 23rd, 2012.      0 comments

6:00 PM (NZT)

Currency Commentaries:

Click to access our currency pair reports:  
NZD/USD                                      AUD/USD                                   
NZD/AUD (AUD/NZD)                    AUD/GBP (GBPAUD)                   
NZD/GBP (GBP/NZD)                    AUD/EUR (EUR/AUD)                   NZD/EUR (EUR/NZD)
NZD/CAD                                                            
NZD/YEN

Major Announcements last week:

·         Japanese prelim. GDP -.6% vs -.3% expected
·         Australian Home Loans 2.3% vs 1.9% expected
·         BOJ announce 10 Trillion YEN QE program
·         UK Inflation 3.6% YoY as expected
·         German Economic Sentiment 5.4 vs -11.8 expected
·         US Retail Sales +.7% vs .6% expected
·         NZ Retail Sales 2.9% vs 1.1% expected
·         European GDP -.3% as expected
·         Australian Unemployment rate 5.1% vs 5.3% expected
·         US Philadelphia Fed Manufacturing Index 10.2 vs 9.0 expected
·         UK Retail Sales .9% vs -.3% expected
·         Canadian Inflation .2% vs .1% expected
·         US Inflation .2% as expected

Market Overview:

Last week the financial markets saw further intraday volatility, whilst mostly within contained broader ranges. Generally the sentiment within markets remains positive, but there is an underlying vulnerability to shocks that it easily exposed. The uncertainty surrounding progress towards a Greek debt resolution remains the focus. Daily swings in the likelihood of success were seen last week. Most contention seems to surround EU Finance Ministers trust that Greek politicians will carry out the austerity measures they have pledged to make. Current expectations are of a positive announcement to be made at some stage in Europe today (Monday), but delays have been numerous and certainly would not surprise. Elsewhere in the markets, the focus came in Asia late last week. Japan surprised with a 10 trillion YEN quantitative easing (QE) initiative to help stimulate the Japanese economy, and provide a reason to lower demand for the YEN. In China authorities again lowered the reserve ratios on the banking sector. This has the effect of boosting lending and sustains economic growth. A cooling property sector and gloomy outlook for the export sector has prompted the move. Markets start the week with a positive tone, in expectation of progress in Europe, and increased appetite for risk assets following the stimulus added in China.
 
In Australia last week the news was all about the stronger than expected employment numbers. The debate now focuses on the effect of these numbers on the outlook for the cash rate. The Reserve Bank of Australia (RBA) are unlikely to feel further pressure to reduce the cash rate with numbers like these. This week sees the release of the RBA monetary policy meeting minutes on Tuesday, and these will be closely monitored. RBA Governor Stevens also speaks twice this week, first on Tuesday, and then again on Friday. Any comments with regards to monetary policy will see reaction from the market.
 
In New Zealand the record 4th quarter retail sales figures released last week saw demand for the NZ dollar climb. This week is relatively quiet for NZ economic data, so the lead will come from the wider markets appetite for risk, and will be driven by outcomes in Europe. Tuesday does see the release on the Reserve Bank of New Zealand’s inflation expectations survey, but in the current environment the results will have very limited impact on the foreign exchange market.
 
In the United States the economic picture continued to brighten last week. Continued signs the labour market is improving will be welcomed by the Federal Reserve (FED). The labour and housing markets remain the primary concern in the US. With numbers showing improvement, the likelihood of further QE from the FED in the short term has been reduced. With a lower chance of further QE, longer term interest rates have continued to grind higher in the US, and this will support the US dollar overtime.
 
This week will certainly prove to be very interesting in Europe. The success of the European Central Bank’s (ECB) longer term funding program has reduced the financial vulnerability in Europe somewhat. Ironically, and understandably, as the financial stability has increased, the political gamesmanship has also increased. Greek politicians have seen further pressure from their Euro-zone partners, to provide assurances the spending targets will be met. It is easy to be skeptical of Greek intentions, given the inability to enact commitments to date. Euro-group meetings today (Monday), will hopefully come up with a positive result for Greece and enable the focus to move on to the next step towards the debt swap goal. Economic data will remain of secondary importance to EURO sentiment in the meantime.
 
The UK economy continues its slow return to growth. With its imported inflation problems finally starting to work their way through the system, the pressure will come off the consumer. Retail sales numbers on Friday were demonstrably better than expected and maybe a good indicator that the consumer is starting to grow in confidence. This week will see the focus on the Bank of England’s (BOE) monetary policy meeting minutes on Wednesday. A change from the previous unanimous decision to increase the level of QE, would indicate a  lower chance of further increases to the program. Friday sees the release of the revised GDP numbers for the 4th quarter 2011, and this will be closely watched.
 
There was surprise in Japan last week, when the Bank of Japan (BOJ) announced a new 10 trillion YEN QE program. They will be very happy with the reaction from the foreign exchange market, as the YEN has given up ground almost across the board since the decision. This week coming sees little on the economic calendar in Japan. The Yen’s performance will likely be driven by its efforts against the US dollar, as it continues to move back from its historic highs. The GDP numbers on Monday showed a -.6% reduction in growth for the 4th quarter 2011 and no doubt will have contributed to the BOJ’s decision to move ahead with the QE program.
 
The news on the Canadian economy was reasonably light last week. The focus was the inflation number released on Friday and at .2% for the month, this was .1% higher than expectation. This week will again see the lead predominantly from offshore, with only retail sales numbers on Wednesday to provide the focus. The Canadian dollar continues to be under pressure from both the Australian and New Zealand dollars, but should see demand pick up if the US economic numbers continue to improve in the coming months.

 

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