5:15 PM (NZT)
Click to access our currency pair reports:
NZD/AUD (AUD/NZD) AUD/GBP (GBPAUD)
NZD/GBP (GBP/NZD) AUD/EUR (EUR/AUD)
Major Announcements last week:
· Peoples Bank of China cut the cash rate 25pts for first time since June 2008
· Spain formally requests EU assistance for its banking sector
· RBA cut the cash rate 25pts to 3.50%
· BOC, BOE and ECB all leave their cash rates unchanged
· Australian GDP 1.3% vs 0.5% expected
· Australian Employment +38.9k and unemployment rate 5.1% as expected
· US services PMI 53.7 vs 53.6 expected
· Canadian Manufacturing PMI 60.5 vs 53.5 expected
· Chinese inflation 3.0% vs 3.2% expected
Last week had the potential to be a very interesting one for financial markets, and it certainly did not disappoint. The pressure building in Spain has finally given way and the Spanish Government has requested assistance from the EU for the banking sector. The assistance will likely be to the tune of 100 billion Euro’s. So Spain officially becomes the fourth Euro-zone member to receive assistance, if under somewhat different circumstances. Isolating the assistance to the banking sector will mean fewer concessions will have to be made. The Spanish approach for bank sector support is positive, if the Greek electorate can take its medicine and vote for the centre right pro-austerity parties then another step towards a more certain European future will have been taken. Elsewhere in the markets the central banks provided a high level of focus. The Reserve Bank of Australia (RBA) cut their cash rate as expected, and the Peoples Bank of China (PBOC) also cut by 25pts, to help their slowing economy. The Bank of England (BOE) and European Central Bank (ECB) held monetary policy unchanged for the time being, as did the Bank of Canada (BOC) which was expected. Certainly further central bank easing of monetary conditions is expected throughout the remainder of 2012, and this helped growth assets recover some of their lost ground in the latter half of the week.
The RBA’s 25pt cut to a new cash rate of 3.50% was within market expectations. The positive Q1 GDP numbers and monthly employment report saw demand for the AUD pick up demonstrably. These positive numbers coupled with the rate cut from the PBOC, provided a strong lead for the AUD to reverse some of its recent weakness. Certainly as the Chinese economy looks to have growth slowing to around the 8% level, and inflation confirmed at 3%, further stimulation for the Chinese economy is not out of the question and this will directly impact on Australian exporters. Of note were also comments from Treasurer Swan that Australia has ample room for fiscal stimulus, should conditions warrant it. This week is relatively light on economic data in Australia, so the lead will again come from the wider market risk appetite.
The New Zealand economy was somewhat off the radar last week. But of note was the bounce in diary prices at the latest Fonterra auction. The 13.5% rise in prices will be of welcomed relief to NZ’s largest export sector, that saw prices drop 40% from their peak not long ago. The rate cut in China will also be seen as a positive for the NZ dollar by international investors, as the Chinese market becomes ever more important for NZ exporters. This week’s focus is of course the Reserve Bank of New Zealand’s (RBNZ) monetary policy decision on Thursday. Money market pricing puts the odds at a 20% chance of an easing of 25pts. To my mind any easing will not likely come from the RBNZ, in the absence of a full blown return to turmoil in Europe. The pending Greek election on June 17th
will be key to developments in the short term.
Last week the economic news was mixed in the US. Factory orders were materially weaker than forecast, but the latest services numbers were relatively strong. There was a flora of FED rhetoric in the headlines, with the majority of it again pointing towards further quantitative easing if required. FED Chairman Bernanke made a balanced report on Capitol Hill, in his testimony on the economic outlook. Certainly Europe presents obvious concerns, but he stated the FED has options it can consider. This week’s focus starts with the monthly retail sales and producer price numbers on Wednesday. The latest inflation numbers come Thursday and consumer confidence on Friday.
News over the weekend that Spain has officially asked for assistance for its banking sector has come as some relief to the market. Whilst the mechanics of the package will take time to finalise, it does seem logical to remove the uncertainty surrounding Spain ahead of the Greek elections this coming weekend. The ECB kept their monetary policy powder dry last week, in what appears to be a prudent wait and see approach in the short term. Further policy accommodation is likely to come sooner in some form or another. The EURO has seen some demand to start the week so far. It is unlikely we will see a sustained EURO rally ahead of the coming weekends elections, as they rightly represent significant event risk for the EURO. Inflation numbers on Thursday, provide the data highlight for the week in Europe.
The BOE held monetary policy unchanged last week, and we will have to wait for next week’s meeting minutes for a breakdown of that decision. It seems likely that further quantitative easing will be forth coming at some stage, and this fact has been weighing on GBP demand of late. On a positive note UK services data on Thursday was stronger than expected. This week sees manufacturing numbers on Tuesday and a speech from BOE Governor King late Thursday. Given the close correlation between the UK and Europe, any material bounce in the fortunes of the GBP, seems unlikely ahead of the Greek elections this weekend.
Rhetoric from Japanese finance officials with regards to the strength of the YEN continued last week. The bounce in risk appetite assisted the YEN lower which will have been welcomed by Japanese exporters. Of note was also an upward revision in the Q1 GDP numbers from 1.1% to 1.2%. The Bank of Japan comes into focus later this week with their monetary policy decision due at some stage on Friday.
The BOC kept the cash rate unchanged as expected last week. A dramatic fall in monthly building permit numbers was balanced by very strong manufacturing numbers released on Thursday. The labour market remains steady with the 7.3% unemployment rate, which was expected. There is little in the way of top tier economic data this week.