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Weekly FX Update - 12th December 2011

Written by Sam Coxhead on December 12th, 2011.      0 comments

5:35 PM (NZT)

Currency Commentaries:

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

Major Announcements last week:

·         EU summit sees 17 member Euro-zone intergovernmental fiscal agreement
·         UK service’s index 52.1 vs 50.6 expected
·         US non-manufacturing PMI 52 vs 53.6 expected
·         RBA cuts cash rate 25pts to 4.25% as expected
·         RBNZ leaves the cash rate unchanged as expected
·         BOC leaves cash rate unchanged at 1.0% as expected
·         Canadian manufacturing index 59.9 vs 55.2 expected
·         Australian GDP 3rd QTR 1% as expected2nd QTR revised from 1.2% to 1.4%
·         BOE leaves cash rate unchanged at .5% as expected
·         ECB cuts cash rate to 1.0% as expected- more cuts to come
·         Australian unemployment rate 5.3% vs 5.2% expected
·         Chinese inflation 4.2% vs 4.6% expected (down from 5.5% previously)
·         US preliminary consumer sentiment 67.7 vs 65.6 expected

Market Overview:

Interesting market dynamics continue as we head into the end of 2011. The weekends EU    summit did not deliver a final solution to the European debt crisis, but a 17 member Euro-zone intergovernmental fiscal agreement was reached. In fact, if it weren’t for the UK, the unlikely goal of a wider 27 member treaty changing pact would have been made. The prospect of a financial transaction tax proving too hard to swallow for David Cameron, as it would threaten London’s icon banking status that accounts for around 10% of Britain’s economy. The intergovernmental agreement has been accepted with muted approval by the markets, as it is a step in the right direction, as opposed to any fundamental structural change. The wider markets saw mostly sideways trade last week, with most markets seeing sideways trades as the year winds down. Of note was the sharp fall of inflation in China to 4.2%. This was  well lower than the expected 4.6%. This indicates a slowing of activity at a fairly sharp rate, and brings the lower global economic growth profile back into focus.
In New Zealand as expected the Reserve Bank of NZ (RBNZ) left the cash rate unchanged at 2.50%. Increasing uncertainty means the cash rate will likely remain unchanged well into 2012, although the market still expects a hike before the end of next year. This week sees an empty economic calendar in New Zealand, so the focus will be on the wider market for the lead. Next week sees the NBNZ Business Confidence Survey and 3rd quarter GDP numbers released, and both will be keenly watched.
The mixed economic picture remains in Australia. As widely expected the Reserve Bank of Australia (RBA) cut the cash rate 25pts to 4.25%. Further cuts can be expected in 2012 also, as they look to buoy a slowing economy. Last week’s other events were growth and employment numbers. Growth for the 3rd quarter was 1% as expected, but the 2nd quarter was revised higher from 1.2% to 1.4%, giving the release a positive spin. Unfortunately the unemployment rate edged up from 5.2% to 5.3%, and is likely to be a continuing trend. The AUD came under some heavy pressure following the release of the low Chinese inflation numbers. If further evidence is seen of a sharp slowdown in China, the Australian economy will be directly impacted. The focus this week will be the RBA monetary policy meeting minutes on Tuesday.
In the US, the emergence from the mid-year economic soft patch continues for the time being. The economic dislocation from the weakness in Europe is encouraging. This week is busy in the US, but the primary focus will be the Federal Reserve’s (FED) monetary policy announcement and statement on Tuesday. This week also sees retail sales, manufacturing and inflation numbers of note. Financial conditions in Europe still represent a large risk for the US. The interconnectivity of the global banking sector posing the biggest risk, and therefore sentiment in Europe will again be the primary driver of US dollar price action this week.
In Europe the markets reacted in a positive manner to news as it came out from the EU summit on Friday. Funding costs for those members with stressed debt markets remain high, but not at fatal levels for the time being. The UK will be firmly on the outer with key EU members after their isolating stance at the summit, which meant that the treaty could not be changed. The fact that 26 out of the 27 members agreed to change the treaty, should be seen as a positive. The ECB’s cut of 25pts to the cash rate will be well accepted, and is most likely the first of a string of cuts, as conditions continue to weaken in Europe. The focus this week will continue to be on the debt markets, and this will be the driver for wider market sentiment.
In the UK the focus this week will be on inflation and retail sales number on Tuesday and Thursday respectively. The inflation numbers will probably be most closely watched. If they continue to remain high, further quantitative easing from the Bank of England (BOE) maybe questioned. Whilst there will be dissatisfaction with the UK stance at the EU summit, their position was understandable. The British economy remains very much under pressure, and any thoughts of a financial transaction tax would decimate London as a center and greatly impact the UK economy.
The Canadian economy remains sluggish, but a bright spot was last week’s better than expected manufacturing numbers. The continued pick up in US economic activity will be benefitting Canada greatly. The Bank of Canada (BOC) leaving its cash rate unchanged was of no surprise, with no change expected in the coming couple of quarters at this stage.