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Weekly FX Update - 12th September 2011

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

6:00 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:

  • UK Services PMI 51.1 vs 54.3 expected
  • RBA leaves cash rate unchanged at 4.75% and maintains wait and see approach for future direction
  • US Non-Manufacturing ISM 53.3 vs 51.2 expected
  • Australian GDP 1.2% vs 1.0% expected and previous revised up from -1.2 to -.9%
  • BOJ leaves monetary policy unchanged as expected
  • German Constitutional Court allows Eurozone bail funds to be offered
  • BOC leaves the cash rate unchanged and moves to neutral bias- downside economic risks realised
  • Australian Unemployment rate 5.3% vs 5.1% expected
  • BOE leaves monetary policy unchanged - further QE expected in the coming months
  • ECB leaves the cash rate unchanged but moves to neutral bias (at least) from tightening
  • Chinese Inflation 6.2% vs 6.3% expected
  • US president Obama announces 447 billion USD jobs plan and receives luke warm response from the market
  • Chinese Trade Balance 17.8B vs 24.7B expected, driven by strong import demand, healthy number.
  • Canadian Unemployment rate 7.3% , as expected

Market Overview:

The major theme of European debt inspired risk aversion, continued to play out through the course of last week’s trade. Risk aversion reached a peak in the offshore session on Friday, as the odds on a Greek Government debt default again increased. Markets are pricing in around a 90% chance of default from Greece, as they struggle to implement the spending cuts necessary to ensure further bailout funds from the ECB, EU and IMF. The main beneficiary of this risk aversion has been the US dollar, as safe haven demand pushes it higher on almost all cross rates. The unprecedented Swiss National Bank (SNB) implementation of a “floor” on the EUR/CHF at 1.2000 to curb Swiss Franc strength, will have added to the US dollar demand. Interestingly the economic numbers from China remain relatively robust, with import demand a sign that activity remains strong. The strength of the Chinese economy should offer some support for the Australian and New Zealand dollar, both of which have been under pressure, as the risk aversion has increased in recent weeks.
In New Zealand last week there was an absence of economic data, which meant direction came almost entirely from external leads. This week the Reserve Bank of New Zealand (RBNZ) takes center stage, albeit no hike to the cash rate is expected amongst the current developments offshore. The statement accompanying the decision will be closely watched for any intimation of the timing of hikes towards the end of the year. Various commentators have made calls for the RBNZ to hold fire until March or even June next year, but the interest rate market currently has around a 50% chance of a hike priced in by the December meeting.
Last week was a busy one for with economic releases in Australia. The Reserve Bank of Australia (RBA) backed up previous rhetoric by maintaining their wait and see approach to changes in monetary policy. The market saw the comments as meaning there is less chance of a cut to the cash rate in the near term, and this was AUD positive. Next came the 2nd quarter GDP numbers that were stronger than expected and the upward revision to the 1st quarter number, which also added to the positive weight. Finally the employment numbers were released and these were not as robust as expected and the unemployment rate jumped to 5.3% from 5.1% previously. This coming week is light on economic data, so expect the lead to come from developments offshore, particularly in Europe.
In the United States the economic outlook remains patchy at best. President Obama has released details of a plan to boost jobs numbers at a cost of 447 billion US dollars. There has been a luke warm response to this from the markets. The US dollar has benefitted through the problems escalating in Europe, but the potential for further quantitative easing in the US clouds the outlook for the US dollar over the medium term. Certainly momentum is with the US dollar at this stage. This coming week sees the release of the last retail sales, inflation, manufacturing and consumer sentiment numbers. All of these will be closely watched for further insight into the relative health of the US economy. In the absence of dramatic initiatives in the Euro-zone, to slow the chances of a Greek default, expect the US dollar to remain in demand, as investors seek the relative safety of the big dollar assets.
The chaos in Europe will continue this week. The German Constitutional Court ruling in favour of the legality of German bailout contributions to pressured member states did little to calm nerves as the week wore on.  The threat of credit downgrades for major European banks with Greek debt exposure, will maintain the pressure. Expect the market to remain jittery and vulnerable to quick moves. Last week the ECB left the cash rate unchanged and various European bank analysts now think the next move will be a 50 pts cut in the cash rate to 1.0%, in the coming months. The IMF have cut growth forecasts for the Euro-zone in 2011 and 2012. With so much uncertainty in Europe, it is hard to see how the EUR can rebound with any real strength in the short term. Fridays resignation of German ECB board member Stark added to the risk aversion, as tensions are obviously high at the top levels of European financial institutions.
In the UK the Bank of England made no changes to monetary policy at its meeting last week. Momentum is growing for the expansion of its quantitative easing program in the coming months and this has led to a softer Pound Sterling. This coming week sees the release of the inflation and retail sales numbers. There is potential for some the GBP support if the risk aversion continues.
In Japan efforts are being put in place to build momentum in the economy following the devastation of six months ago. The strength of the YEN remains a concern for officials, and further pressure will be felt as a result of the moves by the Swiss National Bank to curb CHF strength. Further intervention efforts can not to ruled out at some stage. The likelihood would be increased if a coordinated approach was taken by the G7 group of countries, as was rumoured to be on the agenda at meetings over the weekend. Momentum against the AUD and NZD should slow from current levels, as interest rate differentials come into play.
In Canada the Bank of Canada (BOC) left its cash rate unchanged, but its bias has certainly moved from tightening to neutral and there is little chance of any hikes coming in the next 12 months on current pricing. Employment numbers showed less jobs growth than expected, but the unemployment rate remains stable at 7.3%. This week is light on economic data, so expect the lead to come from external influences.
In South Africa the economy remains patchy. There remains widespread concerns about demand for its exports as the global growth profile is revised lower.  The South African Reserve Bank is now expected to maintain an unchanged cash rate at record lows until May next year. Interestingly other emerging market nations of Turkey and Brazil have cut interest rates, in an attempt to ignite some growth in their struggling economies. With little in the way of major economic data this week in South Africa, expect the lead for the RAND to come from offshore once again.