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Weekly FX Update - 14th March 2011

Written by Sam Coxhead on March 14th, 2011.      0 comments

3:15 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:

    • Canadian Building Permits  -5.1% vs +1.3% expected
    • Australian Home Loan Applications -4.5% vs -.7% expected
    • The RBNZ cuts OCR  by 50pts to 2.50%
    • Australian Unemployment rate 5.0% as expected
    • Chinese trade balance disappoints at -7.3B vs +4.6B expected
    • BoE leaves cash rate unchanged at .5%
    • US Trade Balance -46.3B vs -41.4B expected
    • Chinese CPI 4.9% vs 4.8% expected
    • Canadian Unemployment 7.8% vs 7.7% expected
    • US Retail Sales 1.0% vs .8% expected
    • US Consumer Sentiment falls to 68.2 from 77 as Gasoline prices affect outlook 

Market Overview :

The past week provided plenty of action in the markets. With stimulus ranging from easing oil prices, big central bank cash rate cuts, deepening Govt debt concerns in Europe and the US, and of course the horrific earthquake driven series of disasters in Japan. In the coming week trading ranges in the FX markets will most probably be wider than normal. These wider ranges will be driven by high levels of uncertainty and low levels liquidity.
The Middle East/North Africa (MENA) geo-political tensions remained on the radar, but failed to build in momentum. Gaddafi remains brutally defiant in Libya, but faces increasing international pressure by to step down from power. In Saudi Arabia the protesters “day of rage” on Friday did not explode as many had expected. Security forces and police had a huge presence in public areas. The lack of escalation in tensions saw the oil price drift lower over the duration of the week. The softer oil pricing helped Equities market book some healthy gains in some sessions, and helped limit losses in others.
Govt debt levels and ability to finance remain under the spotlight. In Europe the focus remains on Portugal for the time being and it appears to be a matter of time before assistance is required. Debt restructuring remains imminent for Greece, and the Irish negotiations will be tension filled as they try and reduce the cost of their funding package. Adding to the mix was the credit downgrade for Spain by Ratings Agency Moody’s. On a positive note, Friday saw EU leaders reach agreement on the EU Competitiveness Pact that is aimed at setting structure in place to more “standardize “ Govt spending within the Euro-zone.
In the US there is also focus on Govt debt levels, and the ever rising of the “ceiling” on borrowing. This is a theme that should get more attention in the future and is at the core of the paradigm shift away from the USD as the reserve currency over the medium term. The data was mixed in the US with the Trade Balance coming out worse than expected. However, Retail Sales bucked the trend by showing some strength in February. Of focus this week will be the Federal Reserve’s Statement when they announce interest rates unchanged. As inflationary pressures build they will change the wording of their statements to indicate a changing of bias with regards to the cash rate and Quantitative Easing (QE) programs. After the Earthquake on Friday, there has been some speculation from commentators on CNBC that the Fed would undertake QE3 in response to the earthquake. Although the commodity currencies did rally, this can be regarded as very much a long shot. The earthquake effect on the US economy will be positive as demand for  US exports will be high from Japan as the carnage is cleaned up. There will also be a lower supply of exports from Japan as supply chains have ground to a halt, benefiting US producers.
In the UK, the Bank of England left the cash rate unchanged as expected and attention moves to the “Meeting Minutes” due for release next week. The Pound Sterling saw some softness on the back of this, as there was a small chance there would be a hike, due to the increasing inflationary pressure. Wednesday sees some unemployment numbers released, which will be keenly watched. On the whole the GBP remains on consolidation mode against most currencies and is likely to remain so ahead of any change of the interest rate stance from the BoE.
The Australian dollar has been volatile while still remaining in its broader .9900/1.0200 range. As the commodity markets cooled for the most part of last week the AUD traded softly. At times it showed signs of “bought” positions being liquidated at a rapid pace. This was especially evident after the Chinese Trade numbers were worse than expected. With the AUD being a proxy for Chinese growth, it can move significantly when Chinese data surprises. Unemployment in Australia remains at the impressive rate of just 5% . This week is light on economic data, but the RBA Meeting Minutes on Tuesday will be closely watched.
In New Zealand the RBNZ cut the cash rate by 50pts to 2.50%.  RBNZ Governor Bollard termed the cut as “insurance” against the negative economic effects of the Christchurch earthquake. Whilst this saw some weakness from the NZD after the release, the subsequent sessions saw the NZD grind higher as investors with “sold” positions took profit. The RBNZ acknowledged the full economic impact of the earthquake over the medium terms remains uncertain. I expect that any jump in inflation over the medium term will see some aggressive tightening priced into the NZ interest rate market.
The Japanese situation remains largely unknown. The earthquake induced series of disasters will most definitely cause a sharp slowdown in economic activity in the world’s third largest economy. The Bank of Japan (BoJ) will definitely flood the market with cash to make sure that financial stability remains intact. Beyond that it is difficult to predict until the extent of damage is known. After the Kobe earthquake the YEN rallied to record levels as Yen repatriation dominated flows. With large Private and Insurance based investment offshore chasing higher yield, it is easy to see why the currency may appreciate. I would anticipate that the BoJ would intervene in the markets to stem any great appreciation in the Yen. The current economic conditions in Japan are vastly difference to what they were in 1995 and BoJ will not want to see the Yen appreciate as it did then.