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Major announcements last week:· Gold sets all time high, before selling off $50 on Friday
· CRB Index (basket of commodities) sold down by 3.6% Friday, largest one day fall in 18 months
· Australian Unemployment 5.4% against 5.0% expectation - Weakens AUD
· US Consumer Sentiment rises to 69.3 - important at this stage of the cycle
· UK Manufacturing Production was weak at +.1% against a +.3% expectation
· China trade balance +27.2 billion USD vs + 25.3 billion expectation, adds to China -US tensions
Market Overview:High levels of currency market volatility continued over the last week. The US dollar found some support as investors looked to reduce exposure in “risk” assets (those that do well when the economic outlook is positive, also termed “growth” assets). This bucks the market trend over the last three or so months, which had been to increase exposure to risk assets. Mostly positive data in the US has seen the expectations of the extent of Quantitative Easing (QE) from the Federal Reserve pared back somewhat. This significantly impacted both equity and commodity markets in the later part of the week. Equities were weaker almost across the board. Fridays 3.6% fall in the CRB Index (basket of commodities - Gold,Oil etc), was the largest one day move in 18 months. A slurry of data out in the US this week, will give the market further insight as to the extent of which the Fed will employ its QE tools , and a large bearing on where many currency pairs end the week.
The Eurozone Govt. Debt issues are leading the headlines again, with Ireland drawing much speculation about bailout deals, even though they have no cash requirements until mid 2011. The pressure for Ireland to come to a funding agreement with the EU or IMF is building. A lack of action on this would increase the spread of concern to the likes of larger member states, Spain and Italy. These concerns are likely to keep the pressure on the EURO for the time being, especially as the economic data released is commonly coming in under market expectations.
The global move away from growth assets coupled with worsening employment numbers saw the Australian dollars’ momentum turn. With a decline in fulltime employment, Australia’s unemployment rate increased to 5.4% against a market expectation of 5.0%. Expectations of any moves higher in the AUD would have to be limited at this time, with a resurgent USD and lower commodity prices taking the wind out of the Australian dollars sails for the time being.
While the New Zealand dollar has performed relatively well in the last week, there was weakness after the RBNZs’ bi-annual Financial Stability Report. RBNZ Governor Bollard stated the high level of the NZD was tightening monetary conditions and potential cash rate rises would be measured, should the strength continue. Positive noise from the APEC meeting, and subsequent announcement that NZ has agreed terms for Russia’s first ever Free Trade Agreement (FTA), should see the NZD on the radar for investors as this relationship is good news for the NZ economy and especially the exporting agricultural sector. Russia is currently the worlds’ 12th largest economy, and growth prospects are good.
The Great British Pound has continued its period of relatively good performance over the last week, especially against the ailing EURO. Its momentum was stalled on Friday as the debt concerns in Ireland heightened and the UK banking markets exposure to Irish debt was a talking point. UK consumer confidence numbers are stabilizing which is a good sign, although patchy manufacturing numbers reiterate the fragility of economic data as the UK economy emerges from its recession.
As expected the G20 summit in South Korea was full of tension, and empty on resolution. The US was openly criticised for their QE program and China was openly criticised for protecting the value of the Yuan. The “Seoul Action Plan” is to be fleshed out by IMF officials and a group of finance officials over the coming months. The goal is to help shape common monetary and exchange rate policies, along with trade, development, financial and structural reform.
In China, the largest four property lending banks have all hit their “lending caps” for the year and will not lend any more. These caps are one of many tools used by the Chinese in an effort to slow the property market.