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Weekly FX Update - 17th October 2011

Written by Sam Coxhead on October 17th, 2011.      0 comments

5:00 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 Manufacturing Production -.3% vs -.1% expected
  • Australian Home Loans +1.2% vs 1.1% expected
  • UK Unemployment Claimant change 17.5k vs 24.7k expected
  • Australian monthly Unemployment Rate 5.2% vs 5.3% expected (previous revised from 5.3 to 5.2%)
  • Chinese CPI 6.1% as expected
  • US Retail Sales (core) +.6% vs +.2% expected (previous revised from .1% to .5%)
  • US Consumer Sentiment 57.5 vs 60.2 expected
  • Credit downgrades for Spain and various European banks

Market Overview:

The recent positive sentiment continued to flow through the markets last week. The extent of the turnaround is surprising but can be attributed to a number of different factors. Positive economic news continues to flow from the United States and any worries about a fall back into negative growth have now been all but extinguished. The European debt situation also looks to be improving. Whilst German and French officials are yet to announce details of their plan, Greek debt reprieve, bank capitalisation backstops and further debt market support are on their agenda. Further buoying sentiment is the momentum building internationally for wider use of the IMF to support Europe. Further IMF contributions are politically palatable, and a seemingly ideal way for non-European nations to contribute to the stability in the region, that benefits the global economy. With sentiment more positive, the markets have been driven further by large positional changes. Notably has been the exiting of US dollar bought positions, with the commodity currencies (e.g. AUD and NZD), being significant beneficiaries of this change. However, the outlook is not without risk. The complexity of the Euro-zone situation remains the same, and there are signs in China that certain parts of their economy remain fragile. Chinese state investment companies have reportedly been active in buying Chinese banking stocks, in an effort to stabilize this sector, as it is under pressure due to its exposure to  falling property values.
In New Zealand the economy had a quiet period for economic data releases last week, and this continues this week. The Christchurch rebuilding stimulation will be a welcomed edition to the economy as it starts to gather momentum. Manufacturing looks to be slowing down a little after having a good run in the first half of the year. Agriculture remains fairly buoyant, although the kiwifruit industry is under intense pressure, as the full extent of the vine disease PSA starts to be felt. The interest rate market has been surprisingly flat in the last couple of weeks, intimating the repositioning in the foreign exchange markets may have got a little ahead of itself. The New Zealand dollar saw renewed demand almost across the board, as the sentiment change pushed it higher
In Australia last week the focus was the release of the monthly employment numbers. The release surprised the market with its strength, the 5.2% unemployment rate beating the markets expectation of 5.3%. The prior months numbers also saw positive revisions.  The Australian dollar outperformed almost across the board last week. The change in sentiment saw investors flock to buy back AUD they had sold, and this saw the AUD go through several periods of very strong appreciation. The week ahead sees the focus on the release of the Reserve Bank of Australia (RBA) monetary policy meeting minutes on Tuesday. Also of note are the quarterly Chinese GDP numbers on Tuesday, given the AUD’s high correlation to the Asian economic growth profile.
In the US the economic data continues to improve from its slump in August. Last weeks’ latest retail sales numbers showed a strong rebound, and the strength of the numbers was further added to by the upward revision of the previous number. Consumer sentiment numbers were lower than expected, but the correlation between consumer spending and sentiment if not always high. With the corporate earnings season fully underway, a lot of focus is given to the results as they hit the headlines. The strong results for Google definitely helped the wider market sentiment last week. This week coming sees inflation, producer price, housing and manufacturing sales numbers due for release. Various analysts have increased forecasts for US growth, with Barclays Bank increasing their 2011 growth forecast from 2.0% to 2.5% late last week.
The focus in Europe obviously remains on the French and German plans to stablise the economy. Execution and delivery are going to be very important to the success of the measures that are expected to be released at a summit in Brussels on the 23rd October. There is definitely wider global support emerging for the Euro-zone. The emerging markets are reliant on the health of European and US economies for growth, and talks are underway to increase the IMF activities in Europe. This is seen as a way for these countries to contribute further and is in addition to Russian and Chinese individual pledges to continue to buy Euro-zone debt.
The economic outlook in the UK continues to look mixed at best. Weaker than expected manufacturing data last week highlighted the soft nature of the recovery currently in place. This week coming is a busy one in the UK with inflation numbers on Tuesday, Bank of England (BOE) monetary policy meeting minutes Wednesday, and retail sales numbers on Thursday. Amidst the current environment of credit downgrades, speculation is rife that the UK will soon be downgraded also. This will do little for the performance of the somewhat beleaguered Pound Sterling.
In Japan the high level of the YEN continues to cause consternation. Speculation continues to gather momentum that the Bank of Japan will implement some kind of floor on the USD/YEN rate (capping YEN), in a move similar to what the Swiss National Bank did to stem the appreciation of the Swiss Franc. Reports of elevated radiation levels surrounding the Fukushima power plant saw the YEN a little softer across the board last week. The economic data remains mixed in Japan as the economy emerges from the disasters earlier on in the year.
The Canadian dollar performed reasonably well last week, as the risk appetite continued, although it lost ground to its two commodity currency cousins, the Australian and New Zealand dollars. Whilst the Canadian economy continues its slow growth profile, last week did see positive housing and manufacturing numbers released. The recent improvement in the fortunes of its largest trading partner the US, will be a positive over time. This week coming sees the focus come on Friday, with the monthly inflation numbers.