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Weekly FX Update - 19th March 2012

Written by Sam Coxhead on March 19th, 2012.      0 comments

4:25 PM (NZT)

Currency Commentaries:

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

Major Announcements last week:

·    Australian Home Loans -1.2% vs -.5% expected
·         Bank of Japan leaves monetary policy unchanged as expected
·         German Economic Sentiment 22.3 vs 10.6 expected
·         European Inflation 1.5% on an annual basis
·         US Retail Sales .9% vs .8% expected
·         US Federal Reserve laves monetary policy unchanged as expected
·         UK Unemployment rate 8.4% as expected
·         US Philadelphia FED Manufacturing Index 12.5 vs 11.9 expected
·         US Inflation .4% as expected
·         US preliminary Consumer Sentiment 74.3 vs 75.8 expected

Market Overview:

Sentiment in the foreign exchange markets proved to be as interesting last week as expected. Whilst the upshot has been further range trading for most pairings, a sense of change is apparent. The US dollar saw a distinct period of strength, before giving up its gains. The week saw continued optimism for the US outlook for the first half of 2012, being balanced by a move back into European debt markets, as fears subside for the time being around Greece. The interest rate gap between periphery Euro-zone members and that of benchmark Germany narrowed as the fears subsided. This lends its self towards EURO demand in the short term, and tamed the resurgent demand for the US dollar. As long as indicators remain positive in the US, demand for the US dollar will return. Uncertainty around Asian growth remain, and this should undermine any real further demand for the Australasian currencies in the short term.
In New Zealand the calendar was free of top tier economic data last week. Residential property in New Zealand is starting to see a pick up in the number of sales, albeit price increases remain small. This will no doubt be in line with the increased understanding that the Reserve Bank of New Zealand (RBNZ) are unlikely to be raising the cash rate in 2012. This week sees the current account data released on Wednesday. The long awaited 4th quarter GDP number will be released on Thursday and will be the domestic focus of the week.
In Australia last week home loans numbers again pointed towards a tepid property market. This week has a distinct central bank focus with Reserve Bank of Australia (RBA) Governor Stevens making a speech today, and the release of the latest monetary policy meeting minutes tomorrow. The RBA have made it clear that moves in the cash rate from the current level of 4.25%, remain squarely placed on the economic data flow in the short term. If the data points towards a further reduction in the cash rate, there would likely be a fall in AUD demand. The domestic economy in Australia became more mixed over the last couple of quarters, and the outlook for Asian growth remains pivotal for the short term outlook in Australia. Chinese manufacturing numbers on Thursday will be closely watched by people with Australian dollar interests.
The US dollar saw some strong demand at times last week. Whilst it was unable to consolidate its move to higher levels, fundamentals are pointing toward further demand over time. A move higher in interest rates, and relatively solid economic data, should see demand become more consistent as the likelihood of further full blown quantitative easing (QE) is discounted. At the FED monetary policy meeting last week they noted the beleaguered US housing remained depressed, but for the most part they were more upbeat than expected. This week sees the focus on the housing market with building permit, existing, and new homes sales numbers due for release. A number of FED board members are also due to make on the record speeches, including chief decision maker Ben Bernanke.
The interesting move in European markets last week was the contraction of the gap in interest rates between the peripheral member states and that of the core of France and Germany. It indicates investors have more confidence to chase the higher yield and is provided some strong EURO support at times. On Friday there was clear evidence of speculative investors who had sold Euro, scrambling to buy EURO to stem their losses. German economic sentiment numbers were stronger than expected and is an encouraging sign. Inflation remains under control as last week’s reading was just 1.5% on an annual basis. This week various manufacturing numbers due for release and a speech by European Central Bank (ECB) chief Draghi on Thursday. Any material change in peripheral member interest rates will impact on EURO demand.
Last week in the UK there was little in the way of economic news, apart from the unemployment rate being confirmed at 8.4% as expected. Interestingly in tandem with the EURO, there were times of strong demand for GBP, as investors scrambled buy back GBP they had sold. This week will prove to be an interesting one, with an array of economic data due for release. Tuesday’s inflation numbers start the week. These are followed by Bank of England (BOE) monetary policy meeting minutes, and the annual budget release on Wednesday. Thursday sees the latest retail sale figures due. The inflation numbers are likely to be the key for the week, as low numbers enable the BOE to maintain the option of further QE if required.
The economic pressure on Japan continues with machinery orders and manufacturing numbers coming in below expectations. The Japanese current account deficit and surprise QE program from the Bank of Japan (BOJ) has seen continued pressure on the YEN. This week sees very little in the way of economic data from Japan. Of note is the approach to the financial year end for Japanese corporate, 31 March. This can see repatriation of off shore earnings ahead of the date, and could be of particular significance this year considering the Yen’s rampant strength.  
In Canada last week the second tier capacity utilisation and manufacturing numbers were both slightly weaker than expected. The CAD did however see periods of strength against the Australasian currencies, albeit the gains were not able to be maintained. This week sees retail sales numbers released on Thursday and the inflation numbers Friday.