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Weekly FX Update - 1st August 2011

Written by Sam Coxhead on August 1st, 2011.      0 comments

5:45 PM

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 Preliminary GDP .2% vs .2% expected
  • US CB Consumer Confidence 59.5 vs 57.1 expected
  • US New Homes Sales 312k vs 321k expected
  • NBNZ Business Confidence 47.6 vs 46.5 previous
  • RBNZ leaves cash rate at 2.5% as expected
  • Australian 2nd Quarter Inflation .9% vs .7% expected
  • US Durable Goods Orders +.1% vs +.5% expected
  • US Pending Home Sales 2.4% vs -1.5% expected
  • Canadian GDP -.3% vs +.1% expected
  • US Advanced GDP 1.3% vs 1.7% expected, but Q1 revised down from 1.8% to .4%
Chinese PMI 50.7 vs 50.2 expected

Market Overview:

The waiting game continued through the course of the last week for the financial markets. The US debt ceiling debacle has been painful to watch as the various factions within both the Republican and Democrat parties vied for their two minutes in the spotlight. As a consequence of this process, the US dollar has been under pressure, especially from the Australasian currencies. The European debt situation remains tenuous as well. Further credit downgrades for the Greek Government and bank entities have followed the bailout and in general the peripheral member costs of borrowing began to climb again. In New Zealand the Reserve Bank (RBNZ) indicated that they would be removing the 50pts of emergency interest rate cuts in the near future. In Australia, higher than expected inflation numbers have put the heat back on the Reserve Bank of Australia (RBA) and the market has reversed recent moves. The possibility of an interest rate hike by the RBA, to five percent in the cash rate at this week’s cash rate review, is now being contemplated by the markets. In the UK, economic activity remains subdued as manufacturing and housing numbers remain mixed. The Canadian economy has hit a soft patch, mirroring the slowdown in the US, with monthly GDP numbers showing a contraction. As Japan attempts to emerge from its natural disasters, the government has pledged another 25 billion in disaster relief.
In the US, an agreement has been reached to raise the debt ceiling. It is expected to be passed into law on Monday. The primary issue now is whether or not the forecast budget cuts will be sufficient to placate the credit rating agencies and avoid a downgrade from the current AAA status. A credit down grade at the Federal level would have a meaningful impact across the US economy. JPMorgan analysts suggest that it would add 100 billion to the interest costs over the medium term. In addition to this, the higher borrowing costs will filter through to corporate and consumer funding. Adding to the uncertainty was Friday’s release of the advanced GDP numbers for the 2nd quarter. The 1.3% number was less than the market expectation of 1.8%, but even more alarming was the revision to the 1st quarter number, from 1.8% down to just .4%. The US economy is very slow, and this week’s employment numbers are unlikely to surprise to the upside, with the unemployment rate likely to remain at elevated levels.
The higher than expected inflationary pressure in Australia has helped the Australian dollar break through to new highs against the US dollar and Great British Pound. It was just a couple of weeks ago the Australian interest rate market was contemplating cash rate cuts. Now the bias has definitely moved towards a 25 pt hike to 5%, although no change is expected at this week’s cash rate review from the RBA. The picture should be more clear after this week, as we have the statement accompanying the cash rate decision on Tuesday. Also the quarterly Monetary Policy Statement is due for release on Friday, and will be closely watched. Current levels represent great value buying of various different currencies with Australian dollars.
In New Zealand the RBNZ has made it clear that the 50pts of emergency easing to the cash rate will be removed in the coming months. Additional hikes to the cash rate remain a possibility, but Governor Bollard will no doubt use the time to make assessments and probably not pre-commit. The exchange rate is at highs against the US dollar and Great British Pound, and this will be materially impacting the performance of the economy in the second half of 2011. With food and forestry commodity prices showing signs of fatigue, and the uncertain nature of the global recovery of late, any comments from Dr Bollard will be closely watched. This week is all about employment, with the labour cost index on Tuesday being followed by the employment growth numbers on Thursday.
The economy continues its patchy recovery in the UK. Preliminary GDP figure for the 2nd quarter showed a .2% growth rate, which was exactly as expected. House prices stablised for the month which is an encouraging sign. This coming week sees the release of the usual fodder of manufacturing, services and construction numbers, and the Bank of England (BOE) cash rate decision on Thursday. Expect no change to monetary policy from the BOE. As usual, we have to wait for another two weeks for the actual meeting minutes to be released, to find out if the dynamic has changed on the voting committee. For those holding GBP and looking to buy NZ or Australian dollars, further patience look’s to be required. Given the difference in yield, the time value of money is something that should be considered when thinking of transfers at current rates.
In Europe the last week was slightly less eventful than the previous few. The relief seen after the Greek bailout extension has been relatively short lived, as should have been expected. The long hard road for peripheral member economies is starting, and the credit rating agencies remained poised for further downgrades of both Government and bank debt. The only material scheduled release for the week, is the cash rate announcement from the European Central Bank (ECB). Expect no change from the current 1.5% cash rate.
In South Africa the “strike season” is in full swing, with mining and petroleum workers unions looking to ramp up pressure on employers. Unions have been demanding 10 - 15 percent pay increases, while inflations sits around 5%. In the gold mining sector alone an estimated 25 million USD a day is being lost in output. The coming week has little in the way of top tier economic data due for release, so direction is likely to be led by offshore moves and any developments with regards to the striking unions.