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Weekly FX Update - 21st Feb 2011

Written by Andrew Isbister on February 21st, 2011.      0 comments

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:

·         NZ Retail Sales month on month -1.1%, slightly worse than market expectation of -0.3%
·         Australian RBA Monetary Policy Meeting minutes released, no clear signals
·         UK CPI year on year comparison 4% as expected
·         German Preliminary GDP qtr on qtr comparison softer than expectations, .4% vrs .5%
·         US core retail sales month on month comparison below expectation at .3% vs. .6%.
·         Bank of Japan upgrades view of economy, but JPYUSD weakens
·         US Core CPI monthly data slightly higher than expectation, overall low core inflation
·         Key US manufacturing indicator at seven year high
·         China raises bank-reserve requirements for the eighth time in 12 months
·         South African January yr on yr CPI up 3.7%

Market Overview:

Last week’s currency markets we conducted against the backdrop of escalating unrest in the Middle east. However markets traded almost unaffected. Whilst there was some flight to “safe haven assets”, we did not see the sharp selling of “risk currencies”, such as the AUD and NZD, that is often associated with these sorts of events.  
Both the AUDUSD and NZDUSD traded lower initially, before closing the week strongly. Domestically weak NZ retail sales data was the catalyst first up. Across the ditch credit ratings agency Moody's announcement that they maydowngrade the credit rating of Australia’s four biggest banks, sent both currencies lower. AUDUSD however recovered strongly and finishing the week almost 2% higher than immediately post announcement. NZDUSD clawed back ground towards the end of the week, largely off the back of the AUDUSD move. Both were also buoyed by higher global commodity prices on Friday.  
The standout currency pair of the week however was the AUD versus NZD. Again we seen the AUD pushing back to historical highs, in relentless fashion. Whist commentators are again suggesting AUDNZD goes to 1.3500, solid resistance remains at 1.3333 (key NZDAUD support of .7500). Therefore current levels again present exceptional levels to sell AUD buy NZD.
Both currencies were again weaker at times against the GBP, as UK inflationary pressures continue to point to higher UK interest rates, and therefore a stronger GBP, at some point this year. However GBP gains were not sustained, with tests of key support levels failing to eventuate, as BoE comments mid week didn’t back up the current market view of an earlier rise. For those patiently waiting to sell GBP buy AUD and NZD, whilst signs of a strengthening GBP are evident, a stronger GBP is far from a certainly in the short term. On the contrary, possibly the short term risk is actually now to a weaker GBP, as the market is now looking for continued evidence of UK inflationary pressures, and for comments for the BOE that point to an earlier rate rise. There is the potential for the market to be disappointed in this situation, if such evidence is forthcoming, but not as strong as the market is expecting.

The key event this week is the release of UK BoE  Monetary Policy Committee most recent meeting minutes. These will point to how the committee voted in terms of their most recent interest rate decision. If the makeup of that vote has (numbers for and against) has changed, GBP will react and quickly. These will be released Tuesday morning UK time.

EURO zone is a region that continues to exude uncertainty. The European Central Bank went on the offensive to reassure the market their stance on inflation is not weakening, saying they will act (i.e. raise interest rates), if medium inflationary pressures warrant. Of note also was Portuguese 5-year bond yields hit a EURO era high, as the market reacted to concerns Portugal may need to seek financial assistance soon. With so many issues still up in the air, it is hard to justify EURO levels higher than at present.  More likely is further bad news will come at some point, leading to tests again of lower EURO levels.

In the US core retail sales data came in below, and core CPI above, market expectation. Key manufacturing indicator the “Philly Fed Manufacturing Index”, came in at a seven year high, pointing to an upbeat manufacturing sector. Overall, US indicators again last week remained upbeat. Key data in the US this week is  the US on Friday consumer confidence data mid week and end of week Preliminary GDP data for the quarter.

In China last week the bank-reserve requirements were raised again, for the eighth time in twelve months. This is a continuation of their efforts to fight inflations. As previously discussed, a scenario of Chinese inflation not being able to be brought under control, represents possibly the single biggest threat to the fortunes of the AUD this year.

Last week also saw the anticipated upgrade by the Bank Of Japan (BoJ), of the their state of the Japanese economy view. However the result was JPY weakened on most crosses. Market commentators suggest this is a sign the market holds the opposite view. Not a great look for the BoJ.

Over the weekend the G20(see definition) met, again with mixed results. No binding agreements were reached, no directional impact on currency markets resulted. However there is a growing agreement in terms of financial sector reforms required. The goal, amongst other things, of the G20 is for low currency volatility, as no economy benefits from extreme swings in its or the exchange rates of its trading partners.

Both AUD and NZD weakened against the South African RAND last week, as the RAND strengthen against the USD, as a rise in CPI  inflation has arguably increased the chances of higher interest rates before the end of the year. South Africa have a big week ahead, with Q4 GDP released tomorrow, and delivery of the Budget speech on Wednesday.