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Weekly FX Update - 21st Mar 2011

Written by Sam Coxhead on March 21st, 2011.      0 comments

5:55 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:

  • RBA Meeting Minutes seen as dovish by the market
  • German ZEW Investor sentiment dips from 16.2 to 14.1
  • US Fed FOMC statement says recovery on firmer footing, rates to stay low for “extended period”
  • UK Unemployment claims drop by 10.2k
  • US CPI (core) +.2% vs +.1% expected
  • UK Consumer Inflation expectations rise to 4.0% from 3.9%
  • US Philadelphia Fed Manufacturing Index rises to 43.4 vs 29.9 expected
  • G7 Central Banks make coordinated Intervention to curb YEN strength
  • Canadian CPI +.2% vs +.5% expected

Market Overview:

The complexity and wide array of global events that have unfolded over the last week saw huge volatility in the foreign exchange markets. With influences ranging from the multi level impact of events in Japan, increased tension in the Middle East/North Africa (MENA) region, continued European Govt debt issues, inflationary pressures and the usual array on economic data flows saw market depth decrease and the volatility increase with. Expect the volatility to continue over the next couple of months as markets remain uncertain.
The devastating series of events in Japan saw the Yen reach record levels as the USD/JPY rate pushed through levels set in the aftermath of the 1995 Kobe earthquake. The breach of the 1995 record YEN high triggered automated stop loss buying of YEN that sent all markets into a tail spin. A stronger YEN negatively impacts the already devastated Japanese economy further. This push to new record levels saw the G7 Central Banks embark on the first coordinated FX market intervention since 2000 to curb the YEN strength. Further intervention will eventuate if the YEN resumes its push for higher levels again. With power now restored to a portion of reactors at the Fukushima power plant, hopefully the chances of an escalation in nuclear fallout has reduced.
Western allies embarked on a program to quell the ruthless violence on anti-Gaddafi movements in Libya. The move to enforce a no-fly zone on Libyan air space was led by the French, British and to a lesser extent US military, and looks to have had an effective start to operations. The Gaddafi “cease-fire” coming into effect today looks to be a stalling effect, and outcomes looking forward remain unclear. Oil market reaction and ramifications of that should be muted as the Libyan production halts have already been priced. The stepping back in support by the Arab League of Nations looks to be concerning as the Western allies need a quick and well supported result from this initiative.
In Europe the focus remains on the Govt debt issues at play and the “vigilant” attitude of the ECB with regards to inflationary pressure. Whilst pressures eased over the last week, ECB head Trichet stated  firmly there would be no change on the stance. The market has priced a hike of 25pts for the meeting on April the 8th. The Govt debt issues are never to far from the surface. Talk remains on “Competiveness Pacts” and “Stability Mechanism” within the Euro-zone. Without talk turning to action, the EUR negative risk of Govt debt default remains real. The ECB intervention has seen the selling of YEN and buying of EUR , and the continued shadow on intervention should see demand for EUR underpinned.
In the US the data flow remains more positive on balance, and this even saw a higher than expected Inflation number for Feb. Of note last week was a sharp increase in the Philadelphia Fed’s Manufacturing Index which will be being driven by the continued low level of the US dollar. The Fed Meeting minutes did not reveal much. They stated that the recovery is on a firmer footing than at the previous meeting, and they maintained their line that interest rates would remain low for an extended period. The coming week sees the usual array of data and Fed member speeches, with particular focus being on Chairman Bernanke when he speaks on Wednesday.
United Kingdom employment numbers came in slightly better than expectations last week. And the GBP performed reasonably on the week, although it performance was overshadowed by that of the EURO. The coming week looks to be an interesting one for the Pound Sterling. Inflation numbers are due for release on Tuesday and the all important Bank of England meeting minutes will get attention on Wednesday. Insight to the feeling of board members with regards to possible hikes in the cash rate to quell the significant inflationary pressure will be closely watched. The “pro growth” Budget release also comes on Wednesday and is likely to accompany a downgraded expectation of the growth expectations for 2011 from the current level of 2.1% from the Office for Budget Responsibility.
Reserve Bank of Australia (RBA) Monetary Policy Meeting Minutes were not as buoyant as the market had expected and this caused Australian dollar weakness as the interest rate market priced in a 20% chance of a cut in the cash rate from the RBA. The lowering in the Asian growth profile due to the Japanese devastation, and another increase from  Chinese Authorities in their Bank Reserve Ratio’s has seen the AUD move temporarily down through the lower end of its recent .9800/1.0200 broader range. Whilst the AUD recovered well late in the week with a rally in commodity prices, it remains more vulnerable to downside shocks than it has been in quite some time. This coming week is light on local data and the fortunes of the AUD with be driven by the market’s overall appetite for risk.
The New Zealand outlook remains unclear as the clean up in Christchurch stretches out amongst the back drop of ongoing aftershocks. Consumer sentiment has taken a knock and tourism numbers have dropped dramatically. This coupled with softening commodity prices will see the Reserve Bank of NZ quite comfortable with their decision to cut the cash rate to 2.50%. This coming week sees the Current Account and Gross Domestic Product numbers released Wednesday and Thursday respectively. With economist’s expectations of GDP making up a wide -.5 to +.4% range, anything outside this range would see some market reaction. It can be expected that for the most part the market will discount this backward looking number.