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Major Announcements last week:· Ireland to agree terms of funding rescue package this week with IMF and EU
· China raises its “Reserve Ratio” controls to curb inflationary pressure
· US Retail Sales and Manufacturing numbers better than expected
· UK Inflation numbers higher than expected once again
· South African Reserve Bank cuts interest rates to boost domestic economy
· Global debate on Current Account imbalances continue, US Fed defends QE
Market Overview:The recent very volatile nature of the foreign exchange market continues. Last week started with several days of broad based USD dollar strength. This was driven by two factors. Firstly, the continued debate surrounding the US Quantitative Easing program (QE -effectively the printing of money, by lowering longer term interest rates, through the purchasing of US Government Debt or Bonds), saw questions asked as to whether or not the US Fed would use the full 600 billion of its second initiative. Suggestions were also made that there is little chance of further initiatives being embarked on. Secondly, the GBP and EURO were under real pressure as the Govt Debt situation in Ireland progressed to a breaking point. Both issues were USD supportive, as investors who had sold USDs’, pared back their positions. The GBP was under pressure on the back of the Ireland issue due to the UK banks large holdings of Irish Govt. Debt.
In the US the economic data was, on balance, better than expected. The most encouraging numbers coming in the form of Retail Sales, and the much watched Philadelphia Fed Manufacturing Index. With the prospect of reduced levels of QE stimulus from the Fed, longer term interest rates moved higher to levels not seen since the QE program was announced. The Fed remains under fire both externally and internally for its QE program and Fed Chairman Ben Bernanke is defending their position publically.
In Europe the week was dominated by the concerns over Ireland and whether or not they would willingly accept a rescue package before the Govt. Debt concerns spread further afield other Eurozone member states such as Portugal, and even Spain. The latest in a long line of headlines on the issue was the Irish Minister of Finance saying that they are going to accept assistance in the form of a joint package from the EU and IMF. This will take pressure of the entire Irish banking sector that has been under considerable pressure as property prices correct with the slowdown of the pre-financial crisis “Celtic Dragon”. The expectation that some kind of resolution would be reached meant the EURO recovered some of the lost ground it gave up early in the week, especially against the USD. Assuming that Ireland is now organised for the time being, the risk is the outlook for other Eurozone member states comes under the spotlight. Portugal in particular have been very vocal of late, trying to reassure investors that their reduced spending programs are in line with expectations.
In the UK the inflation numbers (CPI), once again came out higher than expected which is of concern. Retail Sales came out at +.5%, as expected. Most of the pressure on the GBP was because of the UK banks exposure to Irish Govt. Debt. This gave investors incentive to reduce bought Pound Sterling positions (so they sold GBP), which kept a lid GBP advances.
In Australia it was a quiet week on the economic data front, so all eyes were on external influences for direction on the Australian dollar. The Chinese Govt. took measures to curb inflation with new “Reserve Ratio controls”. These controls force the banks to increase the ratio of deposits to loans. This negatively impacts the outlook for the AUD, as Australian growth is so closely aligned to growth in China, and its appetite Australian resources. Internally, debate is hotting up about the heightened level of the local property market, and to what extent the market could weather a drop in prices, given the level of debt in the property sector.
In New Zealand the only two pieces of economic data due for release came out stronger than expected. The Retails Sales number getting a boost from big ticket item purchases showing up in the number ahead of the GST hike. Producer Prices were also strong which may keep the RBNZ watching further numbers closely, to see if manufacturers pass through these price increases to the consumer.