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Weekly FX Update - 25 July 2011

Written by Sam Coxhead on July 25th, 2011.      0 comments

6:15 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:

  • NZ Inflation Q/Q 1.0% vs .8% expected
  • Bank of Canada leaves the cash rate unchanged at 1.0%
  • BOE Monetary Policy Meeting minutes more “hawkish” than expected, GBP supportive
  • RBA Monetary Policy Meeting Minutes more “dovish” than expected, AUD negative
  • UK Retail Sales +.7% vs +.5% expected
  • EU Summit of Greek bailout package positive, EURO supportive
  • US Philadelphia Fed Manufacturing Index 3.2 vs 2.7expected
  • Canadian Inflation M/M -.6% vs 0.0% expected
  • Canadian Retail Sales +.5% vs +.2% expected
  • US debt ceiling negotiations unsuccessful leading to weaker USD across the board
  • South African Inflation Y/Y 5.0%
  • South African Retail Sales for May 0.0%
  • South African Reserve Bank leaves cash rate unchanged at 5.5%

Market Overview:

The financial markets have continued to see increased levels of uncertainty over the last week. The primary focus has been the ongoing debt situations in Europe and the United States. The EU summit has produced positive results in terms of a plan for Greece. The EURO has finally found support since the details were laid out, and has rallied significantly against the beleaguered US dollar. Of larger concern remains the inability of President Obama to find common ground on the raising of the US debt ceiling, in a timely manner. With this uncertainly, the US dollar has been under considerable strain. The ratings agencies have placed the US on negative watch, with Standard and Poor’s stating that there is a fifty percent chance of a downgrade, in the next 90 days. The Australasian currencies remain well supported across the board. The New Zealand dollar has continued its stellar performance, as the interest rate market increasingly brings forward expectations of cash rate increases, from the Reserve Bank of New Zealand (RBNZ). The pound sterling has found some support, thanks to some better economic data, and Bank of England (BOE) Monetary Policy Committee (MPC) meeting minutes, that showed a smaller chance of further monetary easing than had been expected. 
This Thursday’s RBNZ cash rate review will be very closely watched. Whilst an unchanged cash rate is expected, the brief accompanying statement will be the key. The market will be looking for direction on the timing of the cash rate hikes, to remove the emergency stimulus put in place after the September earthquake in Christchurch. The rapid rise of the NZ dollar will of course be of central concern to the RBNZ, and places them in an unenviable position. The NZD again set post float highs versus the USD and GBP.  Current market pricing puts the odds on at least 50pts of cash rate hikes before the end of the year. The strength of the economic data is undeniable of late, but the current outlook for the global economy remains soft at best.
In Australia there was an absence of top tier economic data last week. Of central focus was the Reserve Bank of Australia (RBA) Monetary Policy meeting minutes. These were not as positive as the market had anticipated and saw the AUD under some pressure immediately after the release. Australian economic data has been soft of late, and given the global outlook and uncertainty, the position of the RBA looks to be logical. Of primary focus in the coming week will be inflation numbers due for release on Wednesday.
In Europe the positive resolution of a plan for Greece was well accepted by the markets. The difference in funding costs between peripheral member states and those of pillars Germany and France, have contracted significantly. The EURO has stablised as a result, although it saw good gains against the US dollar. This coming week, more detail will be revealed on the plan and this will mean the volatility should continue. From here the focus will move towards the execution of these plans, and the painful emergence back towards balanced books, that this entails.
In the US the focus obviously remains squarely on the resolution of the debt ceiling issue. The August 2nd cut off for a deal may actually be extended, as reported tax takes have been better than expected, so another week’s grace may play out. In the background of this the economic data remains patchy. Some housing numbers are showing strength. There have also been a number of positive corporate earnings results that show there are positive signs in the market. Employment growth remains the primary lagging factor in any significant US economic recovery, and until we start to positive signs on that front, expect no movement from the Federal Reserve in terms of the cash rate. We should see some kind of bounce in the US dollar when a debt agreement is found, but until that time, the USD will remain under pressure.
In the UK last week the less ”dovish” BOE minutes gave the GBP some much needed support. Adding to this support was the retail sales number, giving sign that the British consumer maybe starting to feel a little more upbeat at last. This saw the GBP make ground up against both the EUR and US dollar. This week sees the preliminary GDP number due for release on Tuesday and monthly housing numbers on Friday.
In Canada the outlook remains mixed. The Bank of Canada left the cash rate unchanged at 1% and stated that rate hikes would have to be carefully considered taking into account the soft nature of the economy of its neighbor the US, and the debt situation in Europe. Then came the monthly inflation number which showed a large drop. This saw the CAD under pressure and not even a good retail sales number could provide much of a recovery. This week is light on focus, ahead of the monthly GDP number on Friday.
In Japan the YEN has remained in demand as the uncertainty surrounding the EURO and US debt situations plays out. With little on the economic data to focus on, developments in the US will be the likely driver of price action. Speculation remains around the Bank of Japan and the prospect of intervention, should the YEN continue to strengthen. However given the current level of global uncertainty, intervention looks unlikely in the short term, as a coordinated approach would be necessary in order to be effective.
In South Africa the economic recovery remains patchy. Yearly inflation is at 5% ,but is mainly being driven by food and energy components, and the South African Reserve Bank left the cash rate unchanged last week. The consumer remains under pressure with retail sales numbers showing flat growth on the month. Thursday’s release of public sector capital expenditure and producer price numbers will be the focus for the RAND, and outside this, it should maintain its strong correlation with the EURO.