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Weekly FX Update - 26th September 2011

Written by Sam Coxhead on September 26th, 2011.      0 comments

6:49 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 monetary policy meeting minutes maintain staunch rhetoric divergent with interest rate market pricing
  • German ZEW Economic Sentiment -43.3 vs -44.3 expected
  • BOE monetary policy meeting minutes point towards increased quantitative easing at some stage
  • Canadian CPI +.4% vs +.1% exp
  • US Existing Home Sales 5.03million vs 4.76million expected
  • NZD 2nd QTR GDP +.1% vs +.5% expected
  • Chinese HSBC Manufacturing PMI 49.4 vs 49.9 previously (3rd straight month of contraction)
  • Canadian Retail Sales 0.0 vs +.2% expected
  • IMF and World Bank both lower global growth forecasts
  • S&P downgrade Italian credit rating along with various Italian banks
  • US FED announce new “operation twist” to lower longer end interest rates, and makes downbeat assessment of the economy
  • South African Reserve Bank leaves the cash rate unchanged and issues dovish statement
  • South African inflation 5.3% vs 5.5% expected, and Retail Sales 2.8% vs 2.0% expected

Market Overview:

The market sentiment was initially relatively stable, before nose diving again during the latter part of last week. Safe haven investor rush into US dollars and Japanese YEN continued. There was little in the way of positive economic data across the globe. Equity markets were mostly down in excess of five percent across the board. Precious metals saw aggressive selling, with gold selling off by fifty dollars in the space of an hour in Fridays session. As a consequence interest rates have moved lower across the board. The US Federal Reserve (FED) confirming that they will maintain a low cash rate for the coming couple of years, whilst pushing down longer term rates by extending the maturity of their Treasury holdings. The equity markets reacted to the FED’s monetary policy announcement, like a spoilt child being told they were not allowed any more sweets. The European Central Bank (ECB) look poised to reverse their recent hike to the cash rate. And the Bank of England (BOE)are positioned to increase their quantitative easing (QE) program in the coming months. Adding to fears was the news of a third straight month of contraction in the Chinese manufacturing sector.
Developments in the Euro-zone will remain of primary focus in the coming months, as authorities need to action initiatives to curb further debt contagion spreading. Various media outlets have loosely reported behind the scenes plans to recapitalize European banks, use leverage to increase the power of the European Financial Stability Fund and conduct a controlled default of Greek debt. Some sources are claiming Greek bondholders may be asked to forgive up to 50% of their principle investments. This would enable Greece to move forward towards in a more tenable position. The other effect would be to take pressure off the likes of Spain and Italy, and of course the banks who are the main holders of the distressed debt. Political pressure will make this path awkward and volatile, and will ensure volatility levels remain elevated.
In the US the equity markets saw some wild swings, as the market showed how underwhelmed it was with the FED’s monetary policy announcement. The FED’s downbeat assessment of the economy sent the wider market into the tailspin that saw fears elevate. The one bright spot was a better than expected housing number. The US dollar is being helped by the sharp exit of emerging markets by investors, as part of the larger shun of growth assets. This coming week will see the focus on consumer sentiment numbers, durable goods sales, final GDP numbers and FED chairman Bernanke’s speech Thursday morning Australasian time. With the US dollar having risen so quickly of late, expect progress to be harder fought from current levels, in the absence of further negative news in Europe.
In New Zealand the 2nd quarter GDP number was a disappointing .1% rise, against an expectation of a .5% increase. The likelihood of a hike to the cash rate in NZ before the end of the year is quickly evapourating with the demise of the global economy. This week only sees building numbers and business confidence on Friday for the domestic focus. Most likely the NZD will be driven by global sentiment. Downside moves should be more orderly from current levels, given how far the NZ dollar fell last week.
In Australia the Reserve Bank (RBA) monetary policy meeting minutes again re-iterated the RBA’s rhetoric with regards to inflationary pressure. Their position will have softened somewhat after last week’s global sentiment fall, but it is hard to see the 100 plus points of easing to the cash rate before the end of the year, that the interest rate market has been pushing for. The AUD has been under some periods of intense pressure, especially as the highly correlated copper market saw quick falls. There is little in the way of economic data this week, so moves will almost entirely be driven by external sentiment.
In the UK the GBP has seen some intense selling pressure also. The BOE monetary policy meeting minutes revealed that further QE was discussed and it seems likely that will eventuate in the coming months. The prospect of further QE should keep the pressure on the GBP against the major currencies. However it is likely the GBP will outperform the growth currencies (NZD, AUD) should the global economic picture continue to darken. This week has nothing in the way of top tier economic data in the UK, so expect the lead to be provided by developments in Europe.
The Canadian dollar has been under pressure from the majors, as it is pegged in the commodity basket along with the New Zealand and Australian dollars. It’s fall has been slightly less dramatic than its Australasian counterparts. Canada’s monthly inflation number was higher than expected and this will likely see the Bank of Canada forced to sit on their hands, in terms of cash rate movements over the next few months. This coming week sees the GDP number released on Friday and this will be the primary domestic focus for the week. Against both the NZD and AUD, the Canadian dollar is sitting at crucial levels. A further strengthening of the CAD against the two Australasian currencies will see the pairs move back towards more historic levels.
In Japan the pressure remains on the Bank of Japan. The strength of the YEN is materially affecting the exporting sectors and they remains poised to intervene. But they have curtailed any rumours that they would attempt to impose any kind of cap on the YEN, in the vein of the Swiss National Bank. On a positive note the USD/YEN pair has been relatively stable, and that will give them some kind of comfort for the time being.
In South Africa the lower than expected inflation number has eased the way for a potential interest rate easing from the South African Reserve Bank. This pull back in inflationary pressure could not be better in its timing, as the economy has started to slow. The RAND remains under intense pressure as the wider investor market exits the emerging market space.