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Weekly FX Update - 28th Feb 2011

Written by Sam Coxhead on February 28th, 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:

· European economic data positive on balance, headed by good rise in Business Confidence
· US Consumer Confidence rises sharply
· US Existing Homes Sales rise more than expected but “distressed sales” rise to 37% of  total number  
· US Weekly Unemployment Claims drop below 400k and GDP growth revised down to 2.8% from 3.2%
· Bank of England minutes show Monetary Policy Committee split edges further towards a hike in the cash rate, but disappoints market
· UK GDP revised down from -.5% to -.6% attributable to lower Govt spending
· Canadian Retail Sales -.2% against an expected 0.0% number
·  South African GDP increases 4.4% against an expectation of 4.2% for the quarter

Market Overview:  

The last week proved to be anything but dull in the financial markets . Risk aversion was rife for the first half of the week. This saw commodity and stock markets move lower in unison and the relative “safe haven” currencies of the Swiss Franc and the Japanese YEN in high demand. The double whammy of continued geo-political concerns in North Africa and the Middle East coupled with a renewed focus on European Government debt levels set the tone. Oil maintained its upward trend into the end of the week until Saudi Arabia stated its commitment to increase supply to replace the disrupted Libyan flow. Extended periods of $100 per barrel oil pricing with have a strongly negative impact on global growth. With Oil off its highs towards the end of the week, the stock markets showed some signs of a recovering sentiment. Risk aversion based on an increase in the price of oil will typically mean the US dollar does not see the buying interest that it would does when worries are based on structural financial concerns.
Adding to the mix was the continued devastating run of natural disasters for Australasia in the form of the Christchurch earthquake. The economic impacts of this latest quake have yet to be fully assessed and remain of secondary concern as the search for the missing continues. Early, and very approximate estimates are putting the price of destruction around 12 billion NZD, or approximately 8-9% of GDP. Obviously this has seen the NZD under considerable pressure, although a short term base seems to have formed down around the .7420 level. Speculation about Insurance based NZD purchases seem to have stemmed the downside bias for the time being, but liquidity remains light on most cross rates. The interest rate markets has now fully priced a 25pt cut to the cash rate from the RBNZ, so expect any bounces in the NZD to be limited at best.
 In the coming week the Australian economy has some big data due for release. Tuesday sees Retail Sales for January released, followed by the RBA cash rate release and statement. Expect the cash rate to remain at 4.75%, but the RBA insights on economy to be of interest. Wednesday sees GDP data, with the market expecting .6% growth for the quarter. Thursday, the monthly Building Approvals numbers and the Trade Balance. If the data is released close to expectations, expect the recent range with the USD to continue for the AUD. The outperformance of the NZD by the Australian dollar may well continue in the short term, but current levels still represent very good buying of NZD with AUD from a historical perspective.
In Europe concerns are once again emerging about peripheral member state funding. Closely watched this week will be a host of Govt debt auctions. These auctions are key as they effect sentiment on all debt on issue in the Eurozone, and therefore have far reaching implications. Of note last week were moves in Portuguese debt. The pricing for five and ten year Portuguese debt hit levels at which Greece and Ireland were forced to seek bailout funding from the IMF/EU. Meanwhile in Ireland, negotiations are underway to form a new Government. Any move away from the commitment to the austerity measures assumed by the previous out going party could prove negative for the EURO.
In the UK the tough debate on the Monetary Policy Committee (MPC) at the Bank of England (BoE) is heating up. Last week’s minutes showed that the bias is moving towards an increase in the cash rate at some stage, but not as soon as the “speculative” market had priced in. This coupled with the weaker GDP figure released on Friday stalled the Pound Sterling’s appreciation for the time being. The BoE have a very tough job to manage the economy. Government spending cuts are just rolling out, inflationary pressure is very high and looks entrenched for the medium term. Any hike in the cash rate would potentially see a higher GBP, which in turns will put pressure on exporter profit margins and therefore further lengthens the recovery period for the wider economy.
The South African data is starting to show signs of turning with GDP beating expectations by .2% at 4.4%. Growth looks to be broad-based which is a pleasing sign. Not so pleasing is the increasing non-productive inflationary pressures that comes with climbing oil prices, especially with regards to mining production and agricultural harvest. The coming week is light on data in South Africa, so expect the lead to come from commodity markets for the Rand.