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Weekly FX Update - 28th March 2011

Written by Sam Coxhead on March 28th, 2011.      0 comments

7:00 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:

·         US Existing and New Home Sales slump much worse than expected, foreclosures making up 40% of sales
·         UK CPI 4.4% vs 4.2% expected
·         UK Public sector borrowing increases by more than expected
·         Canadian Retail Sales 0.0% vs +.8% expected
·         NZ Current Account -3.52Bil vs -2.13Bil expected
·         BoE MPC vote split remains 3-6
·         NZ GDP +.2% vs +.1% expected
·         UK Retail Sales -.8% vs -.5% expected
·         US Durable Goods Orders -.6% vs +2.1% expected
·         Fitch and Moody’s downgrade Portugal’s Govt credit rating
·         US 4th Quarter GDP revised to 3.1% from 2.8% previously
·         US Consumer sentiment dips
·         US Fed upbeat comments takes market by surprise, USD positive

Market Overview :

Over the course of the last week the global appetite for risk increased. This  risk appetite was somewhat surprising given the fact that there are still geo-political, environment and financial stresses evident across the world.
The nuclear fallout situation in Japan remains unclear as the Japanese authorities embark on the earthquake and tsunami clean up with expected efficiency. The Nikkei saw large rallies as the market recovers from the panic selling after the disaster. The Yen has been stable which will be encouraging to the Bank of Japan (BoJ). Whilst they remain poised to intervene further if required, at this stage they have been on the sidelines since the first G7 coordinated intervention.
The ongoing and increasingly widespread civil unrest in the Middle East/North Africa (MENA) region continues to have the oil price at elevated levels. Whilst this will continue to be a drag on global growth, the fact that we have not seen prices increase further above the current levels of around 105 USD per barrel seems to have made markets more relaxed. Volatility measures such as the VIX continued to decrease throughout the week.
In Europe the focus on the Govt debt situation continues to make headlines. The EU summit proved to be long on talk ,and short on action. The credit agencies were busy downgrading various types of debt from Portuguese Govt debt, to Spanish Bank  and Mortgage debt. Portugal remains poised to require bailout funding and will have elections in May after the coalition Government breakdown. Ireland continues to attempt to re-negotiate the terms if its bailout. The EUR performed well considering the attention the debt market was getting. Continued Asian Central Bank diversification out of USD and large petro-dollar flows helping support the EUR on any weakness.
The Bank of England (BoE) Monetary Policy Meeting Minutes disappointed the market when released. The voter split remained 3-6, with 3 votes for a hike and 6 against. This disappointment saw the GBP dumped by those looking for an increase chance of a hike from the BoE, even in the face of the higher than expected UK CPI number. The Pound Sterling lost ground on all crosses and looks poised to test  its substantial support level at 1.5980. The Budget proved to be one of fiscal discipline. The increased taxes and reduced spending programs stimulated a large rally from unhappy voters, which ended with ugly scenes and over 200 arrests. The GBP was under considerable pressure from both the AUD and NZD, which were both surprisingly strong over the course of the week. There were large flows from two UK banks selling GBP and buying EUR which added to the pressure.
The US Federal Reserve looks poised to end its Quantitative Easing (QE) program at the end of June as various members made comments that the time was fast approaching to end the stimulatory efforts. Of particular significance are comments from pro-QE Bullard, this change in sentiment should see further USD buying. Increasing inflationary pressure in the US saw longer term interest rates move higher towards the end of the week, which was mildly USD supportive. US data remained positive for the most part, although Consumer Sentiment and Durable Goods Orders dipped in March. The final GDP reading saw 4th Quarter growth increase to 3.1%. This week sees the all important Employment numbers in the US on Friday, with the market expecting an unchanged Unemployment Rate of 8.9%.
In the absence of any local economic data, the AUD had a huge week. With strength initially provided by a large M&A flow coming from the UK, investors with sold AUD positions were forced to  scramble to exit these losing positions which further added to the AUD upside momentum. With a strong equities market on Friday in the US, the AUD/USD set post float highs at 1.0292, before coming off to current levels. 1.0300 represents considerable FX Option related resistance and a breakthrough of the level will be hard fought, but expect it to be tested in the coming week.
The NZD was dragged higher by the AUD last week. Also adding to the bid tone bias was late talk of re-insurance flows related to the earthquake in Christchurch. The broad strength of demand for the New Zealand dollar was surprising. The increased NZ Govt Bond tender program will probably continue to attract interest while the fragility in other foreign bond markets remain. The NZD strength against the GBP was most surprising to many. Looking forward this week, if the GBP/USD can remain above 1.5980, then a chance of a bounce back against the NZD remains real.