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Weekly FX Update - 29 Nov 2010

Written by Sam Coxhead on November 29th, 2010.      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
NZD/EUR (EUR/NZD)
NZD/CAD                                                            
NZD/RAND
NZD/YEN

Major Announcements last week:

  • Ireland agrees EU/IMF 85 billion EURO rescue package
  • US preliminary GDP +2.5% quarter vs +2.0% expectation
  • China increases bank Reserve Ration for the second time in two weeks
  • Canadian and South African inflation numbers higher than expected
  • German business confidence numbers higher than expected
  • Australian Private Capital Expenditure +6.2% vs expected +3.2%
  • S&P downgrades Irish Govt two notches to AA-
  • S&P moves NZ Govt credit outlook from “stable” to “negative watch”


Market Overview:

Last week was dominated by the one central theme, USD strength. Two major factors contributed to this. One, Govt. Debt issues that remain at the fore-front of investors concerns in Europe, and two, the increased geo-political tensions on the Korean peninsula.
 
Overnight, details have been released of the 85 billion EURO bailout package for Ireland. This may allay some concerns in the short term. There has been increasing pressure on Portugal to approach the EU to arrange a funding package, although as the Irish were until last week, the Portuguese are reluctant at this point. Portugal will be under pressure to agree terms of a bailout, as if they do, much pressure would come off the Spanish. The cost of Spain’s borrowing continued to sky rocket last week. To put Spain in perspective, should a bailout be necessary, the amount would total more than the Greek, Irish and potential Portuguese bailouts altogether. The situation is controlled by investor confidence. Many pundits believe if Portugal’s funding was guaranteed by the EU and IMF, then Spain’s debt would be supported by the market. Only time will tell. One thing is for certain, a more coordinated and harmonious voice from the EU would certainly increase investor confidence.
 
The tensions between North and South Korea remain high, and are being fuelled further as joint US-south Korean military exercises commence this week. Although these exercises were planned long before last week’s skirmish, Chinese officials have commented they regard these as escalating the situation. China remains North Korea’s closest, if not only ally, and global pressure is mounting on the China to help reduce tensions. The reason why the USD strengthens in times of tension on the Korean Peninsula, is because further escalation of the situation would certainly dampen Asian trade, and growth prospects in the short term.
 
Domestic economic data released in the US last week was mixed, but on balance would be viewed as slightly positive. The Preliminary GDP figure for the quarter, at 2.5% was better than forecast, weekly jobless claims lower, but the housing numbers continue to disappoint.
 
In the UK the week was quiet on the data front, but Bank of England (BoE) Governor King testified before Parliaments Treasury committee and stated that inflation will remain above the target over the next year before coming back down to targeted levels in 2012. He also stated that the BoE remains poised to adjust monetary policy either way, should the outlook change dramatically.
 
In Canada, higher than expected inflation numbers gave the Canadian dollar a boost, by increasing the chances the Bank of Canada would resume raising the cash rate to more normal levels.
 
In Australia, the Australian dollar has been under pressure from the resurgent USD. The announcement by China that they would again be raising the “reserve ratio” for bank capital, was a major contributing factor. This would be the second time this has been done recently. It has the effect of reducing the amount of lending that banks can make, and therefore reducing the upward pricing pressure or inflation. The one surprise for the week was the Private Capital Expenditure. This number is the change in the total inflation-adjusted value of new capital expenditure, made by private businesses. This came out at +6.2%, vs an expectation of +3.2%.
 
In New Zealand on Monday the credit ratings agency Standard and Poor’s (S&P) moved the NZ Govt’s credit outlook from “stable” to “negative watch”. This added to the heavy nature of the New Zealand dollar.
 
In South Africa stronger than expected inflation numbers have dashed hopes of any further easing in the interest rate from the South African Reserve Bank. Manufacturing numbers released were again weak. 
 

 

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