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Weekly FX Update - 5th December 2011

Written by Sam Coxhead on December 5th, 2011.      0 comments

5:35 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:

  • NBNZ Business Confidence Survey 18.3 vs 13.2 previous
  • Japanese retail Sales 1.9% vs .7% expected
  • UK House Price Index +.4% vs -.1%
  • US Consumer Confidence 56.0 vs 43.9 expected
  • Australian Private Sector Credit 12.3% vs 8.2%
  • Canadian GDP +.2% vs +.3% expected
  • US Pending Home Sales 10.4% vs 1.4% expected
  • Australian Retail Sales +.2% vs +.4% expected
  • Chinese Manufacturing PMI 49.0 vs 49.8 expected
  • UK Manufacturing PMI 47.6 vs 47.1 expected
  • US ISM Manufacturing PMI 52.6 vs 51.6
  • US Unemployment rate drops to 8.6% as 120,000 jobs added.
  • Canadian Employment change -18.6k and unemployment rate of 7.4%
  • Peoples Bank of China lower Bank RRR by 50pts
  • Coordinated central bank action to halve costs of US dollar emergency funding for banks

Market Overview:

Over the last week the wider financial markets made for interesting observation. The intense focus on Europe remains in place, and a feeling of expectation is brewing for the EU summit later this week. Global concerns over the lack of a clear path in Europe remain high. The coordinated action of seven of the world’s leading central banks to provide US dollar funding to banks under stress, gave some relief to markets. This saw the US dollar give up some of its recently gained ground, especially to the Australasian growth currencies. Further signs of slowing Asian economies are of concern, and this saw the Peoples Bank of China reduce their “RRR“ by 50pts, in an effort to provide support. Encouragingly US economic data continues to be mostly positive, therefore further quantitative easing (QE) should be all but ruled out in the short term. Over time this should benefit the US dollar. This week there is a flora of central bank monetary policy announcements to add further spice. Overall the market remains rightfully nervous, and with lower levels of liquidity evident as we head towards Christmas, there is potential for larger than usual moves, if dramatic news comes to hand.
There was little in the way of top tier economic data in New Zealand last week. This week sees the focus primarily on the Reserve Bank of New Zealand’s (RBNZ) monetary policy statement on Thursday. No change to the current cash rate of 2.50% is expected, but as usual the monetary policy statement will be closely watched by market participants. The NZ dollar saw periods of stop-loss buying throughout last week, as investors reversed “sold “ NZD positions, especially against the US dollar. A periodic cleanout of speculative positions is healthy for the market, and given the significant global growth risks still at play, the bias remains to the downside for the NZ dollar in the short term.
In Australia last week the most significant news was the much better than expected private capital expenditure numbers. Whilst the mining component remains dominant, but vulnerable to shock, the numbers were particularly strong. This coupled with the coordinated central bank US dollar funding announcement, gave the AUD a good boost almost across the board. This week is packed with action in Australia. The Reserve Bank of Australia (RBA) make their monetary policy decision tomorrow, with odds on for a further 25pt cut to the cash rate to a level of 4.25%. Wednesday sees the release of the 3rd quarter GDP numbers with 1.2% growth expected for the quarter. Thursday we get the monthly employment numbers with 10.6k jobs expected to have been added in November. Given the significant global growth risks currently at play, the bias for the AUD remains to the downside. Last week’s sharp appreciation was of some surprise and provides opportunities for those looking to sell Australian dollars.
In the US the economic data remains on track to avoid seeing the economy dip back into recession. Along with the improved data, the lowering of expectations of further QE should see the US dollar in demand in the coming months. This coming week sees a relatively quiet economic calendar. Non manufacturing activity numbers will come Tuesday, and preliminary consumer sentiment numbers Friday. For the most part expect the lead to come from developments in Europe. Interestingly, if the trend from Friday entrenches itself, we could see both stock markets and the US dollar gaining ground in unison.
Europe this week is going to be very interesting. Germany and France are trying to put together an agreement that will see closer fiscal integration accompanying and further funding packages on offer, with ECB participation. Expect headlines to dominate the run up to the EU summit on Friday. Adding to the mix is the ECB monetary policy decision on Thursday. There is an increasing chance of a 25pt cut to the cash rate to help stimulate the stalling economy. Various Spanish and Italian debt auctions have been successful in the last week, albeit at far higher cost to the borrowers. Sustainability is the key, and any program put together by France and Germany this week will be just part of a larger overall solution. There is no quick fix for structural issues that have to be sorted out. This means heightened levels of uncertainty for a prolonged period.
Deep concerns over growth continue in the UK. The Bank of England (BOE) is now expected to further increase the QE program, in early 2012 in an effort to stimulate the economy. Inflation is expected to fall sharply in 2012 and the European crisis is weighing heavily on already meager growth prospects, with forecast for 2012 now reduced to just .7%. This week is fairly busy with data in the UK, but most should be of limited impact. The BOE monetary policy announcement on Thursday will be closely watched for any clues about the timing of further QE.
In Canada the recent good run from the Canadian dollar came to an end with the disappointing Canadian employment numbers. The numbers showed job losses were the most since the 2009 recession. The Bank of Canada meet on Tuesday to announce monetary policy. No change is expected to the cash rate, but there statement will give valuable insight into their assessment of the economy. Also on Tuesday are the latest manufacturing numbers and these will be closely watched.
In Japan last week the news was mixed. The jobless rate unexpectedly increased to 4.5% , but this was balanced out by better than expected retail sales numbers. The YEN saw some pressure following the coordinated reserve bank action on US dollar funding to banks. This week sees a fairly quiet week for economic data in Japan. The primary focus will come on the final GDP numbers released on Friday. The YEN’s performance will be dictated by progress made in Europe this week. If some decent progress is made, the YEN could see further pressure, and this would be much to the relief if the Bank of Japan.