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Weekly FX Update - 5th September 2011

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

6:00 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:

  • Australian Building Approvals +1.0% vs +2.1% expected
  • US Conference Board Consumer Confidence 44.5 vs 52.1 expected
  • FOMC meeting minutes reveal discussions on further monetary stimulus, in line with Bernanke speech
  • NBNZ Business Confidence 34.4 vs 47.6 previous
  • NZ Building Consents 13% vs -1% previous
  • US Factory Orders 2.4% vs 1.8%
  • Australia Private Capital Expenditure 4.9% vs 4.1%
  • Australian Retail Sales .5% vs .3% expected
  • US ISM Manufacturing PMI 50.6 vs 48.7 expected
  • US non-farm Employment change 0.0 vs 74k expected
  • US Unemployment rate 9.1% vs 9.1% expected
  • CAD GDP .4% vs .4% QoQ
  • South Africa GDP Q2 1.3% vs 1.6% expected

Market Overview:

Through the duration of the last week the somewhat gloomy outlook for global economic growth continued. The International Monetary Fund (IMF) trimmed its forecasts for global growth in 2011 and 2012 to 4.2% and 4.3% respectively. In the US there were a few more positive numbers released with factory and manufacturing numbers beating expectations. However, the worse than expected US employment report will maintain the pressure on both the Federal Reserve (FED) and Obama’s administration to inject some life into the moribund labour market. In Europe there was little positive news on the week, with tensions around the Greek bailout extension escalating amongst news the Greek economy is likely to shrink by more than 5% in 2011. Growing general populace opposition amongst contributing nations are adding to the tensions. In Australasia the NZD and AUD saw demand early in the week, before tapering off as risk aversion increased. The week on balance produced a stronger US dollar, lower long term interest rates and reasonably flat equity and commodity markets.
In the US the debate of how to stimulate the economy remains robust. Further quantitative easing (QE) remains a prospect, but in the short term the likelihood is that the FED will move towards a weighting of its treasury holdings. This would involve selling short term treasuries whilst simultaneously buying longer term. This does not increase the size of QE in  place, but will have the effect of lowering the rates for longer term loans across the economy, and is being coined “Operation Twist”. The disappointing zero employment growth in August whilst awful, was not as bad as it would appear. Commentary suggests that 45,000 Verizon workers on strike will be re-added to the payrolls next month. Interestingly pressure is building on politicians to help stimulate the economy, as there is only so much the FED is able to do with monetary policy. This coming week is a relatively quiet one for economic data in the US, with the services purchasing managers index and trade balance data on Tuesday and Thursday respectively the focus.
The debt situation in Europe remains tense, at both the general bank and government level. Interestingly, “Troika” (EU, IMF and ECB) officials leaving meeting in Greece amongst allegations Greek officials are not doing enough to slow debt growth. This comes at a time when Finland are asking for collateral for their part of bailout extension contributions. And the German constitutional court is contemplating a ruling as to whether or not any German contributions to European bailouts are unconstitutional or not. It is expected to say the German Parliament should have much more say in all bailout conditions. Given that up to two thirds of the German populace reportedly oppose any new bailouts, increasing political pressures can be expected. The wholesale funding markets for European banks remain tight and this adds to the pressures on the banking sector in Europe. These factors are certainly going to weigh on EURO sentiment in the short term at least.
In Australia last week we saw better than expected results in both private capital expenditure and retail sales numbers, and building approvals numbers slightly disappointing. Interestingly moves in the interest rate markets have been to pare back expectations of easing from the Reserve Bank of Australia (RBA) a little, which is more in line with RBA rhetoric. With the possibility of further QE not ruled out at this stage, the AUD saw solid demand at times. This coming week is action packed for the Australian market with the RBA Monetary Policy Meeting on Tuesday(no change expected to the current 4.75% cash rate). Second quarter GDP numbers are due on Wednesday with a rebound in activity to 1.0% expected. Employment numbers are released on Thursday with 10.4k jobs expected to be added and an unchanged unemployment rate of 5.1%. Demand for the AUD should remain fairly solid in the absence of an escalation of credit fears in Europe.
In New Zealand the economic outlook remains fairly solid for the time being. Business confidence has consolidated at rebounded levels following the earthquakes in Christchurch and Fonterra’s estimated payout for the coming year remains at elevated levels. The lowering of global growth prospects has seen the interest rate market pare back expectations that the Reserve Bank of New Zealand (RBNZ) will start to raise the cash rate from its emergency levels, much before the end of the year. Expect no change from the RBNZ at next week’s cash rate review. With little on the economic calendar in the coming week, expect moves to be driven by external leads.
In the UK economic data remains soft . The Pound Sterling has been under pressure against most trading partners. The increased unease at the debt situation in closely correlated Europe is also not helping sentiment. This week sees the Bank of England (BOE) Monetary Policy Committee release its latest decision. Certainly no change is expected to the cash rate, but there is a possibility of an increase in their amount of QE. Any additional QE initiatives would be GBP negative in the short term.
In Canada the monthly GDP number was +.2% as expected last week. This coming week sees the Bank of Canada and their monetary policy decision and statement the focus on Thursday.  No change to the 1% cash rate is expected, mainly due to the softer than expected nature of the US economy, being Canada’s largest trading partner. The statement accompanying the unchanged cash rate is likely to be more “dovish” than the previous one, pointing towards a longer period before its emergency stimulus level is likely to be reversed. The pushing out of interest rate hike expectations has been built into the CAD over the last couple of weeks, as it weakened against most trading partners.
In South Africa last week’s GDP numbers showed that the economy has hit another soft patch, with annualised growth at just 1.3% vs 4.5% in the previous quarter. This caused pressure on the RAND, as the prospect of any increase in interest rates from the South African Reserve Bank can be ruled out in the coming year. If the soft economy continues, debate will likely spread to the prospect of further easing to the cash rate. Manufacturing and mining led the fall in growth, exposing how reliant Africa’s largest economy is to the global economy.