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Weekly FX Update - 9 July 2012

Written by Andrew Isbister on July 9th, 2012.      0 comments

9:58 AM (NZT)

Currency Commentaries:

Click to access our currency pair reports:  
NZD/USD                                      AUD/USD                                   
NZD/AUD (AUD/NZD)                    AUD/GBP (GBPAUD)                   
NZD/GBP (GBP/NZD)                    AUD/EUR (EUR/AUD)                  
NZD/CAD                                      AUD/CAD                     
NZD/YEN                                      AUD/YEN

Major Announcements last week:

·         RBA leaves cash rate unchanged
·         Australian retail sales better than expected
·         Asian manufacturing indexes weaker than expected
·         Euro area unemployment rate rose to a record high of 11.1% in May
·         Chins surprises with an interest rate cut
·         ECB cuts rates by 25bps
·         Sharp decline in the US ISM manufacturing data
·         Canadian unemployment rate better than expected
·         US employment growth rate worse than expected
·         Key US manufacturing index disappoints
·         UK manufacturing data better than expected, construction data worse

Market Overview:

Last week was an eventful one, with the Bank of England (BOE), European Central Bank (ECB), and the Chinese Central bank (PBOC), all easing monetary conditions. The easing of interest rates normally provides a “risk on” move, with currencies such as the NZD and USD normally seeing strong topside gains as a result. However this was not the case last week. This was most likely because risk assets have already had a significant rally in the past four to six weeks (e.g. global equities up 7%, AUD/USD up 5%), and the interest rate easing moves (PBOC rate cut the exception), had been largely anticipated by the market. Also however, with a back drop of a US economy that appears to be “decelerating”, a Euro zone that continues to face huge challenges, and with China barely maintaining an expansionary manufacturing sector, continued topside moves for risk currencies, such as the NZD and AUD, are tough to justify. The Friday night session saw both the AUD and NZD loose .5% of value against the USD, to close at the weeks lows, as a result of disappointing US employment growth data.
The key local event last week was the expected unchanged rate interest rate announcement from the RBA. One the whole both AUDUSD and NZDUSD traded tight ranges with a marginally upwards bias throughout the week, before Friday night’s sell off. Both posted record post float highs against EUR, and again ground higher against GBP.
The week ahead is dominated by the release of key Chinese data, with CPI inflation today, trade data Tuesday, retail sales and GDP Friday.
Last week building approvals and retail sales data both came in significantly stronger than the market had expected. As expected, was the RBA’s unchanged interest rate announcement. Their accompanying statement, left room for easing in the coming months, if growth indicators come in lower than expectations. So all in all, the RBA appears comfortable with current monetary conditions. In addition to the potential of downside risks from Chinese data releases this week, the release of Australian employment data on Thursday, will be watched closely by the markets.
New Zealand
There was very little data out in NZ last week. Of note however is the return of softer dairy commodity prices, in the latest Fonterra Global Diary Auction. In the interest rate market following the monetary easing from the ECB, BOE and PBOC, we have seen downward pressure on short term rates. Whilst the RBNZ is expected to leave the cash rate unchanged at 2.50% well into next year, if the global outlook continues to darken, expect the market to again start to price in easings from the RBNZ at some point. No top tier data due for release in NZ this week.
United States
Last week’s data gave more evidence that the US economy is growing slowly, with only modest payroll gains and weak readings in key manufacturing indices. The June FED interest rate meeting saw the FED re-start its steps to stimulate the economy by extending what it terms “Operation Twist”, to promote economic growth. Whilst not unexpected by the market, their comments overall were seen as “dovish”. Their economic projections were weaker, and the comment they were "prepared to take further action as appropriate", signaling their concern once again, at the current state of the US recovery. Minutes of the FED meeting, which will be available to the market on Thursday evening, will be closely scrutinized to gleam a closer thinking of their thinking. Non Farm Payroll data released on Friday night undershot market expectations by a substantial margin, and compounded the already heavy sentiment towards the US economy.
The pressure to find solutions to the current issues continues in Europe. Funding issues for Italy and Spain again came to the fore last week, as the interest rates they pay on their debt again soared. As these interest rates soar, the EURO comes under pressure. Adding further downside pressure on the EURO was the ECB rate decision. This week is light on top tier economic data, so again the prevailing interest rates on their debt will be a significant driver of sentiment and therefore the value of the EURO. With a lack of economic data,  political rhetoric will likely to be the focus of attention this week. Market perception as to the strength of further progress in the Euro zone, or just as likely the lack of progress, will continue to be a key driver of the EURO.
United Kingdom
Data wise last week was mixed for the UK. Manufacturing numbers beat expectations, but construction and services numbers undershot significantly. The BOE announced an increase to its quantitative easing program (QE: essentially the electronic printing of money, to stimulate the economy), as was widely anticipated by the market. All in all, the result was a further slide in the value of the Pound Sterling. This week is a very quiet one in the UK, however Tuesday sees the release of further key manufacturing data. Interestingly, the current market consensus is for an improvement in this data set, which if true, should provide some support for the GBP.
Last week’s monthly manufacturing data release wasn’t as downbeat than expected. However the threat of intervention from the Bank of Japan (BOJ) last week, seems to have played on the market, with the JPY well off its recent highs. With Japanese current account numbers due later today, and the BOJ monetary policy decision on Thursday, it is potentially a big week for the YEN. Whilst further stimulation from the BOJ would not surprise in the current environment, at present it’s a 50/50 call, with no change just as likely, come Thursday.
The Canadian economy had a quiet start to the week. Building permits and employment numbers on Friday night beat expectations, whilst manufacturing data disappointed. This week sees the release of the Bank of Canada Business Outlook Survey, housing starts and trade balance numbers. The Canadian dollar has seen choppy trade for the most part this week, as the dual forces of a slowing global outlook, and increasing central bank stimulus make for confused price action. We expect this trading theme to continue in the short term at least.