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Direct FX Weekly Update - Dec 13 2010

Written by Sam Coxhead on December 13th, 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

Major Announcements last week:

·         Obama extends the “Bush tax cuts”
·         US bond yields rise sharply, underpin USD demand
·         Aust. Employment numbers strong , unemployment rate 5.2%
·         RBNZ lowers NZ growth projections
·         Chinese inflation rises to 5.1%
·         Chinese bank reserve ratios increased to stem growth
·         European Govt debt remains under spotlight 

Market Overview:

The last week’s trade in the market was reasonably choppy in nature. December is notoriously illiquid, with the market lacking depth and this has been easily observed. On balance, mainly sideways movement has been seen in most currencies. Whilst focus remains on the European debt crisis, there was no major market moving news to hit the headlines. The debate remains based around the most efficient path forward to stem the contagion spreading from Greece and Ireland to other member states. It seems fairly obvious to all that a coordinated approach is needed, but as yet a definitive course of action has not been decided upon. The idea of initiating a Euro-Bond program, for all member states to replace individual member Govt debt, has been squashed. The ECB and German Govt saying that this is not an option. As the difference in yields between peripheral member states and the benchmark Germany remain wide, focus will remain on Europe.
The bi-product of the Federal Reserve’s Quantitative Easing (QE) program up until last week has been one of weakening the USD. This theme well and truly stopped last week as Obama’s extension of the Bush tax cuts gave the market a real growth outlook boost. This saw bond yields rise in an incredibly fast fashion. The global benchmark US 10 year yield rose by over 25% to sit around 3.30%. Rising yields will provide a base for USD strength. With the exception of the recent horrible employment numbers, the economic data in the US has been mainly positive of late, and looks likely to continue into 2011 as the stock market is at its highest level in over two years.
The Great British Pound had a strong week, outperforming across the board. Buoyed by better manufacturing numbers and a positive recruitment survey which pointed to stronger employee demand across all sectors, the chances of continued recovery remain well placed. Barclays Bank also released a paper that said they see the Pound Sterling as being the best performing major currency in 2011. The Bank of England monetary policy meeting was uneventful, but they remain poised to react to any developments in 2011.
In Australia, the RBA monetary policy meeting was reasonably uneventful, but the stellar employment numbers produced the big surprise with the unemployment rate dipping to 5.2%. This meant any dips in the AUD were shallow. Chinese officials raised the reserve ratios for the Chinese banks for the third time in a month. This is an attempt to slow the economy and in particular the property market. Inflation also remains a problem in China with inflation recorded at 5.2%, with food prices leading the way. With the Australian dollar so closely linked to development in China, any interest rate rise in China may temper demand for the AUD in the short term.
Running up to the RBNZ cash rate review the NZD saw some selling pressure come to the market as investors who had bought NZD repositioned themselves. This weakness continued after the RBNZ statement because of the more cautious wording with regards to the economic recovery. With growth below the RBNZ projections held at the previous statement in September, the market now has just half a chance of a 25pt hike in the cash rate by June 2011. With the prospect of low interest rates for longer, it is reasonable to expect that any rallies will be limited in the short term. Another interest rate rise in China will negatively impact all the commodity/growth currencies, but given New Zealand is a food exporter, the medium term impacts are less certain.
In Canada the Bank of Canada monetary policy statement was also more cautious than the market expected, with interest rates expected to remain on hold for longer than expected a few months ago. Export numbers remain buoyant and property looks to have stabilised. If the positive story in the US continues to gain momentum, so will the prospects for Canada, being its closest and largest trading partner.
The strength of the Rand remains of concern in South Africa. Its remains the key factor for the South African Reserve Bank, in terms of their assessment of a further cut in interest rates. The theory being that a cut in interest rates will make the Rand less attractive to foreign investors as the yield drops, and therefore the Rand will decline in value. With retail sales and housing numbers seemingly picking up, the balance comes from the manufacturing sector which remains under pressure.
Topics: Weekly FX December 2010