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Major Announcements:· RBA leaves cash rate unchanged at 4.5%, employment numbers better than expected
· RBA focused on fragile global environment, rather than strong domestic outlook
· Bank of Japan lowers cash rate target to 0.0 - 0.1% , from 0.1%
· Both the Bank of England (BoE) and European Central Bank leave cash rates unchanged
· US employment numbers disappoint, but the unemployment rate is unchanged at 9.6%
Market Overview:The last week has been a very interesting one in the financial markets. The week started with a little risk aversion which initially took the shine off equity markets, the EUR and AUD currencies. However this quickly reversed. Increasing media coverage of the “currency wars” continued. Japan, the UK and the US have all indicated they will take measures aimed at devaluing their currencies. There has also been moves by Brazil and South Korea to curb currency strength, and very rare comments from
various European institutions about the strength of the EUR affecting their economic recovery.
Most of the currency debate was based around further initiatives such as Quantitative Easing (QE) providing lower borrowing costs and easier access to funds. This goes a long way to explaining the rise in commodity prices to two year highs, and demand for growth currencies such as the AUD and NZD. With the US able to embark on the largest QE initiative, (given the size of its economy), the EUR is the main beneficiary of USD weakness, and this explains its recent strength. A closely watched gauge of market sentiment is the Chicago Mercantile Exchange futures currency index. Last week it showed all time record levels of USD selling. This clearly demonstrates the markets current USD view.
The Reserve Bank of Australia (RBA) did not raise their cash rate, even though it was over 50% priced into the market. This caused a quick sell off of the AUD to the weeks lows. The most interesting part of this was how quickly the sell off reversed, as various Asian central banks were seen buying into the weakness. This type of buying of the AUD is similar to the price action in the EUR. It typifies the pressure on the USD, as many market participants buy other currencies, as a means to diversify out of USD.
Overall, we saw better than expected economic data released in Australia, the UK and Europe. While the US saw weak employment numbers released during Fridays session, the unemployment rate was unchanged at 9.6%.