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Major Announcements last week:· The RBA hikes the cash rate by 25pts to 4.75%
· Irish debt concerns see German/Irish debt spread increase through Greece bailout level of 5.5%
· NZ Unemployment rate drops to 6.4%
· US Fed embarks on 2nd round of QE, 600billion USD over 8months.
· US employment numbers strong at 151k jobs added for the month
Market Overview:The past week certainly proved to be an interesting one in the markets. The much anticipated US Fed announcement of their Quantitative Easing (QE-effectively the printing of money, by lowering longer term interest rates, through the purchasing of US Government Debt or Bonds), to the tune of USD 600 billion over the next eight months was a little above the general market consensus, with a fresh wave to US dollar selling the market response. This US dollar selling pushed almost all other currencies to recent highs against the beleaguered USD.
This second round of QE has caused tension, with the likes of Japan, Brazil, South Korea, China and Europe all voicing their condemnation. This weekend’s upcoming G20 talks will certainly been strained, with Japanese prime minister Kan stating publicly that the US policies are directly contributing to the strength of the Yen, and ultimately Japans ability to pull itself out of the economic doldrums. All counties want to “export” their way out of the soft economies caused by the global financial crisis. If everybody took measures to competitively devalue their currency, a full blown “currency war” could follow. This would mean multiple levels of tariff and protectionism to curb the importation of foreign produced goods. This would spell disaster for the health of the global economy, and the benefits of free trade that go with it.
Ironically the economic data released in the US during the course of last week was stronger than expectations, with pickups in activity in both manufacturing and non-manufacturing activity, construction and stronger employment numbers.
The Reserve Bank of Australia (RBA) provided a surprise 25pt hike in the cash rate to 4.75%, which will support the Australian dollar as interest rate differentials are further increased. Only a large fall in Building Approvals of -6.6% vs an expected +.3% rise, provided any weakness for the AUD. Chinese data remains strong, and given Australia’s close economic relationship with China, the outlook for the Australian economy remains good.
In Europe, once again concerns over Government Debt emerged. Irish debt leading the headlines, as it now costs Ireland an interest rate 5.5% higher than the bench mark of Germany. This 5.5% spread above Germany is wider than the 5.2% level where Greece required the IMF bailout earlier in the year. The re-emergence of Debt concerns should keep a cap on further EURO strength in the near term at the least.
In the UK the economic data was on the whole stronger than expectation. This coupled with the Govt. cuts in spending, and the Bank of England’s decision not to undertake any further QE at this stage, should set the scene for some resurgence in the fortunes of the Great British pound.
New Zealand’s strangely strong employment numbers released on Thursday saw the Unemployment Rate dip to 6.4%. This saw the New Zealand dollar rally to see a high of .7976 against the US dollar, much to the dismay of the exporting sector.