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Weekly FX Update - 26th Oct 2010

Written by Sam Coxhead on October 26th, 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:

·         China surprises market with .25% hike in lending and deposit rates
·         G20 meeting forms general agreement to avoid competitive devaluations
·         Bank of Canada holds rates at 1%, and says rates on hold for now and global outlook weakens
·         Pro QE comments from FOMC members all but confirm further QE at Nov 2-3 US Fed meeting
·         UK Government confirms harsh spending cuts
·         UK Govnt confirms looks to the BoE for the use of QE, should the economy need it

Market Overview:

The last week in the markets has been interesting to say the least. With the prospect of  the weekends G20 meeting lurking in the back ground, the market was reluctant to push too hard for extremes. However the inability to push extremes did not mean a lack of volatility within the daily ranges. Coming into the week there was a hint of an appetite for a bounce in the USD. Whilst the market at times looked poised to reverse some of the recent USD weakness, at no point could this be sustained.
For the most part economic data releases were slightly disappointing, although German numbers remain the most consistently positive.  Corporate earnings have for the most part been positive in the US earnings season, which kept stock markets generally in positive territory.
The much flagged budgetary cuts in the UK were detailed without too much public outcry and Government officials openly supported the Bank of England to increase the level of QE (effectively the printing of money, by lowering longer term interest rates) should the economy require such stimulation.
In the US, various Fed officials also called for more QE on their side of the Atlantic, and it is now a case of how much stimulation will come from their early November meeting, as opposed to if it will happen.
Leading into the G20 meeting (G20- is the world’s 20 largest economies-accounting for 80+% of global GDP), the market was surprised when China raised their lending and deposit levels by .25% in what looked to be gamesmanship on their part. With the prospect of heated debate between the powerful emerging markets and the west, there was all kinds of maneuvering from both sides. The crux of the debate is based around the “pegging” of exchange rates. The west argue that the Emerging Markets ”pegged” exchange rates are not flexible enough to allow for the correction of global imbalances. Chinas Yuan is a prime example of this. It’s thought that by the end of the year the Chinese Yuan would have appreciated by just 2% against the USD, when arguably its percentage rate of appreciation should be well into double figures over this period. Also whilst both the US and UK argue that the target of their QE initiatives is not to lower their currencies, there is no denying that it is a direct result.
Over the course of the weekend there was general agreement to avoid “competitive devaluation” by means of central bank intervention and various QE initiatives. Another meeting in three weeks time will be based around fleshing out the detail of this agreement, and I use that term loosely. Since the meeting ended there has already been a barrage of comments by government officials dismissing the weekend’s events and quasi-agreement. It’s hard to anticipate much progress in three weeks time, and this just points towards an extended period of uncertainty in the markets.
Leading into this week, it is easy to see a continuation of the choppy market conditions we have endured over the last week. The momentum of the USD weakness does seem to be diminishing, but we remain poised close to critical levels on multiple cross rates.
Topics: Weekly FX October 2010