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· NZ Retails Sales disappoint at 0.0% vs + 0.4% expectation
· US Fed Policy meeting minutes and Chair Bernanke confirm a second round of QE is on the cards
· BoE's head states QE remains a powerful tool…meeting minutes to release Wednesday
Market Overview:The past week saw a high level of volatility in all markets. This volatility was driven by a number of factors including the ongoing speculation about increased Quantitative Easing (printing of money) by the US and UK central banks, and various technically significant levels in currency pairs such as the EUR/USD and AUD/USD.
As covered in previous commentaries, Quantitative Easing (QE), has the effect of flooding the economy with cheaper funds, thus lowering borrowing costs for business and individuals alike. The target of this is to stimulate growth and bolster confidence in the short term. The longer term impacts are less positive, as it potentially can create market bubbles.
On the whole economic data released around the world was weaker last week, along with benign inflation numbers released in Europe, the UK and the US. Growth outlook remains muted with various consumer and business confidence numbers released weaker than market expectations.
Interestingly the recent “QE correlation” of having stocks, bonds and commodities all rallying in unison, seemed to break down somewhat. This started mid week after the US Feds Monetary Policy Committee meeting minutes were released. These indicated that further QE would most probably proceed. This saw stocks and commodities rise, but the bond market sold off. By the end of the week when US Fed Chairman Bernanke further stated there was reason to increase the Feds QE program, the result was mildly stronger stocks, but weaker commodity prices and again weaker bonds. This indicates that the market has already priced in this news, and maybe looking at a ”buy the rumour, sell the fact scenario” on the QE initiatives.
Whilst the USD weakness continued on the week, it was at a slowing pace. The main focus was again the EUR/USD, which finally broke through the 1.40 level, dragging most other currencies higher with it. The AUD hit parity with the USD for the first time, albeit briefly before profit taking saw it quickly drop by over a cent from its post float high of 1.0003.
The coming week will be one of anticipation for the market as the Group of 20 (G20) leaders meet to discuss the world’s economy this coming weekend. On the agenda will most certainly be the topical “currency wars”, central bank market interventions, and the markets heightened levels of volatility. Ahead of events such as the G20 meeting, speculators often reduce the size of their currency exposures. Most currency speculators have sold USD. Therefore, we may see a little reversing of the USD weakness this week, as they buy some of these USD back. There is also likely to be fierce debate at the G20, particularly between the US and China. An interesting article regards to this was reported by the Wall Street Journal on Saturday. Click US-China Tension to read the article in full.