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Weekly FX Update- 21st November 2011

Written by Sam Coxhead on November 21st, 2011.      0 comments

6:15 PM (NZT)

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:

  • NZ Retail Sales Q3 2.4% vs +.7% expected
  • RBA minutes reveal lower inflation eased the way for cash rate cut, EZ remains primary concern
  • Japanese preliminary GDP Q3 +1.5% vs 1.5% expected
  • UK Inflation 5.0% vs 5.1% expected
  • German Investor Sentiment -55.2 vs -51.89 expected
  • European GDP Q3 .2% vs .2% expected
  • US Retail Sales .6% vs .2% expected
  • US Empire State Manufacturing Index .6% vs .2% expected
  • Bank of Japan leaves monetary policy unchanged
  • US Inflation .1% as expected
  • UK Retail sales .6% vs -.2% expected
  • US Philadelphia Fed Manufacturing Index 3.6 vs 8.7 expected
  • Canadian inflation .3% vs .2% expected
  • Mario Monti interim Italian Prime Minister and Minister of Finance
  • Italian and Spanish bond yields remain at stressed levels, even French pushing toward 2% above German yield
  • ECB continues to be main support of Italian and Spanish debt in secondary market

Market Overview:

Last week has seen the markets once again taking their lead primarily from developments in Europe, and in particular the European Government bond markets. Italian and Spanish debt continues to be of intense focus, and the European Central Bank (ECB) continues to aggressively support their debt in the secondary market. With the ECB legally unable to lend directly to member Governments, talks are progressing to enable a scheme whereby the ECB lends to the International Monetary Fund (IMF), and the IMF lends to the governments with stressed debt markets.  The theory is this would enable the IMF to maintain a lower cost of funding for the respective governments and avoid any destructive contagion from spreading further. Whatever their next plan is, the speed of implementation is the key. Sentiment remains very fragile, and uncertainty high across most markets. The economic data in the US remains a little more positive than forecast, and it looks likely now the US will avoid a return to recession in the coming quarters. Elsewhere the news remains mixed, with frayed investor nerves maintaining the recent trend of large daily swings in most markets. Overall  the appetite for risk remains low and growth assets under pressure. Adding to the uncertainly is the increasing volatility in the Middle East/North Africa region once again.
In New Zealand better than expected spending related  from the Rugby World Cup saw the 3rd quarter retail sales numbers substantially beat expectations. However the market discounted this good news as the negative sentiment from Europe continued to weigh on the NZ dollar. Compounding issues for the NZD, was the rolling off of the large November 2011 NZ Government bonds. The 8.8billion NZD of bond funds came back into the market and the influence was felt throughout the week. This had the dual effect of pushing interest rates significantly lower, as some funds were reinvested into the interest rate market, and pushing the NZ dollar lower on almost all cross rates, as some funds were repatriated back into foreign currencies. Whether or not the influence continues to be seen this week will be of interest. With only the RBNZ conducted quarterly survey of inflation expectations due for release this week, expect the bulk to the lead to come from the wider market sentiment driven by bond yields in Europe, and the possible hangover from the NZ Government bond maturity.
In Australian last week the main focus was the release of the meeting minutes from the previous Reserve Bank of Australia (RBA) monetary policy meeting, where it cut the cash rate by 25points to 4.50%. The minutes showed it so, because of the lowering of inflationary pressure and the building concerns about the situation in Europe, and the way it may unfold. However there was no clear commitment that they would cut at the next meeting on December 6th, albeit that remains a possibility. Therefore further data watching remains on the cards from here. Unfortunately this week, the main focus will be offshore, with a lack of top tier economic data due for release in Australia. The European bond yields will be the primary focus, but the budget debates in the US will also be closely watched.
The United States looks to have avoided a return to recession in the short term, with the economic data continuing its upswing. A potential hurdle to investor sentiment will come this week in the form of the “super committee” progress on negotiations to cut 1.2 trillion in spending over the next 10 years. This Congressional committee is unsurprisingly struggling to make progress according to all reports. Whether or not this comes to influence the European focused market remains to be seen, but the situation has be acknowledged. Tuesday sees the release of preliminary GDP numbers for the 3rd quarter and the expectation is for a 2.5% number. Forecasts for 4th quarter growth have also been increased with the data improvement, with JPMorgan revising their growth forecast from 2.5% to 3.0% and Morgan Stanley from 3.0% to 3.5%. Tuesday also sees the latest Fed monetary policy meeting minutes released, and the “large ticket” durable goods order number comes on Wednesday. Until we see some respite from the fears in Europe, expect the US dollar to continue to see demand.
In the UK, the bright point last week was the welcomed retail sales number. Against expectation of a -.2% number for the month, the market was buoyed by the +.6% increase. Unfortunately the Bank of England (BOE) growth forecasts for 2011 and 2012 have been revised down to just 1% and this indicates the likelihood of further quantitative easing measures from the BOE are likely. Against the Australasian currencies, the GBP continues to claw back ground as the growth currencies underperform because of the ongoing issues in Europe. This week sees the release of BOE monetary policy meeting minutes on Wednesday, and final GDP numbers on Thursday.
In Europe the focus remains on the performance of the bond markets. Aside from Germany, bond yields have pushed higher over the last week. This directly correlates to the risk aversion seen in the wider market. Italian and Spanish yields continue to teeter close to the 7% level in the 10 year bond. To put this in context, just five months ago the Italian 10 year bond yield was around 2.0%, and unnervingly just above levels where French yields closed on Friday. The idea that the ECB fund lending of the IMF to debt stressed Euro-zone members is gaining momentum, even if it is a circular solution. The Spanish election results,  and ongoing meetings between the new Italian and Greek leaders and other European heads of state, will mean politically charged headlines will come thick and fast this week. This situation has already affected global growth in the second half of 2011. There is potential for the debt contagion to spread further afield and this is why it is so important that a credible solution be established quickly. Until this happens, focus will remain steadfastly on Europe and its effects on the global outlook.
In Canada Fridays slightly higher than expected inflation number will be giving further encouragement to Canadian dollar fans. This coupled with the elevated oil price should keep underpinning the form of the CAD over the coming week. The domestic focus for the week comes in the form of Canadian retail sales numbers on Tuesday, with the market expecting +.4% for the month.