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Weekly FX Update : Will the ECB back up their words with action? - 30 July 2012

Written by Sam Coxhead on July 30th, 2012.      0 comments

4:45 PM (NZT)

Currency Commentaries:

Click to access our currency pair reports:  
NZD/USD                                      AUD/USD                                   
NZD/AUD (AUD/NZD)                    AUD/GBP (GBPAUD)                   
NZD/GBP (GBP/NZD)                    AUD/EUR (EUR/AUD)                  
NZD/CAD                                      AUD/CAD                     
NZD/YEN                                      AUD/YEN

Major Announcements last week:

·         HSBC Chinese Manufacturing 49.5 vs 48.2 previous
·         RBA Gov. Glen Stevens delivers an upbeat assessment of the Australian economy
·         Canadian Retail Sales +.3% vs +.5% expected
·         Australian Inflation +.5% vs +.6% expected
·         UK GDP -.7% vs -.2% expected
·         RBNZ leaves monetary policy unchanged
·         ECB’s Draghi commits to “Within our mandate, the ECB is ready to do whatever it takes to preserve the EURO”
·         French and German leaders in joint statement say they are ”duty bound to keep the Euro-zone intact”
·         US GDP 1.5% as expected (lowers chances of near term action from the FED) 

Market Overview:

Last week proved to be a very interesting one for the financial markets, and may prove to be a water shed one for 2012. Unsurprisingly, the lead came from Europe. In what appears to have been an orchestrated move to provide reassurance to  investors, the President of the European Central Bank (ECB) was joined by Euro-zone leaders in calls of commitment to the Euro-zone, and the single currency. The ECB head Mario Draghi stated that within the ECB’s mandate, the ECB will do whatever it takes to preserve the EURO. He was joined in chorus by various politicians including the leaders of both France and Germany. These initiatives have caused a material turn around in sentiment in Europe and around the world. The reversal of the recent risk aversion at times was at a furious pace. This week sees the ECB , along with the Bank of England (BOE) and US Federal Reserve (FED) make monetary policy announcements. It seems like the ECB will announce substantial initiatives to assure funding opportunities continue for the likes of Spain and Italy. Less certain are expectations for further moves from the BOE and FED. If the ECB are able to produce action to back up their words, the markets should react positively in the short term at least and would provide a significant boost for growth assets. Given the recent deterioration in sentiment globally,  policy makers must be acutely aware that to disappoint would likely have dire consequences in the real economy, both in Europe and elsewhere around the globe.


In Australia last week the domestic lead was provided by the 2nd quarter inflation number. The .5% result was high enough to see a paring back in expectations for further easing to the cash rate at next week’s RBA monetary policy announcement. These paring back in expectations of a lower cash rate extended further with the increase in risk appetite driven by Europe into the end of the week and over the weekend. Building approval, retail sales and trade balance numbers will be released in Australia this week. These domestic releases are likely to take a back seat to the sentiment driven from Europe and the actions of the ECB on Thursday at their much anticipated monetary policy announcement.

New Zealand

The Reserve Bank of New Zealand’s (RBNZ) monetary policy decision  dominated the local landscape last week. There was little to surprise in the unchanged decision to leave the cash rate at the emergency 2.50% level and the accompanying neutral statement. Interestingly, the reaction has been NZ dollar supportive in what looks to be a situation of offshore investors being caught out with “sold” NZD positions that have needed to be reversed. The increase in risk appetite driven from the ECB comments has further supported the NZ dollar to start this week. The majority of the lead will come from offshore this week with just the NBNZ business confidence survey to provide the local focus.

United States

Last week saw a continuation of the mixed economic data in the US. Stronger manufacturing data was balanced by some softer housing numbers and the 2nd quarter GDP result  that came in on expectation at  1.5%. The reasonable GDP result, coupled with pending ECB announcement and employment numbers on Friday, point towards an unchanged monetary policy decision from the FED on Wednesday. The employment numbers will be closely watched and any climb in the 8.2% unemployment rate will push for further action from the FED in the coming months. The reversal of US longer end interest rates from their record lows late last week hopefully signals a material change in sentiment for the wider market away from dangerous risk aversion.


The strong verbal stance taken by ECB officials last week will have to be backed up by action this week at the ECB meeting on Thursday. A commitment to further term lending to banks, possibly a lower cash rate and some kind of increased bond buying program are a minimum. To disappoint would point towards a failure of leadership and mean some kind of ugly conclusion to the EURO in the medium term. In the meantime, the Spanish and Italian costs of funding have fallen dramatically. This is the intended reaction that officials would have been looking for. The fact that Germany and France issued a joint statement  that they are “duty bound to keep the Euro-zone intact” is meaningful. The European Stability Mechanism(ESM) is likely to be granted a banking licence by the ECB. The effect of this is to increase its power to support distressed bond markets and would be another positive step if it can be achieved.

United Kingdom

In the UK last week the 2nd quarter economic contraction was confirmed larger than expected at -.7%. This number came as long end interest rates hit record low levels in the UK as funds flood in from Europe. If it had not been for inbound European funds the GBP would have seen widespread pressure. This week sees the BOE meet to announce monetary policy, and even after last week’s number it seem unlikely that we will get further easing at this meeting. But the pressure is mounting to see a further reduction in the cash rate from the current .5%. Along with the BOE announcement on Thursday, manufacturing numbers on Wednesday and construction data Thursday will be closely watched.


Early last week saw the Japanese long end interest rates driven to record lows as the risk aversion increased. The increased risk aversion drove some solid YEN demand , so it will have been a relief to the Bank of Japan (BOJ) and the Japanese export sector when the ECB verbal support  hit the news wires. The subsequent reduction in risk aversion has seen a lower YEN, almost across the board. In Japan there is increasing speculation that the lending program for offshore acquisitions will be extended. The BOJ also again have re-iterated they will ease monetary conditions if the continued YEN strength severely threatens Japan’s path to recovery. These points when put together should cap any material YEN increases in the short term. Also of note was another disappointing Japanese retail sales number. This week sees just the release of second tier economic data, so expect the wider market risk appetite to provide the lead.


Last week Canada was amongst a large group of stable nations that saw their longer end interest rates pushed to record low levels. Interestingly the CAD remains in solid demand and this was highlighted by a massive 15 billion CAD takeover offer by the Chinese for the massive iron sands company Nexen. The takeover offer by CNOOC Ltd (China’s largest oil and gas explorer) would be China’s largest offshore acquisition if they get the go ahead from Canadian authorities. Canada’s retail sales number came in under expectations last week, and will have all eyes on the monthly GDP data when released on Wednesday.

Topics: Economic news