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Weekly FX Update 11th April 2011

Written by Sam Coxhead on April 11th, 2011.      0 comments

5:00 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:

·         RBA leaves the cash rate unchanged as expected
·         UK Services PMI jumps to 57.1 vs 52.5 expected
·         US FOMC Meeting Minutes show mixed opinions reduction of easy Monetary Policy, downside risks diminished
·         Australian Unemployment rate dips to 4.9% vs 5.0% expected
·         BOJ downgrades Japanese economic outlook, leaves rates unchanged as expected
·         ECB hikes cash rate 25pts to 1.25% as expected
·         BOE leaves cash rate and QE program unchanged as expected
·         Canadian Unemployment rate 7.7% as expected
·         Peoples Bank of China increase lending and deposit rates for the 4th time in six months

Market Overview:

Last week’s trade in the foreign exchange markets saw the continuation of the trend of US dollar weakness. There were a number of contributing factors, but to mind my the main driver the was continuing trend of high oil prices. The battle for control of Libyan oil fields and processing plant continued between the Gaddafi and Rebel forces. If these tensions continue in the short term, the oil price will remain at elevated levels. With most oil contracts settled in USD, the petro-dollar diversification away from USD maintains the upward pressure on other currencies. There are reports that some kind of “road map for peace” has been reached with Gaddafi. Details remain sketchy at the time of writing, and the oil price is just a little lower from Fridays close in New York. The EUR and commodity currencies, such as the AUD and NZD, have continued to benefit from this high oil price theme. Adding to the USD uncertainty was the Budgetary agreement between Obama and the Republicans. A 38 billion dollar cut in spending was finally agreed and passed into legislation at the final hour. This averted the embarrassing situation of a US Government shut down that would have started this week.
The USD weakness was in the face of continuing debt issues in Europe that saw various Debt credit rating downgrades, and Portugal finally approaching the EU and IMF for funding assistance. Adding to the complexity of Europe’s situation was the European Central Bank (ECB) expected lift their cash rate by 25pts to 1.25%.  This increase in the ECB cash rate, and the prospect of another 75pts of cash rate appreciation over the next three quarters, puts even further pressure on the struggling peripheral states. This is because their interest rates are pegged to the ECB cash rate in their bailout packages.
The Bank of Japan(BOJ) has understandably downgraded Japan’s economic outlook, as export volumes slump with halted manufacturing production lines. As aftershocks continue in Japan, the YEN should remain heavy in the absence of Insurance inflows.  Speculation of the BOJ underwriting Japanese Government “Earthquake Bonds” further added to the YEN sentiment, as this eventuality would equate to the printing of money.
China posted their first quarterly trade deficit in seven years as the high commodity prices make the cost of their imports more expensive. In a further effort to curb inflationary pressures the Peoples Bank of China (PBOC) raised their lending and deposit rates for the 4th times in 6 months.
The Australian dollar continued its rise, which saw it reach new post float highs on a daily basis. Fridays push higher on the USD strength saw it peak at 1.0577. The momentum is undeniable, and was added to by Thursdays employment numbers that saw the Unemployment rate dip to an impressive 4.9%. The AUD also benefitted by further Asian central bank diversification away from the USD. In the statement that accompanied their unchanged cash rate at their announcement on Wednesday, the RBA said the high level of the AUD was reducing the need for cash rate increases in the future.
The New Zealand dollar was another beneficiary of the USD weakness , much to the dismay of the exporting sector. In the absence of any market moving economic data, its performance was driven by investor appetite for risk. Relatively high yielding NZ interest rates have been in demand . This demand for yield is well highlighted by the ease at which the NZ Debt Management office has progressed the NZ Governments increased Bond tender program.
In the UK the economic numbers were better than expected almost across the board, and inflationary pressure remains high. The Bank of England left the cash rate unchanged and we wait for the Meeting Minutes to be released on the 20th for further insight on the cash rate looking forward. The GBP has been the underperformer of the non USD currencies for the most part, and a signal of the hike in the cash rate in the future from the BoE would benefit the struggling GBP. UK Inflation numbers on Tuesday will be closely watched for further insight to the mounting pressure on the Bank of England (BOE) Monetary Policy Committee to raise their cash rate.
In Canada the economic data remains relatively positive with Building and Employment numbers beating expectations. The high oil price saw the CAD in demand, although not to the extent of the Australasian currencies. Next week Bank of Canada Interest rate meeting should see no change in the cash rate, but the statement will hold interest.