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Weekly FX Update...26 April 2011

Written by Sam Coxhead on April 26th, 2011.      0 comments

5:45 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 CPI +.8 vs 1.0% expected
·         Canadian CPI 1.1%% vs .8% expected
·         US Building Permits and Existing Homes Sales beat expectations
·         Australian PPI +1.2% vs +1.0% expected
·         German IFO Business Climate Index strong at 110.4
·         UK retail Sales +.2% vs -.5% expected
·         Bank of England Monetary Policy Committee voter split unchanged at 6-3 in favour of no hike
·         Canadian Retail Sales .7% vs .5% expected
·         S&P places US credit rating on “Negative Outlook”

Market Overview:

The continuation of the “ugly contest” for the world’s major currencies remained hard fought over the last week. The winner was again the US dollar which suffered in the grip of possible US credit downgrades, and the continuing heightened price of oil due to the ongoing tensions in the Middle East/ North Africa region. The Euro remains vulnerable to shocks from the ongoing debt saga in the peripheral member states. The Bank of England’s tolerance of inflationary pressure continues, leading to the lagging nature of any Great British Pound recovery. Australasian growth currencies remain in demand as commodity markets remain relatively buoyant and higher yields attract investors.
The Reserve Bank of Australia Monetary Policy Meeting minutes did nothing to excite the market last Tuesday. They were measured in their wording, acknowledging some impact on demand for exports from their second largest trading partner, in the short term. They remain comfortable with the cash rate at 4.75% for the time being, and the current interest rate market pricing has a hike priced in for May 2012. The Producer Price Index for the quarter jumped 1.2% against expectations of a 1.0% increase, and this added to the upward momentum the AUD had for much of the last week. A new post float high was seen at 1.0775 and has been touched a couple of times. The main focus of this week is tomorrow’s Consumer Price Index release for the quarter which has an expectation of a 1.2% rise. The rampant metals markets have provided a strong base for the AUD to continue its rise of late, but a 3% drop in the price of copper overnight saw the AUD soften somewhat, and reminds us that some kind of correction lower from the AUD will eventuate at some stage.
In New Zealand, last week’s .8% rise in the Consumer Price Index was less than the expected 1.0% rise and saw some temporary weakness hit the NZD. Short term interest rates reacted accordingly moving 10-13 basis points lower, removing approximately half an interest rate hike before the end of the year. The remainder of the week was driven by market appetite for growth assets. The increased New Zealand Government bond tender program has been well received by investors and is not surprising given the carnage seen in European debt markets at the moment. The focus this week will be on tomorrows NBNZ Business Confidence Survey results and Thursday’s Reserve Bank of New Zealand Official Cash Rate announcement which should see the cash rate left unchanged at 2.50%.
In the US the economic data remains patchy but positive housing data and good corporate earnings results give reason for a little positivity. Probably of most impact last week was the S&P placement of the US credit rating to a negative outlook as their debt burden grows. This gives the US a one in three chance of losing their AAA credit rating at some stage in the next two years. It appears that the political gridlock on the budget was the stimulus for this first leg towards a credit downgrade. The positive tech company earnings results coming from Wall Street ironically further added to the US dollar weakness through increased appetite for risk. This week sees the usual slurry of economic data in the US, but of most focus will be the Federal Reserve Open Market Committee statement on Wednesday, following their unchanged cash rate stance. Interestingly, this press conference is the first of its type following a Fed monetary policy decision and looks to increases the lines of communication between the Fed and the market. Advanced GDP numbers on Thursday will also be a key indicator and will provide the lead for the remainder of the week.
Sovereign debt issues remain the primary issue in Europe. Following the Moody’s credit down grading of various Irish bank Debt, the prospect of a debt restructure for Greece was the focus. A debt restructure would mean that Greece were not able to make payments that are due, and investors will be forced to accept losses. Whilst no official statement has been made, a delegation of European and international monetary officials are poised to meet in Greece in early May and this would indicate that a restructure will take place. The diversification away from US dollars by Asian central banks and Middle Eastern petro-funds has supported the Euro of late. Should European officials not be able to arrest investor fears about the state of peripheral Euro-zone member debt, another wave of contagion could start. Meanwhile the economic data from the power houses of Germany and France remains positive and highlights the two tiered nature of the European economy.
In the UK, the lack of change in the 6-3 voter split on monetary policy from the Bank of England saw investors sell the Pound Sterling. With a potential rise in the UK cash rate now pushed out to August or October, any interest rate inspired rally in the GBP seems some time off. On a positive note the Retails Sales numbers surprised to the topside and this saw the GBP make up some portion of its lost ground. Preliminary GDP numbers on Wednesday this week provide the focus, with the market expecting a return to growth at +.5% for the quarter.
In Canada last week the surprise came in the form of the Consumer Price Index number, rising 1.1% for the month against an expectation of a .7% rise. Friday’s Retail Sales numbers also provided a positive note. This intensifies debate around the Bank of Canada and the possibility of when their interest rate hike will come. With this in mind the focus of the coming week will be the GDP number on Friday, with the market expecting no growth for the month.
In South Africa the building inflationary pressure being driven by fuel and food costs are putting pressure on the fragile recovery. Retail sales numbers also disappointed, but the Rand was relatively buoyant, thanks again to a stronger demand for gold for much of the week.
Whilst I am a supporter of a weaker US dollar over the medium and longer term, I get the feeling we are approaching some kind of turning point in these markets. The USD index, which is the broad measure of US dollar of strength against the basket of trading partners, is heading down towards levels not seen since the pre-Lehman Brother collapse in 2008. I think there is potential for a USD recovery at some stage soon. The catalyst for such a recovery could come from a number of different areas, but my pick would be the further spread of debt contagion in Europe. Obviously a turnaround would be aided by some kind of correction lower in the commodity markets, most probably being led by the hard commodities sector. This scenario would see the Australian dollar more susceptible to a larger pull back than the NZD, and add to the strategy that the New Zealand dollar represents good value buying with Australian dollars, at or below current rates.