Directfx Weekly Market Overview FX Update

Addition since completion of this report: This afternoon has seen two major aftershocks hit the city of Christchurch NZ. There has not been any further deaths, but there has been further destruction. Liquefaction is widespread again in the eastern part of the city, and further damage to buildings in the CBD is evident. At the timing of writing 54,000 homes were without power and the much heralded rebuild process is likely to be set back by months. The NZD has been sold against all currencies by around 1%. Until further is known about the extent of the wider infrastructural damage, expect any NZD appreciation to be limited. The interest rate market has reduced the chances of a December to around a 33% chance.

Last week market sentiment overall, was one of risk aversion. For the most part the economic data has continued to soften around the globe. Stock markets continue their recent bearish trend, commodities are lower for the most part, and in the face of lower longer end interest rates, the US dollar strengthened. The European debt situation continues to be closely watched. Tensions remain elevated and the politics surrounding the extended Greek bailout package dominate the headlines. The stand out performance came from the New Zealand dollar, as the Reserve Bank of New Zealand (RBNZ) pointed towards a December cash rate hike. Independently of OPEC, Saudi Arabia pledged to increase its oil production, which caused a move lower in the oil price on Friday.

The New Zealand dollar set post float highs against the US dollar and Pound Sterling, as investor demand increased in the wake of RBNZ Monetary Policy Statement. The RBNZ have pointed towards December as the time when they start to raise the cash rate from the record low of 2.50%. The demand following the release has been impressive to say the least. Only general market strong risk aversion has been able to curb the offshore enthusiasm. Whether or not this enthusiasm follows through over the coming weeks remains to be seen. The old adage of every five percent appreciation in the currency equating to a .25% hike in the cash rate, should be kept in mind. Wednesday sees quarterly retail sales numbers due for release in New Zealand and provides the domestic highlight of the coming week.

In Australia a relatively unchanged statement by the Reserve Bank of Australia (RBA) accompanying their static cash rate decision, led to a weaker AUD. The market was obviously looking for more from the statement and chances of a hike at the July meeting have reduced accordingly. The weaker fulltime employment numbers released added to the negative AUD sentiment, even with the unemployment rate remaining at an impressive 4.9%. The general market risk aversion naturally will see the AUD under pressure, and the coming weeks Chinese economic numbers will have a bearing on the prospects for the Australian dollar. There is little in the way of domestic economic data, so the lead this week will entirely be driven by offshore sentiment.

In the US the weaker economic data flow continues. The inevitable debate about the possibility of further quantitative easing has started, but is premature at this stage. The US dollar has found support as the EURO has come under renewed pressure and the commodity market outlook softens somewhat. The next two weeks looks to be fairly pivotal from an international perspective. The Chinese data will shed further light on the strength of their burgeoning economy, and the wider global outlook. In Europe the progress towards Greek agreement on extended bailout terms remains key, any further escalations of tensions will see US dollar demand increase. Domestically, retail sales numbers Tuesday, inflation numbers Wednesday and manufacturing and consumer sentiment numbers Friday will provide the focus. Risk aversion should under pin US dollar demand in the short term.

In Europe the European Central Bank (ECB) remains in an unenviable position. A July hike in the cash rate remains on the cards due to inflationary pressures, but this would come as the peripheral states remain under intense economic pressure. The Greek situation remains unresolved ahead of some top level EU meetings. Unless the Greek Government can commit to the required austerity measures, contributing members will not commit extended funds. These tensions should weigh on the EURO in the short term and lends towards the risk aversion sentiment remaining in place for the broader market.

The sluggish economic data flow remains in place in the UK. Tuesdays inflation numbers will be closely watched, as with retail sales numbers on Thursday. Bank of England (BoE) Governor King also speaks on Thursday and comments with regards to monetary policy will be reacted to. Last week's unchanged cash rate decision was expected, but with a new voting member on the committee, next week's release of the meeting minutes will be closely watched.

The monthly Chinese data will be closely watched for any softness. Inflation, industrial production, producer price and new loans numbers are all due Wednesday and could be some market reaction. Expect the AUD and a lesser extent the NZD react to these, being so closely linked to the Chinese growth profile.

In Canada, better than expected employment numbers were outweighed by risk aversion leading the Canadian dollar lower. With little in the way of top level domestic economic data this week, expect the overall market appetite for risk to continue to provide the lead. A speech by Bank of Canada Governor Carney, will be closely watched for any comments regarding the outlook for monetary policy.

Sam Coxhead

Global Currency Payments & Transfers

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