DirectFX Market Overview 21/3/2011

Weekly FX Update - 21st Mar 2011

Market Overview:

The complexity and wide array of global events that have unfolded over the last week saw huge volatility in the foreign exchange markets. With influences ranging from the multi level impact of events in Japan, increased tension in the Middle East/North Africa (MENA) region, continued European Govt debt issues, inflationary pressures and the usual array on economic data flows saw market depth decrease and the volatility increase with. Expect the volatility to continue over the next couple of months as markets remain uncertain.

The devastating series of events in Japan saw the Yen reach record levels as the USD/JPY rate pushed through levels set in the aftermath of the 1995 Kobe earthquake. The breach of the 1995 record YEN high triggered automated stop loss buying of YEN that sent all markets into a tail spin. A stronger YEN negatively impacts the already devastated Japanese economy further. This push to new record levels saw the G7 Central Banks embark on the first coordinated FX market intervention since 2000 to curb the YEN strength. Further intervention will eventuate if the YEN resumes its push for higher levels again. With power now restored to a portion of reactors at the Fukushima power plant, hopefully the chances of an escalation in nuclear fallout has reduced.

Western allies embarked on a program to quell the ruthless violence on anti-Gaddafi movements in Libya. The move to enforce a no-fly zone on Libyan air space was led by the French, British and to a lesser extent US military, and looks to have had an effective start to operations. The Gaddafi “cease-fire” coming into effect today looks to be a stalling effect, and outcomes looking forward remain unclear. Oil market reaction and ramifications of that should be muted as the Libyan production halts have already been priced. The stepping back in support by the Arab League of Nations looks to be concerning as the Western allies need a quick and well supported result from this initiative.

In Europe the focus remains on the Govt debt issues at play and the “vigilant” attitude of the ECB with regards to inflationary pressure. Whilst pressures eased over the last week, ECB head Trichet stated firmly there would be no change on the stance. The market has priced a hike of 25pts for the meeting on April the 8th. The Govt debt issues are never to far from the surface. Talk remains on “Competiveness Pacts” and “Stability Mechanism” within the Euro-zone. Without talk turning to action, the EUR negative risk of Govt debt default remains real. The ECB intervention has seen the selling of YEN and buying of EUR , and the continued shadow on intervention should see demand for EUR underpinned.

In the US the data flow remains more positive on balance, and this even saw a higher than expected Inflation number for Feb. Of note last week was a sharp increase in the Philadelphia Fed’s Manufacturing Index which will be being driven by the continued low level of the US dollar. The Fed Meeting minutes did not reveal much. They stated that the recovery is on a firmer footing than at the previous meeting, and they maintained their line that interest rates would remain low for an extended period. The coming week sees the usual array of data and Fed member speeches, with particular focus being on Chairman Bernanke when he speaks on Wednesday.

United Kingdom employment numbers came in slightly better than expectations last week. And the GBP performed reasonably on the week, although it performance was overshadowed by that of the EURO. The coming week looks to be an interesting one for the Pound Sterling. Inflation numbers are due for release on Tuesday and the all important Bank of England meeting minutes will get attention on Wednesday. Insight to the feeling of board members with regards to possible hikes in the cash rate to quell the significant inflationary pressure will be closely watched. The “pro growth” Budget release also comes on Wednesday and is likely to accompany a downgraded expectation of the growth expectations for 2011 from the current level of 2.1% from the Office for Budget Responsibility.

Reserve Bank of Australia (RBA) Monetary Policy Meeting Minutes were not as buoyant as the market had expected and this caused Australian dollar weakness as the interest rate market priced in a 20% chance of a cut in the cash rate from the RBA. The lowering in the Asian growth profile due to the Japanese devastation, and another increase from Chinese Authorities in their Bank Reserve Ratio’s has seen the AUD move temporarily down through the lower end of its recent .9800/1.0200 broader range. Whilst the AUD recovered well late in the week with a rally in commodity prices, it remains more vulnerable to downside shocks than it has been in quite some time. This coming week is light on local data and the fortunes of the AUD with be driven by the market’s overall appetite for risk.

The New Zealand outlook remains unclear as the clean up in Christchurch stretches out amongst the back drop of ongoing aftershocks. Consumer sentiment has taken a knock and tourism numbers have dropped dramatically. This coupled with softening commodity prices will see the Reserve Bank of NZ quite comfortable with their decision to cut the cash rate to 2.50%. This coming week sees the Current Account and Gross Domestic Product numbers released Wednesday and Thursday respectively. With economist’s expectations of GDP making up a wide -.5 to +.4% range, anything outside this range would see some market reaction. It can be expected that for the most part the market will discount this backward looking number.

Major Announcements last week:

• RBA Meeting Minutes seen as dovish by the market
• German ZEW Investor sentiment dips from 16.2 to 14.1
• US Fed FOMC statement says recovery on firmer footing, rates to stay low for “extended period”
• UK Unemployment claims drop by 10.2k
• US CPI (core) +.2% vs +.1% expected
• UK Consumer Inflation expectations rise to 4.0% from 3.9%
• US Philadelphia Fed Manufacturing Index rises to 43.4 vs 29.9 expected
• G7 Central Banks make coordinated Intervention to curb YEN strength
• Canadian CPI +.2% vs +.5% expected

Currency Commentaries:

NZD/USD

Initial resistance comes for the NZD/USD at .7350. Any breach of this will be more about USD weakness than any kind of NZD strength. Whilst the economic data will be watched, external factors are more likely to provide the lead. GDP figures come from NZ on Thursday and in the US on Friday. Both will be closely watched, as will any comments from the respective heads of the Central Banks in speeches due to be given. US Fed Chair Ben Bernanke speaks on Wednesday, and Friday sees RBNZ head Dr Bollard speak at the Basel III conference in Sydney on Friday. The pair remains in the broader .7100-.7500 range we have seen since the Feb 22nd earthquake in Christchurch.

NZD/AUD (AUD/NZD)

The coming week sees little in the way of Australian data on the calendar, so the focus will be NZ based. Wednesday sees the Current Account released and Thursday GDP. Both figures would have to be well away from market expectation to cause significant market reaction. RBNZ head Dr Bollard makes a speech in Sydney at the Basel III conference on Friday, and any further updates with regards to Monetary Policy will garner attention. The NZD has moved away from the 20 year lows against it saw against the AUD earlier this month, but at current levels still represents good value buying of NZD with Australian dollars. Any real deterioration in global appetite for risk will see the AUD underperform.

NZD/GBP (GBP/NZD)

The Pound Sterling outperformed the New Zealand dollar over the last week. The pair breached the significant level at .4500 (2.2222), and the way is opened for further NZD weakness.. This coming week will see the UK news most probably take the lead. Tuesday sees the all important CPI number released, and this will be closely watched. The Bank of England Monetary Policy Committee Meeting minutes are released on Wednesday ahead of the annual Budget. The UK face slowing growth but increasing inflationary pressure, so the Bank of England have tough decisions to make over the coming months. If they are forced to move the cash rate higher earlier than currently priced , the GBP will benefit. Expect little market reaction to the NZ Current Account or GDP numbers due for release on Wednesday and Thursday respectively. RBNZ head Dr Bollard speck to the Basel III convention in Sydney on Friday, any comments with regards to Monetary Policy will be closely watched. Intervention from the BoE buying GBP and selling JPY if it eventuates, will help the Sterling outperform.

NZD/CAD

The NZD/CAD traded within its post earthquake .7050-.7300 range for the last week. The data flow starts in Canada on Tuesday with the release of the Retail Sales number and the annual Budget. Wednesday sees the Current Account In NZ , followed by GDP on Thursday. Whilst the data will be watched , do not expect too much reaction from the markets. Probably of most significance will be the direction of the oil price and whether or not the Bank of Canada intervene and buy CAD, as part of the coordinated G7 program to weaken the YEN.

NZD/RAND

The NZD/RAND pairing remained within its recent 5.00/5.20 range over the last week. With external factors driving global markets, local data did not have an effect and this is likely to continue this week. In South Africa this week we have CPI on Wednesday, and the South African Reserve Bank’s(SARB) decision on the cash rate on Thursday. The SARB will leave rates unchanged. In NZ, we have the Current Account on Wednesday and GDP on Thursday. Expect market reaction to these only if they are outside the range of surveyed expectations.

NZD/EURO (EURO/NZD)

The EUR outperformed the NZD over the last week. The factors causing the EURO strength are unlikely to change in the near term. The strong talk from the European Central Bank continues. This coupled with further weak USD sentiment and ECB buying of EURO as part of the G7 coordinated Intervention program, should under pin the EUR for the time being. Govt debt concerns remain close to the surface , but for the time being remain secondary. A flora of second tier European data is due for release alongside the NZ Current Account and GDP data, on Wednesday and Thursday respectively. Expect the data to be watched but international events to continue to dominate.

NZD/YEN (NZD/YEN)

The fortunes of the New Zealand dollar against the YEN remains in the hands of the Bank of Japan. I have no doubt that at some stage the market will test the resolve of the G7 Central Banks and the demand for YEN will force the intervention program to continue. As the USD/JPY crashed through the lows set after the 1995 Kobe Earthquake, various very large buy YEN orders were triggered and this forced the NZD to its lows at 54.78 in a matter of minutes, before quickly staging a recovery. The NZ current Account and GDP numbers due for release on Wednesday and Thursday respectively will be watched but expect limited market reaction.

AUD/USD

The AUD was under pressure from the USD throughout last week, before staging a recovery on Friday. With the fortunes of the AUD so closely linked to the Asian growth profile, it is easy to see why the weakness has gained momentum as the Japanese disaster unfolded. With little in way of domestic data in Australia this week the pair be lead by international developments and the markets appetite for risk. Housing numbers in the US on Tuesday and Wednesday will be watched, but expect no reaction. Friday’s Durable Goods number should only see movement if it comes out lower than expected. US Fed Chair Ben Bernanke speaks on Wednesday, but expect little insight from him so soon after last week’s Fed statement.

AUD/GBP (GBP/AUD)

The Pound Sterling outperformed the Australian dollar for the most part last week, although Friday saw the AUD in demand as the appetite for risk returned. This week’s focus is all about the UK with CPI on Tuesday, before the Bank of England (BoE) Meeting Minutes and Govt Budget on Wednesday. The Monetary Policy Committee Meeting Minutes will probably garner the most attention as they will reveal for insight as to the timing of a hike in the cash rate from the BoE. Whilst the UK economy remains sluggish and the Govt spending cuts are just starting to come into force, the imported inflationary pressure is reaching levels that cannot be sustained. If the BoE minutes reveal that the board are moving closer to a cash rate hike, the GBP will benefit. Also making issues more complex is the BoE’s part in the coordinated Intervention from the G7. Any further instances of the BoE selling JPY and buying YEN, should see the AUD under short term pressure from the GBP.

AUD/EURO (EURO/AUD)

The EURO outperformed the recently beleaguered AUD over the last week. With the AUD so closely linked to the Asian growth profile, the events that unfolded in Japan were always going to provide some pressure. With little in the way of first tier economic data in either economy this week, the lead will come from the events in Asia. Should the central banks of Germany, France and Italy enter the market again as part of the coordinated G7 intervention program, the EUR will obviously benefit. Should the market’s overall appetite for risk maintain its pick up, the AUD will continue to take back some of the lost ground.

GBP/USD

The Pound Sterling and US dollar pair remains in its recent, but familiar range. This week could prove crucial for the outlook of this pair with the lead coming from the UK. CPI numbers on Tuesday provide the initial focus, before the Bank of England Monetary Policy Meeting minutes and the annual Budget on Wednesday. If the Meeting Minutes reveal a swing in bias towards earlier than expected hikes in the cash rate, the GBP will benefit. With less potential for impact, but still important will be US Fed Chair Ben Bernanke’s comments on Wednesday. And the US Durable Good’s number on Thursday, for an insight into the US consumers appetite for bigger ticket items.

GBP/EURO (EURO/GBP)

The EURO has outperformed the GBP in grinding fashion over the last week. With European Central Bank(ECB) officials maintaining their strong talk on inflation, a hike of 25pts from the ECB remains fully priced for their next meeting on April 8th. This week’s focus is on the UK. We have CPI numbers due Tuesday, before BoE Monetary Policy Meeting Minutes and the annual budget on Wednesday. Any move closer to a hike from the Meeting Minutes would be GBP positive. The EURO remains the main beneficiary of USD diversification by Asian Central Banks and that seems to be supporting the EURO in periods of weakness.

GBP/RAND

The GBP rose sharply against the RAND for most of last week before the RAND recovered some ground on Friday. While the South African Reserve Bank meet to announce the cash rate on Thursday, there will be no change. This means the focus this week will certainly be in the UK. CPI starts it off on Tuesday, before Bank of England Meeting Minutes and the annual budget are announced on Wednesday. Any further change in bias towards hiking the cash rate from the Meeting Minutes will be GBP positive. Any further coordinated efforts by the G7 Central banks to weaken YEN and buy their respective currencies would see the GBP outperform in the short term.

ENDS

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