Direct FX Weekly FX Update, 4 April, 2011

Direct FX Weekly FX Update – By Sam Coxhead from www.directfx.co.nz

Market Overview:

The last week has again proven to be an interesting one for the Financial markets. The “cross roads” feel to the price action is being driven by the prospect of a flurry of central bank information flows coming this week. The European Central Bank (ECB) looks poised to deliver at least 25pts of hiking to the cash rate. The debate at the US Federal Reserve has intensified, with many board members making their thoughts publically known. The number of members looking for a reduction of the easy money policy and ending the Quantitative Easing looks to have increased. While those in support of maintaining easy policy for some time to come, are remaining steadfast. The Federal Open Market Committee (FOMC) meeting minutes are due for release on Tuesday in the US and will hopefully provide further insight to the debate. Central to the debate to the removal of the very accommodative low cash rate at 0-.25% and the ending of the Quantitative Easing program in June. Normally the prospect of higher a higher cash rate and the absence of the Fed buying in the Treasury paper markets would lead to lower equities and higher yields across the board. While the yields have pushed higher a little, their inability to consolidate at higher levels has been halting any advance the USD may potentially make. Higher yield in US interest rates is USD supportive, but this has been sporadic at best. This trend has increased the global appetite for the risk, and seen the AUD and NZD grind higher against domestic fundamentals. The AUD has consistently been pushing post float highs with the new high of 1.0417 being posted this morning. The short term momentum of both the NZD and AUD is undeniable, but to my mind is unwarranted at this time. For those looking to make a transfer into USD may want to considered the staggering of the amount, to have an averaging effect.

The continuing situation in Libya and the general unrest in the Middle East/North Africa region has maintained upward pressure on the oil price. The inflationary impact of persistently high oil prices that negatively affect global growth prospects has also been discounted by the equity markets for the time being.

The debt issues in Europe remain appropriately topical. Further credit agency downgrades for various types of Greek, Irish and Portuguese debt were seen last week. Portuguese and Greek yields pushed out to record highs last week, indicating the continued likelihood of further assistance, much to the angst of other member states. The ECB are poised to hike the cash rate by at least 25pts on Thursday in an effort to dampen inflationary pressures. The EUR remains moderately well supported through these difficulties, with much of its support coming against the selling of YEN.

The Japanese situation remains difficult. Problems with the stabilization for the Fukushima power plant continue and delays in the resumption of many Manufacturing programs points to further weakening in their economy. The YEN is weaker across the board, and as yet the market seems to have discounted the presence of re-insurance inflows for the time being. Discussion on whether or not the Bank of Japan could underwrite Japanese Govt Bonds to cover the disaster costs has further led to YEN weakness. This is essentially the printing of money and most certainly would be Yen negative if this course of action was taken.

The GBP continued to give up ground against both the NZD , AUD and lesser extent EUR over the last week. The Bank of England cash rate decision on Thursday should not give any surprise, and we have to wait for the Meeting Minutes in a couple of weeks to ascertain if the bias towards a higher cash rate has increased. UK economic data remains subdued but House Price Index increase last month was better than expected.

In New Zealand the NBNZ Business Confidence survey showed a plummet in Business Confidence after the Christchurch earthquake. This dramatic drop was second only to the drop after the Lehman collapse in 2008 as the global credit markets ground to a halt. The volatile Building Consents number showed a 9.7% drop for the month of January. This coming week sees only the quarterly NZIER Business Confidence Survey due for release and this is unlikely to provide any upside surprises.

Australia saw worse than expected Building Approval numbers and slightly better Retail Sales numbers. This week sees the RBA on Tuesday announce the cash rate will remain unchanged at 4.75% but the accompanying statement will be closely watched. Home Loan numbers are due Wednesday and Employment statistics on Thursday, with the Unemployment rate expected to remain at 5.0%

Last Friday’s release of US employment numbers saw a slightly better than expected result. The Unemployment rate was 8.8% with 216k of jobs being added. The Private Sector activity more than making up for the reduction in Public Sector jobs. Fed Chairman Ben Bernanke is due to take questions late on Monday (UST) after a speech and any comments with regards to Monetary Policy will be closely watched. The focus of the week will be the FOMC minutes on Tuesday for any further insight they will provide.

ENDS

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