Direct FX Weekly Market Overview 17/5/11

Direct FX Weekly Market Overview by Sam Coxhead of www.directfx.co.nz

Market Overview:
The past week proved to be a very interesting one for observers of the financial markets. The soft price action in the commodity markets, coupled with intense focus on the fragile European debt situation meant there was a bias towards risk aversion. In the face of this was some improving economic numbers in the US, along with Germany and France, the powerhouses of Europe. Building global inflationary pressures were also evident, and the higher interest rate projections that go with them. This made the US dollar appreciation, a relatively orderly affair. The US dollar has continued to see a grinding resurgence driven by the lower commodity markets and bias towards risk aversion. The EURO remains under pressure on all cross rates as the difficult process of “re-profiling” Greek debt is fleshed out. “Re-profiling” is apparently an investor digestible term for the managed default of bond payments.

The New Zealand dollar performed relatively well on most cross rates, with its lead being taken from the Australian dollar in the absence of tier one economic data. The Reserve Bank of New Zealand (RBNZ) Financial Stability report held few surprises. Even International Monetary Fund statement that the NZD was 20% overvalued, and comments from RBNZ Governor Bollard about the undesirably level of NZD, had little overall effect on the price action over the week. The NZ Govt deficit was 15% worse than expected, as tax cuts did not flow through to spending. With little on the economic data calendar in NZ this week, the focus will be on the pre-election Govt Budget due for release on Thursday. With a commanding lead in the polls, expect appropriate fiscal restraint from National’s Minister of Finance Bill English.

The Australian dollar preformed relatively well given the market conditions. It gave up ground to the US dollar as expected given the weakness in the commodity markets and its high level from a historical perspective. Given the weaker commodity markets, unexpected negative jobs growth, and another rise by Chinese authorities of their banks Required Reserve Ratio, the AUD could easily have moved lower against most trading partners. The prospect of a higher cash rate in the coming months is supporting the AUD. Tuesdays Reserve Bank of Australia Monetary Policy Meeting minutes will be closely watched by the market for any indications to the actual timing of the coming interest rate hike.

The EURO will probably remain under pressure in the coming week as the focus on the complex debt situation remains intense. Adding to the mix is the two tiered nature of the Eurozone’s economy. Better than expected GDP numbers in Germany and France are in stark contrast to those of the fragile peripheral member states. As austerity measure’s start to bite in the economies of countries trying to reduce their debt burdens, the accompanying drop in tax revenues may well prove to be the tipping point. Results of a Bloomberg survey last week showed 85% of respondents expected a Greek bond default. Yields on Greek debt are now twice that of when they received their initial bailout package last year. Forecasts of medium term European inflation were increased last week, further adding to pressure on the European Central Bank for a hike in the cash rate. Monthly inflation numbers due on Monday will reveal the latest information on this.

The economic outlook in the UK remains sluggish at best. Housing and manufacturing data remains moribund at best and last week’s Bank of England (BoE)Inflation Report increased the forecasts for medium term inflation. This places further pressure on the BoE to tame inflationary pressure through a cash rate hike at some stage. This week’s economic calendar is busy for the UK. Monthly inflation numbers are due on Tuesday. Wednesday sees the release of the much anticipated BoE Monetary Policy Committee Meeting (MPC) minutes, ahead of retails sales figures on Thursday. The GBP gained against the EURO last week and remains at historically low levels against both the NZD and AUD. Any clear indications of a move in bias towards higher rates from the BoE MPC minutes, should see the GBP outperform as the interest rate differentials will close.

Economic data in the US remains patchy with retails sales numbers just making expectation, consumer sentiment lifting, but the trade balance wider than expected last week. Longer term interest rates in the US remained relatively low last week with the risk aversion at play. Employment remains a key issue for the Federal Reserve (Fed), as they contemplate the removal of the stimulus of the last few years. With inflation remaining relatively subdued at this stage, the conjecture will be based around the reduction of the Fed’s holdings of Treasury bonds for the most part. This week’s focus will mainly be on the Federal Open Market Committee meeting minutes due for release on Wednesday. Also remaining in the picture is President Obama’s push for the Budget approval to raise the US Government’s debt ceiling.

The Canadian dollar remained relatively range bound over the last week. There was little in the way of market moving data , and with the oil price stablising around the USD $100 level, there was little stimulus to push the CAD either way. The focus this week will be Friday’s release of the monthly inflation and retail sales data.

The YEN remained relatively strong against most trading partners last week as the risk aversion bias played its part. Should the USD/YEN drop below 80.00, the prospect of further Bank of Japan (BoJ) intervention to curb YEN strength remains real. Taking this into account, along with the possibility of disaster re-insurance flows into YEN, and there is potential for a period of range bound price action around current levels. Monthly GDP figures on Thursday will be watched for the size of the post disaster economic contraction and the BoJ Monetary Policy Statement on Friday will also garner attention.

ENDS

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