Weekly FX Update by Sam Coxhead from www.directfx.co.nz

The last weeks trade on world financial markets proved to be interesting to say the least. Established correlations between different markets look to be taking a breather, with equity markets grinding higher in the face of softer economic data. The softer economic data in Europe and North America looks to be reducing the pressure on the central banks to tighten monetary policy. As interest rates moved lower, the EURO and USD have underperformed accordingly. Focus on the Greek debt situation remains, and the resolution negotiations remain intense. In the US the lifting of the debt ceiling is still being hotly debated. The Australasian currencies remain relatively well supported in the face of the easing global growth profile.

The New Zealand dollar was the star performer last week. It has gained ground against all trading partners and is threatening record highs against the USD and GBP. Its form was driven by a number of different factors. The Reserve Bank of New Zealand Inflation Expectations survey came out showing a 3% number. This is at the upper end of their target band and will continue to be monitored closely by the bank. The Fonterra payout was at a record level, as expected. Further re-insurance based inflows were also noted. A story carried by a local financial website, sparked global media attention on the Chinese interest in buying NZ Govt Bonds, as they have been doing for some time. Increasing the focus on the New Zealand Govt Bond market, was a trip to Asia by Finance Minister Bill English. It appears prudent for the Treasury to be increasing issuance to meet demand at this time. Any future tightening of global credit markets would sharply increase the cost of funding of the increased bond program in the future and this would be of further detriment to New Zealand’s finances. However the buyer of NZD Govt Bonds pays for them with New Zealand dollars. Therefore any large scale bond purchases tend to put upward pressure on the value of the New Zealand dollar, which is what we have saw last week.

Ratings agency Moody’s downgraded the four main NZ banks late on Friday. This brings them into line with their Australian parent banks, who also rely heavily on the offshore markets for funding. This week’s domestic focus will be on the NBNZ Business Confidence survey results on Tuesday, ahead of the monthly Building Consents Friday. The release of the highest trade surplus on record today will add to the upside momentum, that is quite undeniable now.

In Australia the domestic focus for the week was the stronger than expected Private Capital Expenditure number released on Thursday. The AUD did see some periods of heavy price action, especially against the New Zealand dollar. It rebounded sharply against the USD from its lows as US yield sustained a move lower for the time being. This coming week sees the Current Account and Private Sector Credit numbers released on Tuesday, the much anticipated GDP number Wednesday, and Retail Sales and the Trade Balance round out the busy week on Thursday. With continued Asian Central Bank diversification away from the USD, and the heavy nature of the EURO, expect the AUD to remain in demand for the most part. With current western interest rate tracks trending lower almost across the board, the AUD should remain supported with the Reserve Bank of Australia still on track to hike the cash rate in the coming months.

In the US economic data continues its patchy run. Housing and labour numbers remain subdued at best and this will be of concern to the Federal Reserve. This also carried through to the GDP number which was disappointing at 1.8% vs 2.2% expected. Talk of a third Quantitative Easing program seems to emerge as the data underperforms. This would undoubtedly be an outside chance, but something that should remain in mind. This coming week has the usual host of economic data due for release, but the highlight will be the monthly non-farm employment and unemployment rate numbers on Friday. The unemployment rate is expected to remain steady at 9%. Meanwhile the talks continue to find agreement on the lifting of the Federal debt cap, and negotiations will be closely watched.

The Great British Pound has performed relatively well over the last week, just giving up ground against the rampant New Zealand dollar. Final GDP numbers were unrevised at .5%, and relatively hawkish comments from Bank of England (BoE) Monetary Policy Committee members Weale and Tucker gave the GBP bulls a little enthusiasm on Friday. There are few that would argue that any real strength from the GBP is probably some way off, but if the likelihood of an increase in the cash rate from the BoE gains momentum, the fortunes of the GBP will improve with it. Tuesday this week sees the Inflation hearing of the BoE representatives before Parliaments Treasury Committee. Any comments with regards to the cash rate will be reacted to.

In Europe the Greek Government continues to scramble. Unilateral talks between political parties were unable to agree to a definitive austerity program, so the tension continues. Meanwhile the Italians have bought forward austerity measures in what looks to be an effort to stem the debt contagion from breaching their borders. Outgoing European Central Bank (ECB) head Trichet has made comments that medium term inflation is likely to be under control, and this contrasts his usual stoic nature with regards to inflation. Indeed German inflation was released lower than expected last week and eases the pressure a little on the ECB to lift the cash rate.

The Canadian economy was mostly off the radar with little in the way of economic news last week. The CAD was generally lower in line with the US dollar. This week sees the monthly GDP number released on Monday ahead of the Bank of Canada cash rate announcement on Tuesday. The cash rate is widely expected to remain unchanged and the accompanying statement will be closely watched.

Ratings agency Fitch has placed the Japanese credit rating on negative watch as the economy slows and the disaster clean up costs rise.

In South Africa the South African Reserve Bank Governor Gill Marcus stated that that there is little that monetary policy can do to stifle cost-push factors that are increasing the costs of oil, electricity and food. With this in mind expect that rates will remain lower for longer with the market picking the next cash rate rise in November amongst a climate of high inflationary pressure. Expect GDP figures due for release on Tuesday to be closely watched.

ENDS

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