Direct FX Weekly market Overview

The wider financial markets had a general theme of risk aversion last week. This was almost entirely bought on by the intense focus on the European debt crisis, and with particular focus on Greece. Greek PM Papandreou threw the markets into a tail spin when he spontaneously announced that not only would he hold a confidence vote on the Friday, but also hold a referendum on the latest bailout in December. Amid talk that the referendum would be a proxy for Greek membership in the Euro (and bond default), Papandreou came under intense pressure both internally within Greece, and from other European leaders. The subsequent cancelling of the referendum, and passing of the confidence vote, has seen a plan to form a national unity interim government to pass the necessary legislation to secure the EU/IMF aid package. This will come as a relief to markets in the short term. To compound matters in Europe, Italy is now under intense pressure in the debt markets as its cost of raising funds sky rockets. Make no mistake this European debt crisis will not end soon, and will ensure a certain level of volatility remains in place for the start of 2012 at least. Elsewhere around the globe the economic data remains mixed. The European Central Bank (ECB) and Reserve Bank of Australia (RBA) cut their respective cash rates by .25%. The softer global growth outlook for 2012 and 2013 illustrates again how deeply the events of 2008/09 have affected the global economy.

In New Zealand it was an interesting week where further signs of easing inflationary pressure were seen in lower than expected labour cost and employment numbers. Diary prices remain under downward pressure albeit they are still at historically healthy levels. Certainly the pressure has come off the Reserve Bank of New Zealand (RBNZ) to lift the cash rate in the coming months, with the first hike now likely to come in the second quarter of 2012. There is little in the way of domestic economic data for the NZ economy this week, so direction for the NZ dollar will come from external leads.

In Australia the RBA did not disappoint the interest rate market with its 25% cut to the cash rate last week. The move was backed up by both building and retail sales numbers being released below market expectations. The RBA’s quarterly Monetary Policy Statement held few surprises, pointing towards the European debt crisis and lower global growth outlook as risks to the Australian economy. This week is reasonably light on economic data with just the trade balance, home loans data and of primary focus, the employment numbers on Thursday. The RBA see the unemployment rate climbing gradually over the coming quarters and this month is expected to rise to 5.3% from 5.2%. The Australian dollar remains volatile, although given global sentiment, the bias has to be to the downside. The risks to this view would be that of relief rallys as was seen two weeks ago, and the possibility for yet another round of quantitative easing from the US Federal Reserve (FED).

In the US the economy was light of the radar, as the global focus was almost entirely on Greece. The data remains patchy, albeit on the rebound from the disappointing numbers seen from the 2nd quarter. The FED remains poised to react to further slowdowns should they eventuate. Encouragingly the employment numbers were positive and this has seen the unemployment rate drop to 9 %. Whilst the drop from the 9.1% previous number is small, it will be an encouraging outcome for the FED. This coming week is light on economic data in the US, and means the focus will remain on Europe. Of note will be the University Of Michigan Consumer Sentiment Survey results late on Friday.

The ongoing saga in Europe looks to be at a point where the focus will change, if only geographically. Assuming the Greek politicians actually follow through with their latest commitments to form a united nation coalition interim government and pass the require EU/IMF legislation into law, the focus may well move to Italy. PM Berlusconi is under increasing pressure to get their own austerity program into action. He has rightly turned down an offer of IMF assistance at this juncture, but has accepted the IMF “oversee” the austerity programs implementation. This is a necessary attempt to reassure the debt markets that Italy is moving in the right direction with regards to its debt reduction program. Elsewhere the economic data remains downbeat as consumer sentiment suffers. A return to recession remains a real possibility in Europe and this is why the ECB acted quickly to reduce the cash rate. A further cut to 1.0% is expected at next months’ meeting.

In the UK the economic data remains bleak for the most part, albeit a couple of glimpses of encouragement were sent last week. The preliminary 3rdquarter GDP number came out at +.5% against the expectation of +.4%, and the monthly construction figure was demonstrably better than expectation also. Next week is light on economic data but the Bank of England (BOE) do meet to announce their latest monetary policy decision. Interestingly Citibank have just released a note to say they expect the BOE to again increase the amount of quantitative easing in action. This would seem unlikely, but if it eventuates, it would be a negative for the recently stable Pound Sterling.

In Japan the big news of last week was the Bank of Japan (BOJ) and their unilateral intervention in the market to weaken the YEN. The US Dollar vs YEN was trading at all time lows at 75.54 when the BOJ made their initial move. Within half an hour it was pushed to the high of the move at 79.53 before easing back to around the current rate of .78.13. The BOJ made their move as the strength of the YEN was materially impacting their export sector and sucking the life out of their economy. This move comes after a funding program of offshore asset purchases for corporates was seemingly ineffective. There is little in way of economic data this week in Japan, so expect limited change in the YEN as the BOJ Intervention risk remains on any YEN strength.

Last week was a big one for the Canadian economy. It ended as a mixed bag with GDP slightly beating expectations and the employment numbers falling short of the expected mark. Again the Bank of Canada (BOC) remains on the sidelines as they are poised to keep their cash rate steady at 1.0% well into 2012. There is little in the way of Canadian economic data this week, so the lead will come from offshore.

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