Market Overview

*Market Overview : By Sam Coxhead of www.directfx.co.nz *

The dynamic start of 2012 in the financial markets continued last week. Within the same old issues from 2011, some new trends seem to be quickly emerging. The weakness of the Euro throughout December has been quickly reversed in January. The weakness seems to have re-ignited moves from various central banks to try and verbally lever their currencies lower. The Australasian currencies remain surprisingly strong on most cross rates. The US dollar has seen renewed pressure, whilst on most pairings remaining in somewhat familiar territory. Potentially 2012 may be a year of continued short term volatility, whilst remaining within a relatively contained broader range. No doubt the European issues will remain center stage, and their impact on the wider global growth profile will remain the key.

The economic data flow in the US has remained relatively positive for the most part to start the year. Ironically, in the face of the domestic evidence, the wider global outlook has seen the Federal Reserve (FED) point towards lower for longer interest rates and further quantitative easing (QE) has increased in its likelihood. Cynically, this move from the FED could be viewed simply as a means to curb the 4th quarter resurgence of the US dollar, but the effects remain the same, and sees the pressure come off the EURO, as large “sold EURO” positions are quickly exited by the speculative part of the market. This week sees the usual array of economic data due for release in the US, but the employment numbers on Friday will be of particular note.

The Australian dollar has had a strong start to 2012, although its progress appears to be coming more laboured. Benign Australian inflation numbers, coupled with a unexpected lack of action to loosen monetary conditions in China last week (looser conditions would be AUD supportive), has seen the AUD give up some ground in recent sessions. The boost provided by the possibility further QE in the US, will provided support so any falls will be somewhat subdued. Next week’s Reserve Bank of Australia (RBA) cash rate announcement should see the cash rate reduced by 25pts to 4%. Speculation is increasing that a further move in March may follow.

The New Zealand dollar has also been in demand in the New Year. The RBNZ monetary policy decision was to stay with an unchanged cash rate at 2.50%. It is expected that the cash rate will remain unchanged until the end of 2012 at the earliest. The buoyant NZ dollar will be causing issues for exporters at current levels. Buffering the NZD effect for the local economy, are continued good prices for the New Zealand commodities. There is little on the economic data calendar for this week, but next week we have employment numbers for the 4th quarter.

In Europe the situation remains tense with Euro-zone members starting to apply real pressure on Greece. The pressure is coming as Greece struggle to cut spending in a meaningful way. Austerity pledges are easy to make, but enforcing them is a different matter. The complex nature of required voluntary cuts to bond values, and the possibility of independent financial controls being put in place, means the path forward is not at all clear. Portugal is the latest to have their bond markets come under renewed pressure. On a positive note, measures in Italy seem to be having an effect and interest rates on Italian debt are trending down as sentiment improves on their outlook.

In the UK the economy remains under pressure. Speculation of increased QE from the Bank of England (BOE) remains rife. The GBP has recovered some ground as the US dollar saw some renewed pressure, but it remains low against both the New Zealand and Australian dollars. Manufacturing, services, housing and construction numbers towards the end of the week will provide some focus. Next week the BOE meeting on Thursday will be closely watched. It is likely that they will not increase the QE at this meeting, but more likely in March.

Sam Coxhead

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