Direct FX Weekly Market Overview

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

Last week improved sentiment, which has been the theme of 2012, continued for the most part. Globally the economic data continued its positive momentum. The foreign exchange market however, did not fully mirror the wider market sentiment, as the US dollar finally saw some demand creep back in.

Many currencies saw mostly sideways movement, before losing ground to the greenback into the end of the week. The situation in Greece is reaching a short term crescendo, as the Greek Parliament this morning voted in the EU required spending cuts. This difficult vote came as rioters hit the streets in Athens and seven MP’s resigned in protest. Focus this week will remain in Greece, as the EU finance ministers are now set to agree on the next tranche of bailout funds are to be offered to Greece. Assuming this happens, it opens the way for the third step of the debt swap, which will see massive write downs on Greek debt, to enable Greece a chance to start to economically recover from its situation over the next decade. The only certainty is that this painful situation will continue to be an ongoing saga. Fortunately the time it has taken to come to this partial conclusion, has given the rest of Europe time to get its house in some as semblance of order, and financial stability is better in Europe generally.

The New Zealand labour market outlook remains clouded. Last week saw the unemployment rate fall to 6.3%, but employment growth fall. These factors were NZ dollar neutral for the most part and the domestic focus this week will be on the retail sales numbers on Wednesday. The NZDUSD lead therefore will no doubt come from offshore, and the wider market appetite for risk. The recent NZ dollar momentum does look like it may have run its course in the short term, as it backs off from the recent highs against its major trading partners.

Last week in Australia the Reserve Bank of Australia (RBA) provided the excitement, when they left the cash rate unchanged at 4.25%. Expectations had been for a 25pt cut to 4.0%. In their accompanying statement the RBA board made it clear that movements going forward would be very much dependent on the economic data, both domestically and offshore. Fridays release of their quarterly Monetary Policy Statement gave further insight to their thinking. They remain poised to cut the cash rate further if required, but were content at current levels given the stablisation of indicators in Asia and US. Thursdays Australian employment numbers will be the focus of the coming week.

In the US encouraging signs continue for most of the economy. Federal Reserve (FED) chief Bernanke remains concerned about the state of the housing market, commentating that it was holding up any decent economic recovery. This works in with other comments that the FED would tolerate a little inflation, as the economy started to recover. Higher house prices would immediately impact on wider sentiment in the US, and should be closely watched as 2012 unfolds. This week the retail sales number on Wednesday, manufacturing numbers Thursday, and inflation numbers on Friday will be closely watched.

In Europe, the economic situation in the core economies has brightened recently. The European Central Bank (ECB) announcement that the cash rate would remain unchanged last week was expected. But the tone of the accompanying statement was more upbeat that the previous one. The Greek debt swap remains the pivotal EURO news in the short term, so focus will squarely remain of the progress in Athens. The ECB will offer further long term funding facilities to banks towards the end of February, and this should further ease financial stability concerns in the region.

Sentiment in the UK should improve in the coming months if the better than expected manufacturing and housing numbers can continue their recent form. The increase in the Bank of England’s (BOE) quantitative easing (QE) program announced last week, should add further confidence overtime, through its lowering effect on longer term funding rates. This week sees inflation numbers on Tuesday. These are expected to move lower through 2012. Unemployment numbers come Wednesday and retail sales numbers on Friday. A higher than expected inflation number would benefit the GBP, as it would lower the chance of an increased QE program going forward.

In Japan the authorities continue to point out the negative impact of the strong YEN on their economy. Last week saw only second tier data on the calendar, with real estate and machinery numbers weaker than expected. Today saw the preliminary release of quarterly GDP numbers, which came in worse than expected. The Bank of Japan’s (BOJ) monetary policy decision will be released tomorrow. Expect further lip service to be given to the strong nature of the YEN after today’s GDP number, but no change to the already loose monetary conditions.

Last week the Canadian economy saw more encouraging signs in the form of better than expected manufacturing and construction numbers. Also adding to the positive sentiment was the trade balance that shows a materially larger trade surplus than expected. This week sees a quiet economic calendar, with just inflation numbers on Friday. Given the current environment, inflation is not of any concern, so expect the lead on the CAD pairing to come from external factors.

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