Direct FX Weekly Market Overview

Direct FX Weekly Market Overview

By Sam Coxhead

As expected most markets have seen sideways price action over the last week. The one stand out performance in the foreign exchange market has been the increased demand for the Pound Sterling. This increased demand has been driven by an apparent about turn from the Bank of England(BOE) monetary policy committee on their inflation outlook. In Europe the debt markets remain under pressure for the peripheral member states. The French elections provided a little more uncertainty with Prime Minister Sarkozy behind in the current polls. In the US the data has become a little more mixed with weekly jobless claims numbers pushing a little higher. The Reserve Bank of Australia look poised to cut the cash rate in Australia, as long as tomorrows inflation number is appropriately subdued.

Last weeks monetary policy meeting minutes from the RBA confirmed to the market that there will likely be a cut to the cash rate to 4.0% on May the 1st. Tomorrows inflation number is expected to be around +.8% and would have to be in excess of 1.0% in order to create uncertainty over the RBA decision. This number is the highlight of the week, and pivotal direction for the AUD in the short term.

In New Zealand last week the 1st quarter inflation numbers were the key event. They showed a benign inflation environment, coming in at +.5% against an expected +.6% number. This will keep the pressure off the Reserve Bank of New Zealand (RBNZ) to hike the cash rate in the near future. Any hike from the RBNZ will likely come right at the end of 2012 at the earliest. Lowering demand for the NZ dollar was news from Fonterra that prices at their monthly online auction had fallen by 10% to the lowest level since March 2011. The RBNZ monetary policy decision on Thursday will be watched for the statement accompanying the likely unchanged decision, apart from this the lead for the NZD will again come from the wider market appetite for risk.

Stronger than expected retail sales numbers in the US saw a positive start to the week for the US economy. However the various manufacturing indexes point towards a softening of demand and the pickup in Weekly jobless claims supports this. Recovery from crisis is never easy and it is too early to clearly state a slowing in activity at this stage. Weekly jobless claims numbers will be closely watched in the near term as the labour market is the key to sustained recovery. The FED is back in focus this week with its monetary policy decision on Wednesday. Expect no change, but the accompanying comments will be as closely followed as usual. The advanced GDP numbers on Friday round out what will be a very interesting week for the US economy.

Last week was a significant week for the Pound Sterling as it saw good demand and surged across the board. The BOE minutes proved quite a catalyst and the prospect of no further quantitative easing drove the demand. The strong retail sales numbers to finish the week were the icing on the cake for those who had interest to see the GBP consolidate its gains. Further appreciation from current levels will likely become more hard fought. This week will be the preliminary GDP numbers on Wednesday the focus, with market expectation for a +.1% number.

In Europe the focus on the respective debt markets remains very much in place. Italian and Spanish debt is the primary concern and political tensions are not helping the uncertain situation. One positive eventuality from last week was the confirmation of in excess for 400 billion EURO for further support funds to come via the IMF if needed. The general elections in France of are pivotal importance, as a change from the right wing Sarkozy leadership would have far reaching implications for the Euro-zone dynamic. German numbers remain the shining economic light within Europe, and highlight why it is Germany’s interest for the EURO to survive. The weak EURO certainly contributing to the competitiveness of German exporters. Wider European manufacturing numbers provide the initial focus ahead of the speech by ECB head Draghi on Wednesday.

In Japan last week the news has all been based around comments from Bank of Japan officials with regards to further monetary easing. Various officials hit the news wires with statements pointing towards further stimulation at this Fridays monetary policy meeting. This lowered demand for YEN, saw the YEN weaken across the board. Expect small ranges on YEN pairings ahead of Fridays announcement. Also of note this week are Japanese inflation and retail sales numbers, albeit it unlikely they will be of material impact ahead of the BOJ announcement.

In Canada last week the Bank of Canada (BOC) left the cash rate unchanged. The accompanying comments were more upbeat than expected and saw speculation about when the hiking cycle would commence from the current record low 1.0% cash rate. This interest sparked demand for the CAD across the board, with some bank analysts calling for hikes in the latter half of 2012. Later came further comments from the BOC that tamed the enthusiasm a little, but the CAD remained broadly stronger on the week.

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