Weekly FX Commentary from Direct FX

Market Overview:

The last week proved to be one of the more interesting periods for some time. The mixture of various central bank announcements, heightening tensions across the Middle East/North Africa region, European debt issues, further strengthening commodity prices and Asian growth prospects, meant there was a lot to absorb. The main theme to further establish itself was that of a weaker US dollar. The US Federal Reserve made no fundamental shifts in policy at its monetary policy meeting. The second quantitative easing program will end as expected in June, and Chairman Bernanke all but ruled out any further of these policy initiatives. The downward adjustments on the growth of US outlook made the statement a little more "dovish" than the market expected, opening up the way for the US dollar to move lower.

Overall the markets look to be at a cross road. This feeling has been coming on over the last few weeks as some previously strong correlations start to break down. With the commodity markets remaining very upbeat for the time being, it would be expected that interest rate yields should be moving higher. Friday saw the benchmark US 10 year Treasury yield at 3.29%, as low as it has been since late March. It appears that the interest rate and commodity markets are diverging. Personally I think the interest rate markets are right and we will see a correction in the commodity markets at some stage soon. Evidence of this occurred this morning when the silver market dropped 10% in a space of minutes. This has been attributed to profit taking from a large hedge fund. The fact that the Chicago Mercantile Exchange increased margin requirements to hold silver positions twice last week. This will put pressure on leveraged accounts to reduce positions and could account for some of the selling.

The corporate earnings season in the US proved to be healthy enough as many blue chip companies beat expectations, adding to the mostly "risk on" bias of the last week. US equity markets were at three years highs even as economic data pointed towards a oil price induced slowdown in growth. Advanced GDP numbers released on Friday showed 1.8% growth for the first quarter, just below the 1.9% expected and down from the 3.1% number from the previous quarter.

The Australian dollar continues its appreciation against the US dollar and most other trading partners, and it hit a high of 1.1009 against the USD this morning. CPI was the domestic focus of the week, and the 1.6% increase was well above the expected 1.2% increase. The high inflation number has seen the interest rate market bring forward the chances of a hike from the Reserve Bank of Australia. The World Bank increased forecast for Chinese economic growth for 2011 and the weekends comments by Treasurer Swann that the unemployment rate may dip to 4.5% have helped underpin the AUD. The prospect of yet higher rates in Australia will provide the focus for investors going forward. The correction in the silver market this morning in thin trading conditions saw the AUD dip almost 60 points very quickly before recovering. This highlights the susceptibility of the growth currencies to a reversal in the commodity markets, and should remain a part of the thought process when considering future money transfers in the Australian dollar. This week sees the Reserve Bank of Australia announce the cash rate, expect no changes at this meeting, but any comments with regards to future hikes will be reacted to.

In New Zealand last week's focus was the Reserve Bank of New Zealand's cash rate announcement. The comment that "the current level of the OCR is likely to remain appropriate for some time" took market participants somewhat by surprise. This caused a move lower in the interest rate markets and weighed on sentiment towards the New Zealand dollar as a consequence. The NBNZ Business Confidence survey bounced off lows set after the February earthquake and this rebound was largely to be expected. The NZ trade balance showed a larger than expected surplus which was added to by increased diary export receipts. This coming week sees the all important employment numbers released on Thursday and will be the focus after the Labour Cost Index and Building Consents numbers on Tuesday and Wednesday respectively.

The Great British Pound was buoyed by the preliminary GDP numbers that came in at .5% for the quarter and exactly as expected by the market. There had been rumours that this number would disappoint and this was why the GBP reacted positively to this number. This week sees the usual housing and manufacturing numbers due for release ahead of the Bank of England's Money Policy Committee decision on the cash rate. This is expected to be unchanged at .5% and the meeting minutes released in two weeks time will give further insight to the future outlook.

In Europe the focus on the debt situation in peripheral member states remains in place. Had it not been for the relentless diversification away from US dollars by Asian central banks and Middle Eastern sovereign wealth funds, the EURO would no doubt be in a much worse position against most currencies. The prospect of a Greek debt restructure remains a real, but daunting prospect. It would equate to an orderly default by Greece, and destruction of investor value. The yield on Greek debt continues to climb on an almost daily basis reflecting the fact there is almost no demand for the debt and therefore no ability for Greece to access funding. Thursday's European Central Bank meeting on Thursday will be the focus for the week, with the cash rate expected to remain at 1.25% ,and the market has just 75pts of hikes expected before the end of the year.

In Japan the news remains mixed with an S&P credit downgrade of Government debt as the disaster rebuild costs start to mount. Inflation numbers were flat, and the Bank of Japan left monetary policy unchanged as completely expected.

In Canada, GDP figures for the month showed contraction of -.2% against an expectation of 0.0%. The CAD again set highs against the USD , but gave up a little ground against most other trading partners. This week sees building and manufacturing numbers on Thursday ahead on employment numbers on Friday.

Sam Coxhead

Global Currency Payments & Transfers

ENDS

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