Weekly FX Update from Sam Coxhead at www.directfx.co.nz

Market Overview:

The past week proved to be a dramatic one for global financial markets. Early inklings from a dramatic drop in the silver market flowed on to broad based selling across almost all commodity markets. The seemingly ever simmering fears about European sovereign debt escalated with the Greek debt crisis reaching a boiling point. Friday's rumours about a Greek exit from the EURO have been vehemently denied by officials, but some kind of "soft" debt restructure seems a foregone conclusion. The Australasian currencies have been insulated from what would have been an even more rapid decline, by the expectation that the Reserve Bank of Australia will raise their cash rate by another 50pts by year end. There was good news in the US where jobs growth was stronger than expected and added to the upside USD momentum being driven by the drop in the commodities markets.

The Reserve Bank of New Zealand will be more confident in their comfortable assessment of inflationary pressures in their cash rate review statement two weeks ago. Last week's sharp drop in the oil price and lower than expected Labour Cost Index, has eased concerns that inflation may get away on them. The NZD gave up ground to the resurgent US dollar, but was buoyed by better than expected employment numbers against most other currencies. This coming week has only the RBNZ Financial Stability report on Wednesday as a focus, and is not expected to be market moving. Expect the weeks lead to be driven from offshore developments, with Euro-zone debt concerns probably the main focus.

The Australian dollar looks to have established a top in the current cycle at just over 1.1000. Any break back above this level will be extremely hard fought. The silver market induced some swift selling of the AUD early in the week, the other commodity markets added to the momentum. Given the general atmosphere of risk aversion, the AUD has performed fairly well, and stemming the flow from the AUD was the RBA's Monetary Policy Statement on Friday indicating another hike of 25pts.

Tuesday sees the monthly trade balance figures released and in the evening the Annual Budget release. The employment numbers round out the weeks Australian data on Thursday with the Unemployment rate expected to be stable at an impressive 4.9%

In the US the data was positive for the week on balance. Fridays better than expected employment numbers providing some much needed support to the equity markets that suffered for much of the week. The fall in the commodity markets saw the USD finally see some support. Adding to the US dollars fortunes was the negative EUR sentiment provided by the deepening Greek debt crisis. Market dynamics of yester year returned with the US yields pushing lower throughout the week, along with the
stronger USD. This is a good indication of the pure nature of the week's risk aversion. Expect any further strengthening of the US dollar to provide those looking to diversify out of US dollars with better levels to buy other currencies. This week again sees a fairly full economic calendar in the US. The focus starts on Wednesday with the trade balance, before retail sales numbers and Fed chairman Bernanke's testimony before the Senate Banking Committee on Thursday. Friday sees the monthly inflation and consumer confidence numbers released.

In the UK the economic data remains down beat and with the prospect of any rate hikes by the Bank of England off the table for the time being, expect any appreciated of the GBP to remain muted. With the fiscal austerity measures just starting to impact, the hard grind for the UK economy looks to continue. Along with the usual housing and manufacturing numbers this week, the focus will be on the Bank of England Inflation report due on Wednesday. There is expectation that the growth forecasts will be again downgraded in this report. Last week's correction lower in the oil price will no doubt improve the inflationary outlook and slightly ease tensions on the Bank of England Monetary Policy Committee, which in itself is mildly GBP negative.

The EURO should continue to trade in a fickle and volatile manner. The expectation of cash rate hikes from the European Central Bank (ECB) should provide support, but this will be balanced by the Greek situation. Assuming that rumours of a Greek exit from the EURO are mostly unfounded, focus will be on how the officials can reorganise the Greek debt load to make it manageable. Reorganisation of a current bond issues is no simple task, extension of loan maturities and the possibility of growth based coupon payments are but two options apparently being considered. The linkages between the wider European banking sector make this proposition both incredibly complex and important. All ECB comments will be closely watched.

The Japanese YEN demand increased as the last week's risk aversion intensified. This added with the prospect of re-insurance inflows to YEN, and the YEN's appreciation is understandable. What also must be kept in mind is the level of the USD/YEN cross. The current rate of 80.50 remains uncomfortably close to the apparent trigger point of 80.00 where the Bank of Japan (BoJ) would again intervene to curb the YEN strength. Given last week's ECB comments that they will work with the BoJ if required should mean the market remains very weary of pushing the YEN strength too much harder against the US dollar.

In Canada, the eventual recognition that the Conservative party would gain power in the elections was Canadian dollar positive early in the week. This was backed up by the stronger than expected employment numbers that saw the unemployment rate drop to 7.6% against an expected 7.7% rate. The move lower in the oil price countered these positive leads. The week ahead is reasonably thin on the economic calendar with just housing numbers and the trade balance on Thursday to provide a
domestic lead.

In China this week the inflation number on Wednesday will be closely watched by all. Following another Indian cash rate hike last week, a higher than expected number will see officials react with further measures to slow the economy and pricing pressures.

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