Direct FX Weekly market Overview

Market Overview:

The uncertainty continued last week, and was visible in the volatile, but mostly range bound price action across all markets. Dominating headlines was the ongoing saga of the Greek debt situation, and expect this to continue with talk of possible extension of the debt contagion.

Equity, commodity and interest rate markets were all volatile, as the appetite for risk ebbed and flowed. Notably the gold market saw inflows as the European debt concerns featured on Friday. Adding to the complexity are the ongoing US Congressional negotiations about the lifting of the US debt ceiling. The fragile nature of recovery of the western economies is plain to see. For the most part economic data was mixed at best in the UK and US. Japanese growth data disappointed as the full implications of the disaster damage starts to come through in the economic numbers.

The New Zealand dollar outperformed on most cross rates. The disciplined, but benign Govt Budget aimed at appeasing the credit rating agencies, seemed to attract investors. Since its release there have been various flows into NZD, with the largest move seen on Friday as a US bank bought the NZD against various currencies. This week sees just quarterly Reserve Bank of NZ Inflation Expectation numbers due for release on Thursday, and do not expect these to raise too much market reaction.

The release of the Reserve Bank of Australia's Monetary Policy Meeting minutes last week saw the prospect of their pending cash rate hike slightly pushed out. Therefore chances of a June or July interest rate hike have diminished a little. The likelihood is a move at the August meeting to my mind, as wage price data was more subdued than expected.

This week is light on economic data, with Private Capital Expenditure numbers on Thursday the highlight. Expect the overall market appetite for risk to be expressed in the price action of commodities and the AUD to follow that lead.

In Europe the suspension or delay of the IMF/EU investigations into the extension of bailout proposals has been forced by the necessity for the Greek authorities to get their affairs in order. These delays are not positive and nervous investors will start to look at related exposures further afield. The further downgrade of the Greek debt credit rating, and that of huge European institution Credit Agricole, because of apparent exposure to Greek debt, is an example of the far reaching implications of this situation. To intensify issues, Italy's credit rating has been placed on negative watch by S&P and will do nothing to quell fears that the contagion has further to spread.

In the UK last weeks' inflation numbers exceeded expectations, but again the Bank of England (BoE) stated they see these pressures as mostly transitory. The BoE Meeting Minutes were as expected and do not expect a hike in the cash rate in the short term. On the whole the UK economic numbers remain weak, but the monthly retail sales numbers did show a welcomed jump ahead of expectations. This week's Inflation Report hearing's will be closely watched on Tuesday, as will the final GDP numbers due for release on Wednesday.

In the US the recovery remains patchy with housing and labour numbers the primary concern. Weaker earnings results from the likes of Wal-Mart and Hewlett Packard are a sign that the consumer remains weary. The Congressional lift of the debt ceiling will remain in the headlines ahead of the August cutoff date, expect a result at the final hour as the Republicans pursue aggressive spending cuts in order to sign off the increase. Along with the usual slurry of economic data, the preliminary GDP figures on Thursday will be closely watched. The appetite for risk will be the leading factor, a further downside lung in commodity prices would obviously see the USD benefit.

The Canadian dollar saw selling pressure on Friday as the inflation and retail sales numbers both came in under expectation and give the Bank of Canada more breathing space with regards to raising their cash rate. This theme will see the Canadian dollar underperform in the short term, especially should the oil price see any downward correction.

In South Africa both the inflation and retail sales figures came in below expectations last week and this takes pressure of the South African Reserve Bank to lift interest rates. The RAND has been suffering from the exit of the risk trade over the last few weeks and these numbers will do little to change its course. Expect the RAND to closely follow the fortunes of the precious metals markets over the coming week.

Sam Coxhead

Global Currency Payments & Transfers

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