Weekly FX Update by Sam Coxhead from directfx.co.nz

Market Overview:

Over the course of the last week further signs of a slowing global economy have emerged. In particular the outlook for the sluggish economies of Britain and the United States has softened again, and the prospects of "lower for longer cash rates" increased. There has been some progress on the Greek debt situation. The "Troika" of the European Union, European Central Bank (ECB) and International Monetary Fund have ended their investigations positively. So long as the Greek administration can get pass marks on prospective budget cuts and privatisation schedules, the extension of bail funds will be forth coming and early July payments are likely to be made. Australasian news remains relatively upbeat with rebounding business confidence in New Zealand and much better than expected Retail Sales numbers in Australia. On balance the US dollar remains under pressure and the EURO remains the main benefactor of this in the short term. The Australian and New Zealand dollars have demand being balanced by a lower global growth profile, and the prospect of higher domestic interest rates.

This coming week is a busy one for central bankers, with the Reserve Bank of Australia (RBA), Reserve Bank of New Zealand (RBNZ), Bank of England (BoE) and ECB, all having their respective monetary policy meetings.

The RBA announces rates later today. The cash rate will likely be unchanged, with a 50% probability of a 25pt hike priced into the interest rate market for their July meeting. Also, Thursday sees the all important release of the employment numbers, with jobs growth of 25k expected and the impressive unemployment rate of 4.9% expected to remain unchanged. Any increased likelihood of a July rise in the cash rate, will see the Australian dollar in demand.

The positive news for the New Zealand economy continued last week with the sharp rebound continuing in the NBNZ Business Confidence Survey. The RBNZ Monetary Policy Statement on Thursday, will be closely watched, as will Governor Bollard's comments to Parliaments Finance and Expenditure Committee later that day. Any increase in the probability of an earlier than currently expected cash rate rise, will be NZD positive, but remains unlikely given the global outlook.

In the UK weaker than expected manufacturing data has pushed back the prospects of any move higher in the cash rate from the BoE in the short term. Various banks have been adjusting their expectations, for example Barclay's Bank have moved their expectation for a move in the cash rate from August, to November. Given the mostly short term focus of the foreign exchange market, the Pound Sterling has been under pressure correspondingly. The BoE announcement on Thursday will be watched, but expect little market reaction.

The Euro had a very positive last week. The beneficiary of good news on the Greek debt front, as well as seeing demand after the much weaker US employment numbers. This trend is likely to continue with little on the economic horizon to drive broad based demand for the US dollar in the short term. The ECB decision on the cash rate will be watched closely, but no change in the cash rate is expected at this Thursdays meeting.

In the United States this coming week, there is little in the way of first tier economic data, so look to the equity markets for the lead. The weak data of late has increased speculation about the prospect of a third round of Quantitative Easing (essentially the electronic printing of money) from the Federal Reserve, but this remains unlikely at this stage. Fed Chairman Bernanke speaks on Wednesday night in Atlanta, and any comments that he make with regards to the economy will be closely followed. With housing and employment remaining fragile, expectations for any change in the cash rate in 2011 have been all but ruled out. This should mean the USD remains under pressure as longer term interest rate remain low.

The economy of South Africa remains interesting, with a nice surprise jump in the GDP number last week. This has caused RAND watchers to reassess their views on how long the Reserve Bank of South Africa (SARB) can leave the cash rate unchanged. Any strong move to price earlier interest rate hikes from the SARB, will see the RAND appreciate as investor chase higher yield via South African bonds.

Sam Coxhead

Global Currency Payments & Transfers

http://www.directfx.co.nz

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