Direct FX's Weekly Update

Over the last week the financial markets have seen increased volatility amid heightened risk aversion. The European debt crisis remains the focus, and the risk hangs on the ability of the Greek Government to pass the required austerity package into law, to secure immediate funding from the EU and IMF. International equity and commodity markets remain under pressure and longer end interest rates moved lower, as bonds benefitted from safe haven demand. The oil price has weakened further as surprising news emerged that the International Energy Agency (IEA), would release 60 million barrels of its reserve in the next 30 days. Japanese authorities added to this, with a reduction in the amount of reserves they will hold. This looks to be in response to the inability of OPEC to increase supply, as the oil price leeches momentum out of global growth. The global uncertainty has seen the US dollar in demand.

The New Zealand dollar remains relatively strong against most currencies, as yield chasing investors maintain demand for the time being. A move higher in short term interest rates through the week supported the NZD. Given the softer global economic outlook and increased risk aversion, tests to the downside for NZD may be seen this week, especially against the US dollar. The NZ trade balance released this morning was 605 million, against an expected one billion surplus, and this saw some NZD selling. From here the domestic focus will be the NBNZ Business Confidence survey due for release on Thursday. The bulk of the lead this week will come from external factors, driven primarily by developments in Greece.

The Reserve Bank of Australia (RBA) released its minutes from its June Monetary Policy meeting last week. The minutes point towards no immediate hike in the cash rate as the RBA give themselves time to assess the economic data over the coming months. The softer global outlook and potential risk stemming from the Greek crisis outweighing the domestic inflationary risks for the time being. In the absence of significant domestic data this week, the lead will be provided by the overall market appetite for risk. Given the uncertainty in the markets with regards to the Greek debt situation, expect a downside bias for the AUD, again especially against the US dollar.

The US dollar has continued to gather a little momentum over the last week, and the European debt situation provided the stimulus for demand. The US economic data was a little mixed, but stronger than expected housing numbers and personal consumption indicators were positive. The intense negotiations around the raising of the Federal debt ceiling continue, and this may provide some US dollar risk over the coming weeks. Falling gold and commodity prices are US dollar positive, and these look be continuing in the short term. Consumer confidence numbers on Wednesday, and manufacturing numbers on Thursday and Friday will provide the economic data focus for the week. But most influential, will be the outcome of the efforts of the Greek Government to pass the austerity program through parliament.

The Bank of England (BoE) minutes from their June Monetary Policy Meeting showed discussion about further quantitative easing (QE) in the UK, and this led to a sell off for the Great British Pound. The UK economy continues to be very soft, and has faced high inflationary pressure since 2009. Normally this inflationary pressure would lead to a higher cash rate, but in the face of slow growth the Bank of England has been caught in an unenviable position. While the prospect of further QE is prominent, there is little prospect of a turnaround in the fortunes of the GBP. Therefore any appreciation of the GBP against the NZD or AUD, will most likely be driven by weakness in the Australasian currencies. The UK focus this week will be the final GDP for the first quarter on Tuesday, followed by housing numbers Thursday and manufacturing numbers Friday.

The EURO remains under considerable pressure as the Greek debt situation plays out. Tuesdays vote in the Greek parliament remains the key focus in the short term. The push for banks to accept voluntary write downs or rollovers of their Greek debt holdings means the financial stress of this situation is far reaching. The complexity of the situation is best displayed by the fact that US institutions have provided the bulk of bond insurance, reportedly to the tune of 100 billion USD. European banking stocks were under intense pressure on Friday, as their holdings of Greek debt come under the spotlight. Chinese authorities have stated their commitment to buying European debt in the last couple of days and hopefully this will help calm this very volatile situation. This week and the coming weeks are pivotal to the future of the Euro-zone, given the stresses on all elected officials from their constituents.

In Canada retail sales came in weaker than expected, with the headline number flat vs. an expectation of a .5% increase. This saw the CAD soften a little against most currencies and this was extended when Bank of Canada head Carney stated that "policy may need to remain stimulative to close the output gap". This type of comment points towards no hikes in the cash rate in the coming months. This week's focus starts with inflation numbers due on Wednesday, followed all important GDP numbers due on Thursday.

The Japanese economy continues to struggle after the devastation from the earthquake and Tsunami. It posted a second straight monthly trade deficit and there are fears that growth will remain under pressure, especially if the nuclear power plants do not resume operation. There has been reports of the Bank of Japan trying to stablise the Nikkei by buying index funds each time the Nikkei sees a 1% fall on a day. The main focus for the week will be the Tankan Manufacturing index on Friday.

In South Africa last week the number employed in the non-agricultural sector beat expectations, showing a rise of .6%. Inflationary pressures are also higher than expected with CPI at 4.6% vs expectations of a 4.3% increase. The extra pressure has almost solely been attributed to an increase in the cost of food. If this persists, the pressure will increase for a sooner than expected interest rate hike from the South African Reserve Bank.

Sam Coxhead

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