Sam Coxhead's Weekly FX Market Overview

Market Overview:

A barrage of economic data and central bank announcements ensured the recent volatility continued through the course of week. The re-ignition of European debt fears again saw the EURO under pressure. The shifting in focus from Greece to other peripheral member states, ensured that concerns remained elevated and the banking sector remains under pressure. A Moody's downgrade of Portuguese debt added to the pressures. With much weaker than expected jobs data in the US and benign prospects in the UK, the major currencies all face negative outlooks. The European Central Bank (ECB) raised the cash rate .25% to 1.50% as widely expected, but this did little to support the EURO. The domestic picture for the Australasian currencies remains somewhat mixed, but the growth currencies remain surprisingly sort after, as global investors chase higher interest rates. This flies in the face of what should be an increasingly softer outlook for commodity prices in the short term, as can be seen in the 6.7% fall in the Fonterra Diary auction prices last month.

Weaker Australian construction and retail sector numbers were balanced out by stronger than expected employment figures. The Australian dollar remains supported on any weakness, even though the prospect of any further cash rate increases remains a distant proposition. In New Zealand the bounce back in confidence since the February earthquakes continues, as evidenced in the NZIER Quarterly Survey of Business Opinion results. The New Zealand and Australian dollars may see some headwinds coming from the Chinese influence, as inflationary pressure remains stubbornly high and import demand falls. The New Zealand dollar has consolidated at higher current levels against the Australian dollar, and could potentially push higher again, if the release of first quarter GDP numbers on Thursday surprise to the topside. This week apart from NZ GDP numbers, there is little in the way of Australasian economic data, so for the most part the coming week's direction will come from offshore influences.

In the US the disappointing monthly employment growth numbers on Friday, were compounded by downward revisions to the previous month. The resulting drop in US Government bond yields was always going to put the US dollar under some pressure. Without any resolution on the raising Federal budget ceiling, expect any real strength from the US dollar to be muted at best. This coming week sees the usual flora of economic data, but the Federal Reserve Open Market Committee meeting minutes on Tuesday will be closely watched. Federal Chairman Bernanke also has a couple of speaking opportunities, and these will be closely monitored also.

In Europe the focus remains on the peripheral member states and their ability to finance their debt. Bank "stress tests" results will be made public at some stage during the week, and these will effect equity markets, if any subsequent capital raising is needed. The tangled web of interests between banks and Government debt means this situation will remain protracted, and topical over the medium term. Credit agencies continue to be active in Europe, with Moody's downgrade of Portuguese debt last week, leading to weaker bond prices across the peripheral state board. Inflation numbers on Thursday will be of interest. There are high level EU meetings this week, with conjecture that the size of the European Financial Stability Fund will be increased, to accommodate any increased demands, such as Italy needing funding. EURO sentiment is weak at the moment, and as the northern hemisphere summer begins, liquidity will drop further. In conditions such as these, sharp moves in both directions are likely and should be kept in mind when considering EURO transfers.

In the UK the economic outlook remains downbeat, as the austerity initiatives from the UK Government start to evidence themselves. Sentiment towards the pound sterling has been appropriately weak and the rhetoric from the Bank of England (BoE) justified this sentiment. Of focus this week will be the monthly inflation numbers on Tuesday and unemployment benefit claim figures on Wednesday. If the European debt issues continue to gain pace, the GBP may see some demand from investors diversifying away from the single currency.

In Canada the economic data remains mixed. Employment growth figures released last week are encouraging. Given the continuing softness in the US economy, as Canada's largest trading partner, we can expect the Bank of Canada (BoC) to remain cautious with regards to the cash rate. Housing numbers and the BoC Business Outlook Survey on Tuesday will be watched, ahead of the trade balance on Wednesday.

The Japanese Yen will see demand if the uncertainty around global growth continues. The domestic outlook remains soft in Japan, but prospects are better as supply chains improve in the manufacturing sector following earthquake and tsunami. There is little on the economic calendar in the coming week. The Bank of Japan does have its Monetary Policy Statement due on Tuesday, but expect little reaction from this.

Sam Coxhead Global Currency Payments & Transfers

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