Direct FX Weekly FX Update
Analysis - By Sam Coxhead from www.directfx.co.nz
The last week of trading in the financial markets has been some of the most turbulent since the start global financial crisis in
2008. Violent moves have been seen in almost all markets as levels of liquidity (depth of market) slumped dramatically.
The perfect storm of lower global economic growth expectations, and therefore lower expected tax revenues, accentuating
the issues being faced Governments laden with debt. The sequence of events that have unfolded over the last few weeks
have seen somewhat extraordinary measures being taken up around the globe. In the US a pledge from the Federal Reserve
(FED) to maintain its super low monetary policy for another two years. In Europe the European Central Bank (ECB) entered
the secondary bond market to buy Spanish and Italian government bonds to stem the markets push of the bond prices to
record low levels. And the Swiss and Japanese authorities continue to take measures to curb the excessive strength of
their safe haven currencies. The week ended on a positive note with better than expected US retail sales numbers adding
further to the bounce from the lows in growth assets. Early indications are that a further follow through from Fridays
positive tone in the week coming. But given the multiple factors at play, and the interconnectivity of the global
markets, expect periods of volatility to continue over the short term at least.
In New Zealand there was little of domestic focus last week. The likelihood of a sharp 50pt rise in the cash rate is now
off the agenda for the September meeting of the Reserve Bank of New Zealand (RBNZ). But the market still have over 50pts
of tightening priced by the end of the year. This should see the NZ dollar supported in periods of weakness, barring
calamity in offshore credit markets. Last week saw the continuation if the retreat of the NZD on a number of currency
pairs, but expect any decline to be less rapid this week.
In Australia the unemployment rate bounced higher to 5.1% from 4.9% last week. The weaker jobs growth will pave the way
for a lower cash rate from the RBA should the domestic economy continue to show softness that has been seen of late. A
reassuring statement from Australian Treasurer Swan over the weekend pointed towards the relative strength of the
Australian economy, and its close association with Asia, and China in particular. Tuesday sees the release of the
previous RBA monetary policy meeting minutes and these will be closely followed. It is reasonable to expect some
sideways trade from the Australian dollar as the market stablises after last week's action. Given last week's
retracement from the extreme highs on various cross rates, expect any weakness to be more shallow from the AUD.
In the US we can expect the economic data to remain patchy at best. The slowdown in the 2nd quarter threatens to
continue, and given the public sector belt tightening is likely to continue into the next election. Consumer sentiment
is likely to remain low as evidenced from Friday's retail sales release detailed below. The Federal Reserve's unusual
step of stating that the cash rate will likely remain low until mid 2013 should reassure businesses looking to invest.
The potential of further quantitative easing from the FED should ensure that longer term interest rates remain low also.
But it can be expected that for any further initiatives of this kind will be kept for the most dire of circumstances.
The long road back to recovery in the British economy continued last week with weaker than expected manufacturing
numbers. The Pound Sterling did manage to take back further ground against the Australasian currencies as the risk
aversion gained momentum. But given the prospect of the very low cash rate being continued into 2013, the prospect of a
trend reversal remains a fair way off. This week's interest will be based around the inflation numbers on Tuesday, Bank
of England (BOE) meeting minutes Wednesday and retail sales data on Thursday.
In Europe the focus remains steadfastly on the spiraling Government debt issues. Over the weekend the Italian Government
passed further austerity measures into law in an attempt to convince the market of its commitment to balancing its
books. With the ECB committing to buy Spanish and Italian debt, further calls for a single Euro-zone bond issuance
entity are again emerging. German enthusiasm to this concept remains the key, and a move towards this would be unlikely
unless the situation deteriorates further and the prospects becomes more politically palatable. Asian central bank
demand for EUR remains in place and provided much needed support over the last week. A high level meeting between German
and French officials this week will offer further insight to plans to stablise the debt issue on a wider scale and will
be closely followed.
In Japan the preliminary 2nd quarter GDP number was released at -.3% versus an expectation of a larger -.6% decrease in
activity. Interestingly however export revenues were lower, in line with recent data in Hong Kong and Singapore. The YEN
remains very strong and Finance Minister Noda stated that authorities remain poised to intervene to curb the strength on
the YEN. If the stablisation of the equity markets continues throughout this week, expect the YEN to come under some
pressure as the Swiss efforts to curb CHF gained momentum to start this coming week.
Sam Coxhead