Direct FX Weekly FX Update - Nov 29

Direct FX Weekly FX Update- By Sam Coxhead of www.directfx.co.nz

Throughout the course of last week the market’s primary focus remained on the debt crisis in Europe. Credit downgrades for Portugal and Belgium, an undersubscribed auction of German bonds, and continued pressure on Spanish and Italian debt markets, saw risk aversion remain elevated. In an effort to speed reforms, French and German officials are now looking at a range of bi-lateral agreements. These would enable fiscal reforms to be activated without the lengthy process of adjusting the EU Treaty to be undertaken. Rumours of a IMF funding offer to Italy has seen this week open positively, as risk aversion is pared back. In the US, sentiment picked up on the news that the “black Friday” retail sales activity was back at pre-financial crisis levels. This backed up the better than expected Durable Goods report earlier in the week. The preliminary 3rd quarter US GDP data was lower than expected, but with the focus more on Europe, this piece of data had limited impact. In New Zealand the centre right National party Government easily held onto power, winning by the largest margin in over fifty years. Overall the US dollar maintained its recent momentum, even if it has given back some ground, after the positive start to the week this morning.

Europe will no doubt continue to dominate the headlines this week. Any progress made by Germany and France towards further fiscal integration may see the wider market risk aversion fall. Italian debt remains the most under pressure, and any unlikely confirmation of a funding solution from the IMF will be well received. This week sees the meeting of Euro-zone finance ministers on Wednesday, and no doubt comments from officials will insight some market reactions. New European Central Bank (ECB) President Draghi is due to make a couple of speeches and these will also be closely followed

In the US, the more positive run of economic data continues, albeit the numbers coming back from very low bases. A more active consumer is encouraging for the wider economy, but the real sticking point remains the labour market. Monthly employment numbers come on Friday and any unemployment rate below the current 9% will be heralded as a step in the right direction. New homes sales and consumer confidence numbers on Tuesday will garner attention ahead of manufacturing numbers on Thursday.

The John Key led National party easily maintained power in the weekends election in New Zealand. This was the expected result, and is not expected to see much reaction in the currency markets. Today’s NBNZ Business Confidence number shows a rebound from the previous 13.2 to 18.3. Given this was when the rugby world cup was on, a pickup in confidence was expected. For the remainder of the week, we have just monthly building consent numbers on Wednesday to consider. Expect most of the lead to come from offshore, with developments in Europe again taking center stage.

The Australian dollar remained under pressure last week as the wider market risk aversion continued. Not helping sentiment was the news that Chinese manufacturing numbers were lower than expected and the sector contracted last month. This week sees the return of some meaningful economic data for the Australian economy. Private sector credit numbers on Wednesday are followed by building approval and retail sales numbers on Thursday. Expect the bulk of the lead for price action to come from developments in Europe. The market now has fully priced in a further cut of 25pts to the cash rate from the Reserve Bank of Australia as its cash rate announcement next week.

The likelihood of further quantitative easing (QE-electronic printing of money) in the UK increased last week and the European crisis intensified. Activity in the UK remains low, and the Bank of England (BOE) will continue to monitor the impact of a sharply slowing European economy closely. Expect the manufacturing and construction data on Thursday and Friday respectively, to be closely watched. Interestingly UK debt remains in demand, as investors avoid Europe. This has provided the Pound Sterling with demand in the face of further QE.

In Canada last week the focus was on the retail sales number on Wednesday. This number proved to be better than expected and helped underpin demand for the CAD. The ongoing elevation of the oil price has been the other driver. This week sees the release of both GDP and the employment numbers. GDP is due for release on Thursday, with an expectation of +.2% growth for the month. The employment numbers are due on Friday and are expected to show a stable unemployment rate at 7.3%.

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