Weekly FX Update - March 5

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

The distinctly choppy price action that has been a feature of markets in 2012 continued last week. The big focus for the week was the European Central Bank’s (ECB) three year funding offer to European banks. The update on the discounted funds was healthy, with the 529.5 billion EURO result at the upper end of the market’s expectations. The reaction was to by US dollars on this release and the US dollar saw good demand throughout the week. Helping drive demand was US FED Chairman Bernanke’s semi-annual monetary policy testimony. The likelihood of further quantitative easing (QE) fell dramatically as he all but ruled it out in the short term. Certainly the economic data has improved in the last few months, even if it is rebounding from low levels. Interestingly sentiment was similar in the UK from the Bank of England, where further QE is now very much data dependent. This raises the question, have we seen the end of the loosening of monetary policy in this cycle? And are we at the pivotal stage where the focus changes from financial stability, back to performance and growth?

In what was a quiet week for economic data in New Zealand, the NBNZ Business Confidence numbers showed a bounce from the previous low levels. This week coming sees the focus very much on the RBNZ and their monetary policy announcement on Thursday. No change to the record low 2.50% cash rate is expected, but as usual the statement and subsequent press conference will give Governor Bollard a good opportunity to explain their thoughts on the domestic and international economies. The NZD remains somewhat elevated on most pairings, although it saw some downside pressure in the offshore session on Friday.

In Australia data was weaker than expected almost across the board last week. This week will prove insightful, as we have the Reserve Bank of Australia RBA) monetary policy statement Tuesday, ahead of GDP on Wednesday, and employment numbers on Thursday. It is likely we will see no change in the cash rate from the RBA on Tuesday. The RBA consider their current cash rate to be neutral, and given the more positive tone of most offshore indicators of late, there will be a reluctance to ease further (reduce interest rates), unless the outlook darkens considerably.

In the US the more positive sentiment continues to permeate through the market. The FED’s taming of expectations for further QE will push the longer term interest higher and this is US dollar positive. The big focus for the week in the US are the employment numbers on Friday. A continued improvement in the employment market will eventually flow through to the housing sector, which continues to be the main cause of consternation in the economy.

In Europe the chances of further debt trouble contagion have reduced over the last couple of months. Financial stability has been enhanced through the ECB’s bank funding operations, but risks remain. Greece is obviously still an issue, and it remains uncertain of the uptake of the debt swap proposal. Portuguese debt also remains under pressure and a possible source of trouble in the coming months. The ECB announces its monetary policy decision on Thursday. No change is expected, and the chances of a cut to the 1% cash rate have greatly reduced in the last few months. News of progress on the debt swap in Greece is expected this week, and will remain the focus. In the event of an involuntary default, expect further pressure to come on the EURO.

The Bank of England’s (BOE) comments last week provided the Pound Sterling with some demand, to take back a little of its recently lost ground on various pairings. Last week’s economic data was mixed but a healthy bounce in construction numbers buoyed the market somewhat. Expect no change from the BOE at their monetary policy decision this week. The rest of the focus will come from services activity data on Monday, and housing numbers Tuesday. Until we get a sustained recovery in Europe, the UK economy is going to have to work had for its growth. In the meantime the Australasian currencies will remain at elevated levels against the GBP.

Japanese economic data was mostly better than expected last week. Importantly for the Japanese economy the trend of a weakening YEN continued last week. The USD is leading the charge against the YEN, having broken a number of significant resistance levels in the last week. This week personal earnings numbers on Tuesday and final GDP numbers on Thursday will be closely watched.

The Canadian dollar saw good demand last week. It posted its best weekly performance in two months, and finally took back some ground against the Australasian currencies. The elevated oil price seems to be finally leading towards increased demand for the CAD. This week is busy for economic data in Canada. Manufacturing numbers on Tuesday are followed by building permit numbers on Wednesday. The Bank of Canada will announce no change to the cash rate at their meeting on Thursday, but as usual their comments will be closely followed. Employment numbers on Friday round out what will be an interesting week. Also of note is the prospect of Iceland adopting the Canadian dollar as their currency. The idea is in its infancy, but would cause CAD demand if it becomes more likely that the idea would be progressed.

Sam Coxhead
Global Currency Payments & Transfers

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