Weekly Market Overview- 23 July By Sam Coxhead of www.directfx.co.nz
Market Overview:
The interesting environment continues to play out in the wider financial markets. Europe continues to stumble along.
Growth is of an ongoing concern, and teamed up with the well established financial issues will maintain pressure on the
EURO for some time to come. The Australasian currencies have direction being driven by two opposing forces. The slowing
global growth outlook is most definitely a negative for the commodity currencies. The slowing global growth picture
increases the chances of a slowdown in the US recovery, and increases the odd of further stimulation from the Federal
Reserve (FED). Any increase in the stimulatory efforts from the FED are New Zealand and Australian dollar positive.
These opposing forces are likely to continue to feature throughout 2012 and point towards a continuation of
directionless trade within establish trading bands.
Australia
The Reserve Bank of Australia (RBA) monetary policy meeting minutes released last week were a little less down beat than
expected. Further easing in the cash rate from the current 3.50% will be reliant on further slowing in economic
conditions. Increased speculation around further central bank buying of Australian dollars underpinned demand for the
AUD throughout the week. On Friday a lowering of Chinese 3rd quarter growth forecasts to 7.4% , and a lower EURO helped
stem further appreciation of the AUD. This week’s focus sits primarily with the 2nd quarter inflation numbers due on
Wednesday. Any result dramatically away from the +.6% market expectation will likely see a reaction from the interest
rate market flow through into a change in AUD demand.
New Zealand
The 2nd quarter NZ inflation number were materially lower than expected. This provides the Reserve Bank of NZ (RBNZ)
room to keep the cash rate lower if need to support economic growth. The latest Fonterra auction results were mixed.
Ironically the outlook should improve as the continued drought in the US puts further pressure on the global grain
markets, making the NZ grass fed dairy products more competitive. The focus this week is provided by the latest RBNZ
monetary policy announcement. Expect no change from the RBNZ, and a short and concise accompanying statement. It seems
like that the RBNZ will maintain its emergency low cash rate of 2.50% well into 2013.
United States
Economic indicators continued to show an again slowing economy in the US last week. Lower than expected construction,
retail sales and manufacturing numbers were seen along with an .2% inflation number for the month of June. FED chairman
Ben Bernanke made his semi-annual testimony on Capitol Hill on the economy and monetary policy. The testimony was
unremarkable in that he has not altered from his recent rhetoric. Further monetary policy stimulation will be used if it
is deemed appropriate. These comments seem to be keeping the US dollar from gaining momentum too fast, albeit seeing
grinding appreciation against the beleaguered EURO. Undoubtedly this week’s focus will be Friday’s release of the 2nd
quarter GDP numbers. The market expects 1.6% growth, although that maybe revised down following the weak series of data
releases lately.
Europe
Spain has again come under serious scrutiny from the financial markets. Funding costs have again soared to record levels
amid news that the EU have agreed the bailout package for the Spanish banks. An illustration of the concern is the fact
that the Spanish equity market was 5.8% lower on Friday’s session alone. The wider situation remains horrible and this
slow moving train wreck shows no signs of slowing down. This crisis is one of economic, financial and increasingly
political issues. None of these are easily or quickly remedied. Last week German economic sentiment numbers dipped
further and this week Europe wide manufacturing numbers are the focus.
United Kingdom
The UK inflation numbers were lower than expected when released last week. This eases the way for additional monetary
stimulus if required and certainly eases pressure on the Bank of England (BOE). Also of surprise were the stronger than
expected employment numbers, however these were countered by the continuation of weak retail sales figures. The BOE
monetary policy meeting minutes were of interest because they revealed a voting split on the additional Quantitative
Easing announced at the meeting. Rather than pushing for 75billion as opposed to the 50billion delivered, two members
voted for no additional easing at all. The sole focus in the UK this week will be the preliminary GDP numbers due for
release on Wednesday. A number at the market expectation of -.2% would confirm a return to technical recession of
contracting activity in two consecutive quarters.
Japan
The Bank of Japan (BOJ) monetary policy meeting minutes confirm that additional monetary stimulus remains a live option
for the BOJ. The strong demand and level of the YEN remains a primary concern of policy makers and the rhetoric from the
Ministry of Finance and Bank of Japan confirm that further market intervention is likely at some stage. This week’s
focus is the trade balance, retail sales and inflation numbers. All three will be closely watched by the market.
Canada
The Bank of Canada did not surprise the market at their monetary policy announcement. The cash rate remains unchanged,
as it will likely continue to be so until 2014. Monthly manufacturing numbers were softer than expected and are a good
indicator of the staggering nature of the recovery. The volatile monthly inflation number show a sharper monthly fall
than expected. Retail sales numbers will be the focus of the week coming and will be released on Tuesday.
Major Announcements last week:
• US Retail Sales +.4% vs +.1% expected
• NZ Inflation +.3% vs +.5% expected
• UK Inflation 2.4% vs 2.8% expected (YoY)
• German Economic Sentiment -19.6 vs -17.3 expected
• US Inflation +.2% as expected (MoM)
• Bank of Canada leave monetary policy unchanged
• UK Retail Sales +.1% vs +.6% expected
• US Philadelphia FED Manufacturing Index -12.9 vs -7.9 expected
• Canadian Inflation -.4% vs -.1% expected