Weekly FX Update - 20th Nov 2012

By Sam Coxhead of www.directfx.co.nz 

Market Overview:
Last week asset markets of all kinds saw reasonably volatile price action as both economic data and macro factors influenced sentiment. The dominant factors of the Greek funding package and the US “fiscal cliff” continued to exert their influence.  Adding to the complex mix were escalating tensions in the Middle East, and the calling of a snap election in Japan. Australasian news was comparatively docile, with just the continued run of down beat 3rd quarter NZ economic data to provide interest. The themes remain similar this week, though the markets uncertainty seems to have dissipated somewhat. Friday saw surprising early progress in the US, and this has seen the positive sentiment extend into the start of this week’s trade. Risk appetite increased further on trade overnight, driven by higher expectation of a solution for Greece, and an absence of negative news on the US fiscal situation. This has seen investors scrambling to cover recent risk aversion trades, best illustrated by the NZ Dollar’s strong performance in offshore markets.

Explanation of the “Fiscal Cliff” – The “fiscal cliff” is a term used to describe the situation the US face come Jan 1st 2013. Current legislation sees the end of last year’s temporary payrolls tax, the end of certain tax breaks for businesses, the end of tax cuts from 2001/03 and the beginning of increased taxes related to Obama’s health care reform. At the same time spending cuts are to come into action as part of the agreement when last year’s debt ceiling agreement was struck. So in a nutshell the “fiscal cliff” currently starts Jan 1st 2013, and means increased taxes and lower Government spending. The  dramatic combined effect would be a fall in US economic activity, that would likely push the flailing US economy back into recession with harsh consequences for a vulnerable US, and global economies.  Compromise is needed, and this is where President Obama  and the Republican led Congress to agree on changes to the legislation to mitigate the serious situation.
 

Australia
Last week was a quiet one for Australian economic news. Credit agency Moody’s re-affirmed the AAA credit rating and left Australia’s outlook as stable. Australia remains in the enviable position of maintaining a strong Government financial position, having a stable political system and having the likelihood of seeing continued demand for its exports through Asian development and growth. This week sees the focus provided by today’s release of the most recent Reserve Bank of Australia (RBA) monetary policy meeting minutes. The minutes were unsurprising and leaves the way open for an easing of the cash rate to 3.00% at the next meeting on December 6th if deemed “appropriate”.
 

New Zealand
The news last week in New Zealand was the continuation of the awful 3rd quarter economic numbers in the form of the latest retail sales data. The .3% contraction saw a steady flow of NZD supply come to the markets in the following sessions. This number has increased conjecture about the RBNZ easing the cash rate from 2.50%. Certainly the pressure seems to be mounting for an easing in the early months of 2013. To my mind it still seems a reach to see the RBNZ hit the panic button and ease from the current emergency low levels. Interestingly, a BNZ Services survey released yesterday points towards a strong rebound in activity in the services sector in October. The Global Dairy Trade auction results overnight will also be closely watched by investors. Next week is again quiet for news with just the (ANZ) NBNZ Business Confidence survey results to be released.
 

United States
Last week was a curious one for the US markets. The economic data was downbeat for the most part and promoted negative sentiment for most of the week. Surprisingly the turnaround came on Friday and was driven in no small part by encouraging words from Republican congressmen with regards to the negotiations with President Obama over the “fiscal cliff”. The devil is in the detail in these instances, but it is positive all the same to have an encouraging start to such important events. Overnight saw the release of a home builder sentiment survey that shows after seven straight months of rises, that sentiment is at levels not seen for six years. This comes as this week sees the focus back on the housing market for the most part. In addition to the survey overnight, existing sales, building permits and housing starts all feature.
 

Europe
It has been an interesting last week for Europe. Growth numbers show the wider economy has just slipped back into recession, albeit growth in France and Germany was better than expected. Positive news is expected from the discussions on the Greek funding tranche due to be paid. Speculation has increased of an extension to the life of the loans and a reduction in interest rates to make the debt load more manageable. Certainly taking the pressure off Greece is seen as positive, as time is one of the key ingredients for economic recovery. This week’s focus is dominated by the EU meetings on Greece funding and manufacturing numbers due out on Thursday. Also of note is the just released confirmation from credit rating agency Moody's that they have downgraded France from AAA to AA1.
 

United Kingdom
Monthly inflation numbers in the UK show stubborn inflationary pressure still at play. An annual rate of 2.7% is uncomfortably high when growth levels are close to zero. There was also an increase in unemployment claims and a disappointing retail sales number for October. In the Bank of England’s (BOE) inflation report the growth forecasts have been  downgraded and near term inflation forecasts increased. In an apparent effort to maintain pressure on the value the GBP, the BOE continue to point pout discussion on the value of further quantitative easing. Tomorrow’s BOE monetary policy meeting minutes are the focus this week and we can expect this the lip service to further QE actions to continue as a theme. The GBP has been relatively stable with the improved expectations for the Greek funding package, and this should continue through into next week at least.
 

Japan
In Japan the news has continued to be all about the upcoming snap election and the likely outcomes from this. It is increasingly obvious that further aggressive policy initiatives will be undertaken by whoever forms the new leadership. Last week’s confirmed contraction in Q3 GDP of -.9% will have provided plenty of motivation for politicians to campaign on. LDP leader Shinzo Abe who is the favourite to win the Dec 16th election, is promoting the idea of a massive infrastructure plan to stimulate the economy. An essential part of this would be the Bank of Japan (BOJ) buying the “construction bond”, which is the printing of YEN to fund the projects. This will likely see the YEN vulnerable in the run up to the election at the very least. Today’s BOJ meeting unsurprisingly produced no change in monetary policy. Tomorrow’s trade balance numbers will be closely watched, but should be of limited impact in the current environment.
 

Canada
It has been quiet for Canadian economic news over the last week. Second tier manufacturing numbers were slightly stronger than expected and retail sales and inflation numbers later this week provide the focus in the near term. Of interest also were comments from Canadian PM with regards to foreign investment. He commented that state owned enterprises represent a “different kind of player” in foreign investment. This is of note because of Canadian Government approval is needed for the massive Petronas (Malaysian target) and Nexen (Chinese target) takeovers. Should these takeovers be turned down by the Government, there would be a material fall in demand for Canadian dollars in the short term. Some kind of decision is expected before the end of the year, and should be monitored by those with interest in Canadian dollars.
 

Major Announcements last week:
• UK Inflation 2.7% vs 2.3% expected
• NZ Retail Sales -.3% vs +.6% expected
• UK Unemployment rate 7.7% vs 7.8% expected
• US Retail Sales 0.0% vs +.2% expected
• UK Retail Sales -.8% vs -.7% expected
• US Inflation +.2% vs +.1% expected
• Moody's downgrades France from AAA to AA1

Firest produced and posted at www.directfx.co.nz