Weekly FX Update - 9th October 2012

Tuesday 9 October 2012, 5:31PM
By Direct FX

By Sam Coxhead of

Market Overview:
Throughout the course of the last week, further evidence of the decoupling between the global risk appetite and the fortunes of the Australasian currencies developed. The slowing of Asian growth indicators are providing the drag  for the closely correlated fortunes of the New Zealand and Australian export sectors. With Chinese manufacturing continuing to contract with lower export demand, the wider region is increasingly feeling the pinch. The IMF have downgraded Chinese growth expectations for 2012 to 7.8% from 8% in July, and 2013 prospects are on a similar track.  In the US, the economy continues its grinding recovery with the unemployment rate surprisingly falling to 7.8% at last week’s announcement. Manufacturing numbers for September were stronger than expected and these results will be welcomed by the current administration as the elections loom on November 6. Whilst the economic outlook remains bleak in Europe, the steps towards financial stability continue for the most part. This sees the EURO consolidate at levels considerably off the lows seen in the middle of this year. The Bank of England (BOE), European Central Bank (ECB) and Bank of Japan (BOJ) all took a breather from further policy accommodation at their respective monetary policy announcements  last week.

Last week the Reserve Bank of Australia produced a slightly surprising cut of 25points to a new cash rate of 3.25%. The interest rate market now sees a cash rate below 3.00% by the end of 2012. This move lower comes as a result of diminishing prospects in Asia reverberate through correlated trading partners. Retail sales figures later on in the week saw lower than expected activity in August and this reinforces the RBA cut to the cash rate. With the economy having been propped up by record mining infrastructure investment which is expected to peak next year, the RBA accommodative policy should start to stimulate activity in the wider economy by that time. This week’s focus comes in the form of the September employments numbers due on Thursday.

New Zealand
Last week saw little economic news released in New Zealand. The wider NZ dollar market saw periods of solid demand throughout last week. This demand was predominantly driven by the spillover from the surge in the NZ dollar over the Australian dollar following the RBA’s cut to the Australian cash rate. The NZD has risen through stubborn resistance against the AUD to break back into more historically average levels as the cash rate differential contracts between the two economies. This week has seen the focus turn to the quarterly survey of business opinion released this morning by the NZ Institute of Economic Research. This closely watched survey revealed a bounce in sentiment from -4 last quarter to +8 for the 3rd quarter.

United States
The news was mainly positive in the US last week. Improved manufacturing and services numbers were joined by current jobs growth as expected and a revision higher from the previous number. The result has been a surprising fall in the unemployment rate from 8.2% to 7.8% and the first month lower than 8% since February 2009. Also in a speech, FED chairman Ben Bernanke reiterated the FED’s commitment to maintaining low interest rates until the recovery gathers speed and speculation has increased that some numerical targets for policy adjustment maybe provided in the coming months. This week sees the usual slurry of economic data in the US, but the latest consumer sentiment numbers on Friday will be of particular note. The upcoming election will provide constant focus in the coming weeks and add further colour to a already dynamic financial market environment.

In Europe Spain apparently remains the focus. It seems unlikely that they will avoid having to ask for wider fund assistance. The economic indicators in wider Europe remain under significant pressure as the painful austerity measures continue to limit near term prospects. Unsurprisingly the ECB left monetary policy unchanged at this time, following the recent structural accommodations they have provided. Expect further pressure to come from the ECB on Governments to provide unpopular support if required. Industrial production numbers provide the economic data focus, whilst further EU meetings and a speech by ECB president Draghi will be closely followed.

United Kingdom
Last week in the UK saw slightly softer than expected manufacturing, services and construction numbers emerge alongside the expected unchanged monetary policy announcement from the BOE. Credit agency Fitch also warned that the UK could lose their AAA credit rating as rising debts and a slowing economy threaten already weak national accounts. This week sees manufacturing production numbers the focus on Tuesday, while the G7 meetings on Thursday will also be watched for any potential developments.

Last week saw no change from the BOJ at their monetary policy announcement. This was widely expected following their recent policy adjustments and was joined by a downgrade of forecasts for activity in 2013. Continuing rhetoric from various BOJ and Ministry of Finance officials about the continuing strength of the YEN not matching fundamentals has kept the lid on further YEN gains in the short term. Of help will be the progress being made in Europe as well, and the apparently imminent approach from Spain for assistance should reiterate the structural recovery in Europe. With the limited economic data in Japan this week expected to have little impact on demand for YEN, expect the wider market sentiment to provide the lead for the YEN for much of this week coming.

In Canada last week the manufacturing, construction and employment numbers were all above the market’s expectations. This has helped buoy demand for the Canadian dollar, which also saw assistance from the stronger US data. This week sees the focus come on Friday with the release of the trade numbers.

Major Announcements last week:
•         Chinese Manufacturing 49.8 vs 49.9 expected
•         UK Manufacturing 48.4 vs 49.5 expected
•         US Manufacturing 51.5 vs 49.8 expected
•         RBA cuts cash rate .25% to 3.25%
•         Australian Retail Sales .2% vs .4% expected
•         ECB, BOE and BOJ all leave monetary policy unchanged as expected
•         Canadian Manufacturing 60.4 vs 59.2 expected
•         US Unemployment rate falls to 7.8% from 8.3% previously

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