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DirectFX's Weekly Market Analysis

DirectFX's Weekly Market Analysis

By Andrew Isbister 8th August, 2011.

Market Overview:

Last week's initial euphoria that followed the agreement to raise the US debt ceiling was short lived, and what followed will be remembered as one of the bloodiest weeks in the markets for some time. With the Euro zone debt crisis again looming bigger and potentially harder to solve than ever, in the form of Italy and Spain and with US economic data on the whole continued it's weak run, the already fragile global economic outlook took a dive. Sentiment drives markets, and sentiment last week changed to very negative, leading to a massive and prolonged "risk off" session. What resulted was one of the worst weeks for equity bourses since 2008, as investors fled. The high flying "risk asset" currencies of New Zealand and Australia were unceremoniously dumped. Whilst there was always a reasonable chance of a US downgrade from ratings agency Standard and Poor's, it still came as a landmark shock to the markets.

However it was not all bad. US credit data (a measure of consumer spending) posted a reasonable increase in June, the first consecutive monthly increase in two years, and a healthier than expected US jobs report was released on Friday. The European Central Bank (ECB) is also rumored to be considering buying massive amounts of both Italian and Spanish bonds, in an attempt to stabalise the debt crisis in that region. Also, whilst the US downgrade has both historical and political significance, and will obviously increase US borrowing costs, the fact is the likes of United Kingdom and Canada are also AA+. So whilst significant, the ramifications are perhaps more long term in nature, with the short term market impact possibly less, than the psychological blow the US has suffered.

With the Australian and New Zealand economies being viewed as robust when compared to many others globally, both the AUD and NZD have been riding high in 2011. Both in recent weeks have been at, or close to, historical highs against the USD, GBP, and EUR. However in general when the global view turns sour, both get hit hard. Last week that was again the case, with both dropping approximately seven percent in value against the USD, in what was a steady week of continual decline, rather than the sharp fall that equity markets suffered in the last two days. Whilst it seems contrary to logic, although the bleak US economic outlook and fiscal position is one of the root causes of last week's events, the US dollar is still seen as a safe haven, and has therefore has strengthened considerably.

With both the AUDUSD and NZDUSD falling largely in tandem, it was left to local data releases to determine NZDAUD direction. The winner again on the week was the NZD. A combination of no change to interest rates from the Reserve Bank of Australia (RBA), weaker than expected Australian retail sales data, and no change to the New Zealand rate of unemployment, saw the NZDAUD finish the week at just above .8070 (AUDNZD below 1.2390) in the interbank market, its strongest point for some time.

As can be expected, both the AUD and NZD faired the same against the GBP and EUR. Whilst both started the week on an initial positive note, by Wednesday the sell off was in full cry. Both are now at levels not seen in many months. Having been at such elevated levels of late, current levels therefore provide good buying of both NZD and AUD with USD, GBP and EUR.

The coming week will obviously be one where risk aversion will continue to be extremely high. Whether or not markets stabalise, will be the big question. In response to the global financial crisis of 2008, a fortune has been pumped into the global economy by governments, by various means, in an attempt to jump start growth. To date arguably the return on that investment has been very poor. Last week's developments, put the US on notice that its level of debt is unsustainable. Therefore, future stimulus measures, if forthcoming, will no doubt be questioned by many, as to their potential level of effectiveness, and long term fiscal consequences.

Data wise this week there are no tier one releases in New Zealand. Australia sees new home loans, NAB Business Confidence, WPAC Consumer sentiment and employment data released. In the UK monthly manufacturing production data followed by the all important BOE quarterly Inflation Report is due for release. Euro zone is light on the data front this week, but the market will no doubt have plenty to digest, as the response from the ECB to the debt crisis is clarified. In the US Wednesday nights Federal Reserve interest rate decision and their accompanying statement will be key. The statement is their primary tool to communicate with investors about monetary policy. Given the events of last week, it will hold a far greater than normal level of importance.

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