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Direct FX Weekly FX Update

Direct FX Weekly FX Update

Analysis – By Sam Coxhead from

Market Overview:

Market volatility continued throughout last week, albeit contained mostly within expected ranges. The intra-day volatility highlights the uncertain nature of the present outlook, and the general lack of depth within most markets. For the most part, investors spent the week waiting for US Federal Reserve (FED) Chairman Ben Bernanke's speech at the central bankers symposium at Jackson Hole. As the week wore on the expectations of further monetary policy announcement from Bernanke diminished. Stronger than expected US durable goods numbers added to this paring back of expectations. Bernanke did not deliver terribly much insight, but did state that the September Federal Reserve Open Market Committee (FOMC) meeting would be held over two days instead of the standard one. This would appear to give the committee plenty of time to discuss the tools, and policy initiatives at their disposal. The markets have seen limited reaction to Bernanke's address, and this will be viewed as a success from the FED's perspective. Ahead of the FOMC meeting on the 20th - 21st September, it can be expected the USD will remain under pressure, in the absence of a further escalation in fears about global growth. Elsewhere in markets the themes remain very much the same, with the overall prospect of a lowered global growth outlook and reasonably persistent inflationary pressures. In Europe the debt issues remain topical, not only at the sovereign level, but also around bank capitalization and the general stability of the sector.

In Australia last week the focus was mainly on a speeches from the deputy governor, and governor of the Reserve Bank of Australia (RBA). The interest rate market remains a little divergent from their rhetoric, still pricing around 100pts of easing in the cash rate before the end of the year. The RBA focus on the trading partners in Asia should not be underestimated. Last week's stronger than expected HSBC Chinese PMI number had little effect on the interest rate market, but certainly gave demand for the AUD a boost. This coming week sees the focus move back to the economic data. Tuesday sees the latest building approvals released, before private capital expenditure and retail sales data on Thursday.

The stronger than expected retail sales numbers and Chinese PMI data last week should keep the focus on the Reserve Bank of New Zealand, as we approach the next cash rate decision on the 15th of September. Along with the Australian dollar the NZD saw renewed demand last week, even in the absence of a definite commitment of further stimulus from the FED. This coming week will see direction mostly be driven by offshore sentiment. Local data comes in the form of building consents on Tuesday and the NBNZ Business Confidence Survey on Wednesday.

The Great British Pound fell out of favour a little again last week. After a couple of weeks of renewed demand, apparent end of months sell flows weighed on the GBP, almost across the board. There was an absence of economic data for the bulk of the week, before the revised GDP number on Friday was released at .2%, as expected. This week sees housing and manufacturing numbers on Thursday, ahead of construction numbers on Friday. With little expectation from the Bank of England monetary policy meeting next week, reported end of month sell flows may well continue to provide the tone in the short term.

The market's resilience with regards to the European debt issues, appears to have grown in the short term. What must be kept in mind with regards to the EURO, is the fact that the negotiations with regards to the Greek bailout package are ongoing. With this in mind expect the EURO to continue to see periods of pressure, and broader ranges to remain in place on most cross rates. The focus for the week will be a speech by European Central Bank head Trichet, as he testifies on the debt crisis to the European Parliaments Economic Committee late on Monday.

In Canada the economic data flow has been light. Last week saw just the release of a disappointing retail sales number, that was -.1%, against an expectation +.3%. This week sees the focus move to the monthly GDP figure. Market expectations are of a modest .2% rise, which is a bounce back from last month's .3% decline. The Canadian economy remains quite reliant on the tepid economy of its largest trading partner and neighbor the US. The Bank of Canada is likely to leave its cash rate unchanged in the short term and this should maintain its reasonably close correlation to the US dollar.

In South Africa there has been debate building around the possibility of a cut to the cash rate from the South African Reserve Bank (SARB). This debate came to a grinding holt last week, as the latest inflation and producer prices index numbers were released. The inflation number was 5.3% vs an expectation of 5.0% and will no doubt mean the SARB are forced to maintain their current interest rate status. The persistent inflationary pressure, coupled with sluggish growth, is not isolated to South Africa and it will be interesting to see how the situation plays out over the medium term.

Sam Coxhead

Global Currency Payments & Transfers

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