Sam Coxhead's FX Market Overview

The last week has been a very interesting one in financial markets. Growth assets such as the New Zealand and Australian dollars initially pushed lower, before turning around, on the news France and Germany were committing to make a plan, to stablise the European banking sector. This move signals the issue has moved beyond whether or not Greece will go through a managed default at some point, to making sure the banking sector is able to absorb the negative effects, when it occurs. The market seems more comfortable with this coming to a head, with both France and Germany committed to having a plan in place, by the time the G20 meet on November 3rd. Chances of a return to negative growth in the US have eased, as a second week of mildly positive data shows a less gloomy than expected picture. The European Central Bank (ECB) and Bank of England (BOE) both under took non-conventional monetary policy to help stimulate their economies last week. And the credit agencies remain active, with Italy and Spain joining European and British banks, in having their credit ratings downgraded.

The week was light on economic data in New Zealand with just the NZ Institute of Economic Research quarterly Survey of Business Opinion released. The survey showed business confidence remained steady for the quarter, but the survey did take place prior to the recent financial market meltdown, and sharp fall in the global growth outlook. The NZD stablised after hitting its lows early in the week. With generally weaker commodity prices for NZ's core exports, the weaker NZ dollar will be sheltering those impacts for the time being. The coming week is again light on the economic data front, so the lead will come from the wider market sentiment.

In Australia the market was a little buoyed by better than expected building and retail sales numbers last week. The Reserve Bank of Australia (RBA) held the cash rate steady at 4.75%, but have altered their rhetoric now, and this should an easing in the coming months. This week coming sees homes loans data on Wednesday and the all important employment numbers on Thursday. Another move higher from the current 5.3% unemployment rate, would see the interest rate market pushing harder for cash rate easing. A lower cash rate will see the AUD undermined to a certain extent.

In the US the better than expected manufacturing, services and most importantly, employment numbers give reason for the market to pare back the probability of another dip into negative growth. The numbers remain weak, but certainly not at levels that were expected two weeks ago. With Columbus Day today in the US, we are faced with a short week. Wednesday sees the release of the minutes from the last Federal Reserve monetary policy meeting, and these will be closely watched. Friday will see the latest retail sales and consumer sentiment reports, and these will give further evidence as to the state of the US consumer.

The various Italian and Spanish credit downgrades will keep the pressure on the European authorities to action their preliminary plans. The decision on the next tranche of the Greek bailout funds will be made by mid November and this will be after the respective authorities have put together their plan to provide capital to banks, should they need it. Whilst this has proven positive for market sentiment, the length of time means there is ample room for further growth in these issues. The ECB decision to leave the cash rate unchanged was surprising, given the soft nature of the economic numbers recently. They did action a new plan to help longer term funding rates and this indicates they believe that European issues are more financial in nature, than economic. A speech by outgoing ECB President Trichet on Tuesday will be closely watched, as will the inflation numbers released Friday.

In the UK the BOE decision to increase the amount of its quantitative easing (QE) program by 75 billion GBP, was widely expected and this saw the GBP soften just temporarily on the news. Manufacturing and services data was actually quite a bit better than expected, but construction numbers disappointed. This week sees the release of the usual array of second tier data, but the monthly unemployment claim numbers on Wednesday will be the most closely watched.

Canadian employment numbers released were better than expected last week and this will be a welcome result for the Bank of Canada. The Canadian dollar did however remained under pressure for the most part last week. This coming week sees housing numbers released Tuesday, and the trade balance on Thursday. The uptick in the economic data in the US, is also encouraging for the Canadian economy.

Sam Coxhead

Global Currency Payments & Transfers

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