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FX Market Commentary - 20th January 2010

The greenback continued its upward trajectory overnight coinciding with a strong equity market performance with the DOW finishing up over 100pts. The US dollar index which measures the dollar's value relative to six major foreign currencies is currently up 0.5 per cent to 77.46.

Sterling rocketed to highs of 1.6458 as UK Consumer Price index surpassed estimates to record 0.6 per cent growth for the month of December, representing an annual growth rate of 2.9 per cent. Another key measure of inflation the Retail Price index also recorded 0.6 per cent jump in December, annually represent a 2.4 per cent rise. We also saw some strength from the pound on the news of Kraft Foods takeover of Cadbury Plc, but failed to maintain the momentum slipping to current levels of US$1.6360.

Across the channel economic sentiment in Europe has suffered another blow, with the ZEW survey losing ground to record a level of 46.4 in January against a previous level of 48. The German economy mirrored the Euro-Zone to record a drop to 47.2 from 50.4 in December. Fears of an economic meltdown in Greece also pressured the Euro falling to lows of US$1.4252 overnight.

The Canadian dollar also lost ground against the greenback, as the Bank of Canada kept benchmark interest rates at a record low of 25 bps, with the Bank also reaffirming interest to remain at current levels until June 2010.

Strong commodity market activity overnight failed to ignite Aussie dollar strength but certainly remained a primary supporting factor. Throughout offshore trading the local unit fell to lows of 91.75 US cents, before a resurgence to current levels of 92.5 US cents. The Westpac Consumer Confidence will be released at 11:30 AEDT, we expect a positive result with a reasonable amount of upside on the Aussie given a better than expected reading.

Afternoon Comment

Despite outperforming local economic data this morning, the Aussie dollar has slipped back below 92 US Cents as Gold slid to lows US 1,133.00 a troy ounce in afternoon trade. The greenback has found strength across the board in the domestic session, in particular the Euro which has extended loses as concerns mount that Greece’s economic woes could escalate. Speculation in China will continue to tighten banking regulations and withdraw economic stimulus, has also weighed on the local unit. Take away these factors and we should have been seeing the Aussie well bid through the 93 US cent figure.

This morning saw The Westpac Consumer Confidence index rise 5.6 per cent for the month of January, against a decline of 3.8 per in December. In a press release Westpac's Chief Economist, Bill Evans, pointed out the positivity of the latest result, considering three consecutive interest rate hikes in the latter part of 2009. Mr Evans also suggested a surprise surge in newly created jobs may have also buoyed consumer confidence. The Australian economy added 35,200 new jobs in the month of September, reducing the official unemployment rate to 5.5 per cent – well in advance of economist predictions of 10,000 new jobs created.