FX Commentary – 29th February, 2012

A primary directive overnight remained the European Central Bank’s long-term refinancing operation (LTRO) – due Wednesday. Risk currencies remain steadfast leading up to the operation which is expected to see around EUR500 billion of cheap loans blanketed across the European banking system. Like the first 3yr Tender late last year, little is known of what sort of participation we could expect from Europe’s financial institutions leaving the opportunity for the ‘surprise factor’ to materially shift markets upon the release. One would expect an on-target number to have little effect while any significant deviation to the upside likely to help risk sentiment, although it should be noted an extremely high take-up of the ECB loans may also serve to highlight just how reliant banks are on ECB funding.

In economic news preliminary estimates for German consumer prices showed inflation rose at an annual rate of 2.3 percent in February – slightly above the previous and expected growth of 2.1 percent. The Euro succumbed to moderate selling pressure before but soon regained composure above the $US1.34-handle. News of Ireland’s intention to put the EU fiscal compact to a referendum applied the pressure of the Euro but weakness was relatively short-lived with the EURUSD pair rising to current levels and intra-day highs of 1.3470. As broadly anticipated, Greek debt was downgraded to ‘selective default’ status by ratings agency Standard and Poor’s in turn forcing the hand of the European Central Bank which suspended the use of Greek debt as collateral on loans.

Across the Atlantic U.S durable goods surprised to the downside to record a 4 percent fall in January against predictions of a more moderate 1 percent contraction. A slight concession to the drop in durable goods orders was strength in the latest consumer confidence reading with the conference board release showing confidence rose to yearly highs of 70.8 in February from a previous index level of 63.

After falling to lows of $US1.065 levels on Monday, the Aussie dollar remained largely buoyant overnight with a leg-down early in U.S trade contained at around the $US1.073 levels. Likes its risk currency counterparts, the Aussie dollar is very much at the mercy of the results of the ECB tender which appears to be carrying the load with respect to the moderate risk-on behaviour seen across the risk spectrum. The day ahead will see the focus shift to the release of local retail sales data which is expected to show sales grow a seasonally adjusted 0.3 percent in January after a contraction of 0.1 percent in December. True to form, any significant deviation from estimates should shift the local unit in unison.

Traditional store sales are increasingly losing business to emergence of online stores as shown in yesterday’s NAB online retail sales index. While traditional store sales grew 2.5 percent in 2011, the index revealed online sales recorded 29 percent growth in 2011 alone. Online purchases are said to account for around 5 percent of total retail sales in Australia.  With the Australian dollar near to historical highs, the implication here is of course a general propensity to purchase abroad.

Also on the docket today is private sector credit/capital expenditure, contraction work done, company operating profits due for release at 1130 AEDT with the HIA new homes sales due at 1100 AEDT. At the time of writing the Australian dollar is buying $US1.0760

Chris Gore

FX Commentary – 28th February, 2012

The G20 meeting in Mexico did little to quell global markets overnight as very little was achieved leading the slide of risk assets through the early part of trade.  The Finance ministers failed to agree on any increase to the IMF contribution to the Euro zone debt fund.   Although Germany did bear some of the blame for the lack of agreement they did manage to convincingly pass the second EU/IMF bailout of Greece by 496 to 90 votes.  This however did not spur confidence with European stocks dragged down, and demand for the US dollar increased with the Australian dollar trading back to 1.065 and the Euro slipping down to 1.3366 at the start of the US session.

With confidence low a surprise print on pending how sales turned the US session on its head.  The S&P was down over 100 points at the start of the US session, but rebounded as monthly pending homes sales came in at 2% nearly double what was expected.   The S&P finished up 0.14%, and as a result the US dollar was sold off with the Australian dollar following equities as it peaked at 1.07820 USD a few hours ago.   There weren’t any other key economic news out overnight which extenuated the bounce from the G20 through to the pending home sales.

After a solid run for the month of February the Yen depreciation march halted overnight as it retreated from it 8 month highs.  The price of oil is getting the blame for this demand for the Yen as WTI futures price of 107.81 worrying the ability for the US economic recovery and seeing bullish bets on its recovery possibly being unwound.   We do have Japanese retail sales data out from January this morning with a 0.2% contraction expected.

Today’s local session does not have any economic data of note and the US equity session saw profit taking occur as it wound up which has given the local session little to open on.  The Australian dollar is 25 pips off its the high following the late paring of gains and we don’t expect too much volatility unless Japanese retail sales data is well away from median estimations.  At the time of writing the Australian dollar is buying 1.0749 USD. 

Joel Murphy

Stronger than anticipated economic feedback provided a solid platform for risk currencies overnight with both sides of the Atlantic assisting markets to maintain a generally positive demeanor.  The German IFO series offered a slightly more optimistic take on the Euro-zone’s largest economy with the business climate, current assessment and expectation components beating expectations. Over to the U.S and weekly jobless claims continued to show signs of abating with the number of U.S citizens filing for unemployment benefits dropping to 351,000 for the week ending February 18.

The Euro continued its trajectory higher with price action rising to 10 week highs. Contrary to what we anticipated in the ensuing days of the bailout approval, the momentum remains in favor of the Euro with the EURUSD pair breaking the $US1.33-figure to current highs of $US1.3375 – although we do expect 1.34-figure to hold considerable resistance. Likewise strength in global equities assisted the Australian dollar to resume a north-bound path with highs of $US1.0716 achieved overnight. We anticipate resistant behavior between overnight highs and 1.0725 in the domestic session with the downside supported at 1.0660. Rates conjecture should provide direction early in the local session with market participant’s watching very closely feedback from RBA governor Glenn Stevens in an address to the House of Representatives Standing Committee at 0930.

The focus from the Euro-region this evening will be German Gross Domestic Product due for release. Clearly all eyes are on the flagship economy and any deviation from expectations should sway crowd sentiment. The United Kingdom will also release growth data this evening with the University of Michigan consumer confidence data the top tier release across the Atlantic. Next week’s ECB’s LTRO is also in the spotlight early on which likely be a key directive in the coming days.

At the time of writing the Aussie dollar is buying $US1.07

EUR/USD: Amid continued uncertainty and conjecture of the future of the shared currency, the Euro forged near 12 week highs against the greenback last week – finishing the week around the $US1.3450 levels. Key to the Euro’s continued strength this week will be the ECB’s Long-term Refinancing Operations (LTRO) with consensus estimates ranging broadly from 400-600 billion-euros of cheap loans blanketed across Europe’s fragile banking system.

Like the first 3yr Tender, little is known of what sort of participation we could expect from Europe’s financial institutions leaving the opportunity for the ‘surprise factor’ to materially shift markets upon the release. One would expect an on-target number to have little effective while any significant deviation to the upside likely to help risk sentiment, although it should be noted an extremely high take-up of the ECB loans may also serve highlight just how reliant banks are on ECB funding. What we do know however is that the first LTRO is considered a turning point in the Euro-region underpinning market sentiment in a similar way we’ve seen across the Atlantic with quantitative easing.

Voting on Greece’s second bailout will also begin this week with the Euro-Zones largest economy Germany set to ratify the agreement this week. The EU summit will also take centre stage later in the week, with leaders set to meet in Brussels to discuss Greece’s ongoing drama’s and boosting the European Stability Mechanism.  

AUD/USD: The Australian dollar closed under mild pressure on Friday with the upside momentum stalling after earlier achieving daily highs of 107.55 US cents. News that ratings agency Fitch downgraded three of Australia’s big four banks provided some resistance for the local unit which crossed below the 107 US cent region in the final period of U.S trade. Citing higher funding costs Fitch downgraded the Commonwealth Bank, National Australian Bank and Westpac from Double-A to Double-A minus, however ANZ – already rated Double-A minus -  was not subjected to another downgrade.

The big news is of course the Gillard Vs Rudd battle for leadership with the official show-down yielding little in the way of direction for the local unit. Given the result was always a foregone conclusion – as widely anticipated it failed to have material impact across local markets.

From a local standpoint, the week ahead will see the release of mid-tier directives with Wednesday’s retail sales data the local headline event. True to form we anticipate the primary directive for the Aussie dollar to remain with events abroad with the ECB’s 3yr tender a key sentiment barometer with Chinese PMI also in focus.  

Chris Gore

USD/JPY: A welcoming theme by Japanese officials has been the weakening Japanese Yen through the month of February. The USDJPY pair is now above the 80-handle and finishing the week a 7-month high. The Bank of Japan has created a clear inflection point after pumping another 10-trillion ($US130bn) into the economy in an effort to promote growth in the ailing economy at their last meeting nearly two weeks ago. While the fundamentals may remain less than inspiring in Japan with over 200 debt to GDP, a weaker currency is a welcome sign for Japanese manufacturers struggling under the weight of a strong currency.

Although not all top tier, there is a significant amount of economic events this week starting with retail sales data out tomorrow morning with median expectations for a print just into the negative.  We then have manufacturing data out mid-week, and CPI and unemployment rate to round the week out.  For those still long USD versus the Yen, it’s trying to find a new resistance point with it now through Early July 2011 highs, and with Greece uncertainty now off the table for the near future April’s high of 85.5 Yen is within sight

Joel Murphy

FX Commentary – 24th February, 2012

Stronger than anticipated economic feedback provided a solid platform for risk currencies overnight with both sides of the Atlantic assisting markets to maintain a generally positive demeanor.  The German IFO series offered a slightly more optimistic take on the Euro-zone’s largest economy with the business climate, current assessment and expectation components beating expectations. Over to the U.S and weekly jobless claims continued to show signs of abating with the number of U.S citizens filing for unemployment benefits dropping to 351,000 for the week ending February 18.

The Euro continued its trajectory higher with price action rising to 10 week highs. Contrary to what we anticipated in the ensuing days of the bailout approval, the momentum remains in favor of the Euro with the EURUSD pair breaking the $US1.33-figure to current highs of $US1.3375 – although we do expect 1.34-figure to hold considerable resistance. Likewise strength in global equities assisted the Australian dollar to resume a north-bound path with highs of $US1.0716 achieved overnight. We anticipate resistant behavior between overnight highs and 1.0725 in the domestic session with the downside supported at 1.0660. Rates conjecture should provide direction early in the local session with market participant’s watching very closely feedback from RBA governor Glenn Stevens in an address to the House of Representatives Standing Committee at 0930.

The focus from the Euro-region this evening will be German Gross Domestic Product due for release. Clearly all eyes are on the flagship economy and any deviation from expectations should sway crowd sentiment. The United Kingdom will also release growth data this evening with the University of Michigan consumer confidence data the top tier release across the Atlantic. Next week’s ECB’s LTRO is also in the spotlight early on which likely be a key directive in the coming days.

At the time of writing the Aussie dollar is buying $US1.07

Chris Gore

FX Commentary – 23rd February, 2012

Expectations of the Australia dollar slipping further didn’t eventuate overnight, with mixed economic news seeing it bottom out at 1.061042 the start of the US session, then inch back up for the rest of the session.  The downside through the European session was driven by 5 out of 6 manufacturing and services PMI’s missing estimates from Europe, following on from yesterday’s China’s HSBC Flash Manufacturing PMI still sitting in contractionary levels which was the reason for the bulk of Australian dollar weakness.  In contrast the Euro is still treading water only 40 pips from its high versus the US dollar following from the moment the Greek bailout was announced, as the China news did not have as dramatic effect on it.

Monetary Policy Minutes from the UK showed that Adam Posen and David miles were pushing for 75 billion pounds of quantitative easing rather the 50 Billion that was agreed to.  The rest of the panel used stronger economic data in the tail end of 2011 to justify their view.   We saw the Pound slip nearly 3/4 ‘s of a cent versus the SU dollar in the minutes following the report as the door now seems ajar for a further round of stimulus to follow in May.  The Pound began the European session at 1.580 USD and has slipped to 1.5665 as the US session ended.

Weaker than expected existing home sales from the States helped keep US stock in the red overnight, although this data is not normally a big market mover there was little else from the States to influence trade. Locally we are in the same boat with little on the economic side, and the current Labor leadership battle dominating news we expect currency markets to remain muted through the Asian Pacific session.    At the time of writing the Australian dollar is buying 1.06350 USD, and 85.33 Yen.

Joel Murphy

• A$ under selling pressure as Euro-region headlines continue to dominate
• Euro down as investors question Greece’s long-term economic fortunes
• A return to the Drachma a viable option?

FX Commentary – 22nd February, 2012

The primary driver across global markets remained with the Euro-region overnight with all eyes on Greece after finally receiving the stamp of approval on its 130 billion-euro bailout. There’s little doubt the approval of Greece’s second bailout package represents a form of closure to Greece’s near-term ability to fund maturing debt, however many consider this latest effort nothing more than a stop-gap, doing little to address Greece’s faltering economy. While austerity measures put in place provides a long-term plan to reduce the nation’s budget deficit, it does little to assist growth in the region with potentially years of sub-zero growth on the horizon. The trade-off for the new injection of capital is however a cause for concern. With over 20 percent of the Greek public now unemployed, the premise of further austerity in the form of government job losses, cuts to pensions, healthcare and other initiatives – the writing is on the wall concerning Greece’s near term hopes of regaining a sniff of economic composure, in turn there remains a valid case for an exit from the Euro region back to a single currency. A return to a single currency may be shrouded in implications but unquestionably has significant benefits. Greece’s dire fundamentals would promote immediate weakness in a single currency environment; hence a return to the Drachma continues to be a viable option given the significant leg-up it would provide to tourism and both local and foreign investment.

In essence, Greece is one part of the Euro debt equation with Italy, Spain, Portugal and Ireland still in the firing line; however it’s important to consider these efforts do act as a firewall for other economically challenged states from the threat of contagion. The Euro peaked at 1.3293 overnight before selling pressure took over from the initial sigh of relief with price action moving below 1.32-figure for a period. At the time of writing the Euro is buying $US1.3230. Meanwhile, the Aussie dollar succumbed to selling pressure making a break to downside of 1.07-figure and remains near to session lows of 106.53. A$ remains under mild selling pressure with further consolidation expected as markets continue to ponder the fortunes of the Euro-zone. Local data on the bill today includes 4Q Wage cost index with HSBC Flash Chinese manufacturing data the key directive in the local session.

Chris Gore

FX Commentary – 21st February, 2012

A US bank holiday typically sees both the European and US session trade in low volumes and limited volatility.  The US session was a quiet affair, but with news that the Greek debt drama may finally be closer to an end with Eurozone finance ministers all Brussels whereby a second Greek bailout deal from comments made by ministers is nearing.  The Euro continued on from its strong Asian-Pacific session to peak at 1.32758 over two cents higher from Fridays close.  The first bailout of Greece began in May 2010 totalling 110 Billion Euros and now 130 Billion Euros will be handed over amid stipulations on spending and savings still being debated.   It seems that this money is being given to Greece so Europe can take it off the table now for 12-18 months, rather than if the measures will actually make any structural change to the way the Greek economy runs.

For the first time in several attempts the Finance Ministry and Bank of Japan looks to achieve near term success in its Yen intervention.  Three of its key traded pairs all hit significant points yesterday firstly with EURJPY trading at past 105 yen on the open yesterday its first time since the start of December last year.  The AUDJPY pair peaked at 86.3 Yen yesterday, a gain of 11 Yen since the 24th of November, and 6 yen since the start of the month with carry traders continuing to be rewarded. And finally the USDJPY pair of which price typically has driven previous interventions, which is holding firm just below 80 Yen.  The Dollar had previous given up its gains versus the Yen in the immediate days following interventions in October and August last year, this time however the gains of remained and have extended.

As mentioned, Presidents’ holiday in the US has slowed overnight volume with the majority of pairs seeing a square off of gains late in the European session followed by flat trade till this morning.   From an economic perspective we have Monetary Policy Meeting Minutes due for release but markets will be looking more towards RBA Governor Stevens Australian Securities Investments Commission Summer School 2012, in Sydney and hopefully we can get a comment on recent employment data, Greece and China.  Otherwise expectations are for a flat day if we don’t see anything further from Greece, with the Australia dollar treading water at the time of writing at 1.0750 USD.

Joel Murphy

FX Commentary – 20th February, 2012

Risk currencies have opened the week on a stronger footing following China’s decision to cut Bank reserve ratio’s over the weekend. This has promoted natural support across commodity currencies with the Aussie dollar earlier forging daily highs just above 1.08-figure. The Euro has also started the week in form with price action making a break above $US1.3200 underpinned by optimism of imminent closure to the Greek bailout talks.

It’s clear the short-term Euro outlook is contingent on closure to Greek bailout talks which is likely to be announced after a meeting of Euro finance ministers this evening, local time. With expectations high leading into talks and negativity surround the ECB bond swap program, Euro could find itself once again in a vulnerable position with 1.30-figure a likely area of near-term support, nevertheless at the time of writing the shared currency is well bid above the 1.32 levels.

According to reports across various news agencies, the European Central Bank has began the bond swap process with securities bought under the Securities Markets Program swapped for an identical structure and nominal value. This implies the ECB has preferential treatment over private investors. The very premise of private investors are subordinate to the ECB in terms of the bond swap, may itself induce a downgrade scenario by one or all of the credit agencies. This in turn raises further questions if indeed to triggers a hard default with respect to credit default swaps – a type of insurance purchased should a default occur. This is a highly possible scenario determined by the International Swaps and Derivatives Association. Given the increased risk of a default type scenario playing out, one expects the Euro to face pressure once again. Finance chiefs will once again meeting on Feb 20 in effort to provide markets closure to bailout talks. With Greece only weeks away from insolvency, officials are also scurrying to negotiate separate deals with private investors before 14.5 billion-euros of debt matures on March 20.

The macro week ahead will see the focus turn to German/Euro-region PMI for both manufacturing and services with German GDP also on the bill later in the week. At the time of writing the Euro is buying $US1.3225.

The key local focus this week will be the release of the RBA minutes for February’s meeting. Against market expectations the Reserve Bank left benchmark rates unchanged at 4.25 percent. The ensuing statement by Governor Glenn Stevens acknowledged both continued downside risks from the Euro region and a moderate upturn in economic data points from the United States.

On inflation, the central bank noted CPI has declined as expected given the decline in food prices after local natural disasters last year. Underlying inflation is expected to remain between the 2-3 percent range over the next one to two years. The board noted interest rates to borrowers have declined close to their medium term average as a result of recent policy softening. In essence the board expects growth and inflation to be close to target suggesting little need for further policy adjustment unless conditions abroad promote further economic hardship locally.

Lasts week’s Statement of Monetary Policy also provided insight into the central banks view of the global economy as it stands. While noting the financial turmoil across the European region remains a stumbling block, the statement also noted some improvements across the region, with borrowing cost’s easing as a result of policy initiatives by central banks. At the time of writing the Aussie dollar is buying $US1.0790.

Chris Gore

FX Commentary – 17th February, 2012

This week’s trend of weak strong European sessions followed by US session sell off’s was flipped on its head last night with some better than expected data from the States and that news the ECB could exchange Greek bonds for new securities. The ECB bond swap deal indicates that the second bailout is nearing and markets took their chance to run with it, the Euro which had slide to 3 week lows managed to recoup the last few day’s losses against the US dollar.  It traded from a low of 1.29738 up to an overnight high of 1.31586 USD.  Also helping drive the gains through the US session was a lower than expected weekly jobless claims and continued strong Philly Fed Manufacturing Index with both the Dow Jones and S&P up .94% and 1.06% respectively, driving up risk assets.

The last fortnight has seen the Bank of Japan and the Government pushing to drive the Yen down in response to their struggling exporters and economy.  Overnight’s risk-on session saw the Yen break further ground with the US dollar peaking at 78.953 Yen, and unlike past intervention points the Yen has not retreated and appreciated in the days after.  Also those riding the carry trade versus the Australia dollar would have seen the AUDJPY pair trade at highs last reached in early August last year up to 84.987.

After yesterday’s surprise unemployment data coupled with overnight bullish US session the Australian dollar traded up within 23 pips of 1.08 USD this morning.  We don’t have anything of note in the form of economic data today so much of the impetus for the Australian dollar will be driven by the performance of the stock market.  The Aussie has flattened off in the tail end of the US session and is at the time of writing sitting at 1.0747 USD.

Joel Murphy

FX Commentary – 16th February, 2012

The Australian dollar trading at 1.069 USD is becoming a bit of a Groundhog Day price each morning, it has traded around that point each day the local stock market opened this week.  Any confidence driven by earlier economic results in Europe and developments of the Greek debt issue are quickly unwound through the US session as further doubts emerge.  Last night was no different with a decision on Greece now being pushed back to February 20th.  The Euro was sold off all the way through the US session giving away nearly a cent and a half from its high to low overnight, closing the US session 15 pips off the low of 1.30432 USD.  Data that also drove traders in a risk of direction was European flash quarterly GDP which showed the economy shrank this being the first time since the 2nd quarter of 2009, at -0.3%.  Recession has been expected for the region but for how long and how severe still up for debate.

The US session offered little respite with weak equities helping drive US dollar demand; and the Australian dollar gave up about 85 pips from its peak overnight.  Although Greek concerns weighed on markets, there were a few positives with demand for long term international purchases of US  assets weakening from 61.3 Billion to 17.9 Billion for the month of December, as the safety play for US treasuries softened.  We also had the Empire State manufacturing index ticked up for the 5 straight month indicating that spending, hiring, and investment are on the improve.

From a local perspective today is a day were Australian economic performance will drive currency markets with unemployment data due for release at  11.30 am, with 10,500 new jobs expected after last month surprise contraction and for the rate to rise to 5.3%.  After last Friday weak trade balance data from China, any enhanced negative movement from local data is likely to increase the chances of a rate cut next month, and in effect lead to the AUD weakening.  At the time of writing the Australian dollar is buying 1.0687 USD.

Joel Murphy