FX Commentary – 14th May, 2012

A succession of negative themes continued to weigh on risk assets on Friday with a global push for safety providing upside for the Japanese Yen and US dollar. Greece’s political woes remained a primary stumbling block with key political parities still failing to form a coalition government while Spain’s economic problems continue to bubble away in the background. Spain announced banks will be required to hold additional capital to the tune of 30-billion euro’s and undergo a stringent auditing process in an effort to guard against a full-scale banking crisis.

Meanwhile, China has taken further policy easing measures over the weekend, announcing a 50bps cut to banks’ reserve requirement ratios to thwart what many expect to be a sharper than anticipated slowdown in the region. Data out of China on Friday failed to allay investor concerns of hard landing from the words second largest economy, prompting the central bank to cut reserve requirements for the third time in six months. Although we’ve seen a moderate in consumer prices, official industrial production data show a steeper than anticipated slowed down in growth. On balance we’ve seen data out of the region fail to inspire market participants with lasts week’s trade data also highlighting a slow-down in domestic demand.

U.S indices finished with moderate losses headed up by banking stocks as negativity surrounding JP Morgan’s $US2 billion trading losses took its toll. Further pessimism across the Atlantic also promoted losses despite strong than expected economic data. Consumer confidence data from the University of Michigan outpaced economists’ estimates on Friday with the index rising to 77.8 in May against expectations of a moderate fall to from 76.4 to 76. Producer prices rose at an annual pace of 1.9 percent in April recording a greater than expected drop from the March reading of 2.8 percent.

The Australian dollar continued its downward trajectory but managed to remain afloat above the key technical and physiological milestone of US dollar parity. From a technical perspective, the latest bout of weakness from the Australian dollar coincides with the relative strength index touching the ‘30’ levels. Technical analysts believe a reading of ‘70’ or above suggests a reversal to the downside while a reading of ‘30’ and below shows oversold signals. Although technical’s may suggest the Australian dollar is oversold, it’s clear the local units fortunes are at the mercy of continued feedback from abroad and indeed stimulus expectations in the United States.

Locally, key to the Australian dollar’s near-term fortunes in the week ahead will be the release of the RBA monetary policy minutes for May. Traders will be watching for any clearer guidance the RBA may take further policy easing measures. Stevens and Co made the largely unexpected move to cut by 50bps, bringing the official cash rate down to 3.75 percent to represent the largest single cut since the height of the financial crisis. The ensuing statement offered little indication the move was the start of a series of cuts suggesting further surveillance of economic conditions is required to ascertain the viability of further easing. In short, weaker than expected growth coupled with subdued inflationary pressures has afforded the RBA with the scope to ease monetary policy.

The Economic Week Ahead – Australia

Monday – May 14th – Deputy RBA Governor Phillip Lowe speech – Devlopments in the Mining and Non-mining Economies | Home Loan Activity (MAY) | Investment Lending (MAY) | Value of Loans (MAY)

Tuesday – May 15th  – RBA Policity meeting minutes (MAY) | New Vehicle Sales (APR)

Wednesday – May 16th - Westpac Consumer Confidence (MAY) | Wage Cost Index (1Q)

Thursday – May 17th - Consumer Inflation Expectations (MAY) | Average Weekly Wages (FEB) | RBA FX Transactions (APR)

Global Top Tier Data

Tuesday – May 15th - Euro-Zone Gross Domestic Product (1Q) | German Gross Domestic Product (1Q) | German Zew Survey (MAY) | US Consumer Price Index (APR) | US Retail Sales (APR)

Wednesday – May 16th – UK Employment Data (APR) | BoE Inflation Report | Euro-Zone Consumer Price Index (APR) | US FOMC Minutes    (MAY) | Japan Gross Domestic Product (1Q)

Friday – May 18th – German PPI (APR) | Canadian Consumer Price Index (APR)

Chris Gore

FX Commentary – 11th May, 2012

After recording considerable gains in the ensuing period of yesterday’s local jobs data, the Aussie dollar has remained under pressure overnight with early strength tailing off in the latter half of U.S trade. The local unit rose to highs of 101.43 US cents before broad based US dollar strength took hold as U.S equity markets pared gains.

European markets managed to squeeze out gains amid progress by major political parties to form a coalition government and the news Greece will receive the next tranche of bailout funds.  Despite this, markets remain on edge with concerns of Greece’s imminent downfall and Spain’s banking system dilemma remaining a primary stumbling block.

The day ahead will see a raft of Chinese data to guide the way with CPI and new loan activity to be the main events. In addition traders will be watching closely to release of retail sales, Industrial production, fixed asset investment and PPI for further clues on the health of the world’s second largest economy.

Yesterday, official data showed China’s trade surplus unexpectedly $US18.42 billion outpacing expectations of $US7.93 billion. Although it showed a significant surplus, the data showed imports grew at a much lower rate than anticipated, with exporting activity also failing to achieve estimates. We saw general short-term weakness across China-contingent currencies with the Aussie dollar grinding lower in the period to follow given the data showed weakening of domestic demand. At the time of writing the Australian dollar is buying 100.6 US cents.

Chris Gore

FX Commentary – 10th May, 2012

Global markets continued to fall under the weight of Euro-Zone concerns overnight with both Greece and Spain in the firing line. After a period of relative calm, concerns of further deterioration of the Spanish banking system crept back into the spotlight with debt yields spiking above the 6 percent region and Spanish stocks falling to 9-year lows.  The Greek election impasse also remains a primary market moving theme as investors consider the repercussions of the nation’s failure to form government. Naturally, negativity from the Euro-region placed pressure on U.S markets with stocks starting the session significantly lower before claiming back ground throughout the session. U.S equities finished in the red with the DOW and S&P falling 0.75 and 0.67 percent respectively.

Risk currencies remained out of favour overnight with the perceived safety of the Yen and Greenback both making significant ground against major counterparts. The Euro was a major casualty with the EURUSD pair making a convincing break to the downside of the 1.30-handle to lows of $US1.2911.

The Australian dollar fell to lows of 100.2 US cents before regaining some ground throughout the U.S session; nonetheless it’s clear the local unit remains vulnerable to further downside with local unemployment data the next major directive at 11.30am this morning. The Australian economy is expected to have lost 5,000 jobs in April from a previous gain of 4,000 with the official unemployment rate likely to edge up from 5.2 to 5.3 percent. This data clearly has a propensity to materially shift price action – should we see significant deviation to the downside of estimate, we anticipate a break to the downside of US dollar parity in the domestic session with a squeezing out of stops below the figure to promote further selling pressure. Importantly, we also expect China’s trade numbers to remain a primary driver throughout the domestic session.

Chris Gore

FX Commentary – 9th May, 2012

Risk currencies continued to grind lower overnight under the weight of ongoing political turmoil in Greece. With the New Democracy Party’s Antonis Samaras failure to form a coalition government, the mandate now falls to the left-wing Syriza party who are staunchly opposed to the austerity measures agreed in exchange for bailout funds. Should the Syriza party succeed in forming a coalition government, the writing appears to be on the wall for Greece – bailout terms breached; troika funds withheld with a disorderly default and return to an independent currency a likely scenario. 

European equities lost significant ground with Frances CAC losing near 3 percent on the day and the negativity spilled over to U.S markets, albeit to a lesser degree.  The Euro continued its south-bound trajectory against the greenback intermittently testing the 1.30-figure overnight but in typical ironic fashion remained the preferred option against the higher yielding Aussie and Kiwi dollars. In short, we’re in a clear risk-off phase and the perceive safety of the US dollar and Japanese Yen remaining the currencies of least resistance. 

The Australian dollar continued to slide overnight with European politics the primary directive. The local unit fell to lows of 100.88 US cents before regaining moderate ground but still remains under pressure slightly above 101 US cents. We anticipate a sustained break to the downside in local trade to trigger further selling pressure with the trend suggesting a better than even odds chance of a near-term move below U.S dollar parity. Stronger local employment number on Thursday with solid Chinese data on later this week may provide short-term buoyancy, however its clear the trend will be set from abroad with European political dramas front row and centre. 

Chris Gore

FX Commentary – 8th May, 2012

After starting the week in a decidedly vulnerable position, the Australian dollar found mild support overnight after earlier yesterday falling to fresh 2012 lows of 101.09 US cents. Better than expected local retail sales data provided a small inflection point with relative calm from the Euro-zone and moderate support for US equities carrying the local unit to highs of 102.2 US cents.

Meanwhile, the growth vs. austerity debate continues to run hot in Europe with concerns over how French President-elect Francois Hollande’s pro growth agenda may affect Franco-German relations with political faction in Greece also remaining a prime concern. In an act of defiance over what many consider draconian austerity measures, Greek voters are throwing their support behind anti-austerity/bailout political parties thereby increasing the risk of disorderly default and subsequent Euro-zone exit. Without a coalition government, the writing appears to be on the wall for Greece – the voters have spoken and the lack of cohesive action by political parties will see bailout terms breached in-turn increasing the likelihood of a return to an independent currency. The Euro continued to suffer under the weight of political uncertainty with moderate losses recorded major counterparts with exception to the EURCHF pair which is sticking like glue to the 1.20 threshold set by the SNB.

On the local docket this morning we have the release of trade balance numbers for March which is expected to see the deficit widen to AUD1.4 billion. The Federal Government will also hand down its annual budget this evening. At the time of writing the Australian dollar is buying 102.1 US cents.

Chris Gore

FX Commentary – 7th May, 2012

European markets remained focused on elections in France and Greece with general political uncertainty promoting downside across risk assets on Friday. We’ve seen a continuance of this theme this morning with Euro currently testing $US1.30-figure in early trade as the news of Sarkozy’s defeat against Socialist candidate Francois Hollande.  We’re seeing general concerns surrounding Hollande’s ability to strike the delicate balance between growth and austerity and it’s clear whoever is at the helm, market participants have little faith in the ability of any leader’s ability to restore fiscal health. Meanwhile, Greek elections also remain a stumbling block for markets, with Greece’s two major parties failing to secure an outright lead according to initial estimates while independent parties opposed to austerity claiming up to 58 percent of the vote.

Across the Atlantic, the release of the official U.S employment data was the key directive on Friday and once again failed to meet expectations. U.S non-farm payrolls record 115,000 new jobs in April, falling short of economist’s estimates of 160,000. Although the official unemployment rate ticked lower to 8.1 percent this was – in part – due to a rise in the number of inactive jobs seekers with a drop in the participation rate. Commodity currencies made a rapid downturn in the ensuing period with the Aussie leading the charge lower against the greenback to lows not seen since early January. The perceived safety of the Japanese Yen was the overall winner on the day with the USDJPY making a break to the downside of Y80. The US dollar is walking the tight-rope between its natural appeal as a safe haven and continued conjecture over the likelihood of further stimulus from the Fed.

Locally, the week ahead will see market participants turn to the release of our very own employment numbers on Thursday with economists estimating 5,000 job losses in April against a previous rise of 44,000. Local markets will also be watching the release of retail sales data on today which is expected to see seasonally adjusted growth of 0.2 percent in March. Also on the docket this morning is NAB business conditions/confidence, building approvals. At the time of writing the Australian dollar is buying 101.5 US cents.

Chris Gore

FX Commentary – 4th May, 2012

The Australian dollar remained under pressure overnight coinciding with weakness from commodity and equity markets. The local unit fell to near 1-month lows of 102.38 US cents but has now stabilized around current levels of 102.6 US cents. Metals and energy markets remained under considerable pressure which promoted natural weakness across commodity currencies with the greenback remaining the currency of least resistance.

After early support on the back of a stronger weekly jobs report, the trajectory turned south after a less than inspiring read on the health of U.S services sector. The ISM non-manufacturing PMI declined to an index level of 53.5 in April from a previous 56. Analyst predicted a more moderate decline to a reading of 55.3.

The number of U.S citizens applying for unemployment benefits fell to 365,000 for the week ending April 28 outpacing expectations of 379,000. Despite the positive jobless claims report, investors continue to err on the side of caution ahead of Friday’s non-farm payrolls. We’ve seen a mixed set of indicator ahead of Friday’s official data with Wednesday’s ADP private sector employment gauge showed 119,000 jobs added in April falling short of the estimated 170,000. Given the mixed set of pre-cursers to the official report we saw a recalibration of expectations ahead of Friday’s report which has attracted natural selling pressure and buying reluctance.

As anticipated the ECB kept benchmark interest rates on hold at 1.0 percent with the ensuing statement by President Mario Draghi providing little in the way of insight into the likelihood of further easing measures. The Euro came under pressure briefly cross through the 1.31-handle before finishing the session flat around 1.3150. The day ahead will see the focus turn to the RBA Statement of Monetary Policy at 11.30am AEST which is likely to see both inflation and growth estimates revised lower.

Chris Gore

FX Commentary – 3rd May, 2012

After spending a period below 103 US cents overnight, the Aussie dollar saw moderate gains through the latter part of U.S trade as equity markets regained composure after a disappointing start to the session. Benchmark indices finished lower on the day with concerns over the state of U.S employment came to fore after a less than inspiring private sector jobs report. The ADP private sector employment gauge showed 119,000 jobs added in April falling short of the estimated 170,000. We’ve seen a recalibration of expectations ahead of Friday’s official non-farm payrolls data with the ADP gauge seen as an important precursor ahead of the main event. U.S corporate earnings have largely been a supportive factor for markets, given the earnings season is coming to a close it’s a question of where the next boost going to come from. Although we had a particularly solid ISM manufacturing number earlier in the week, the ADP employment data overnight casts a shadow over the health the employment sector which naturally has a negative short-term influence on markets.

Earlier in the session official German unemployment data failed to meet estimates with Euro-Zone manufacturing PMI also ticking down slightly. In essence this serves to highlight the vulnerabilities seen across the periphery have made their mark on the heart of the Euro-Zone.  The U.S dollar remained the currency of least resistance with concerns from both sides of the Atlantic providing moderate support at the expense of risk currencies such as the Euro which succumbed to selling pressure to make a break to the downside of $US1.32.

Economic releases during domestic trade include the AIG performance of services index at 10.30am AEST with Chinese services PMI due for release at 11am AEST. Barring any major surprise from Chinese services PMI we anticipate a reasonably narrow range during local trade with 103.5 US cents likely to attract some selling attention while a break through support of 103 US cents likely to be contained around the 102.75 US cent region. At the time of writing the Australian dollar is buying 103.2 US cents

Chris Gore

FX Commentary – 2nd May, 2012

A generally positive market demeanour – for the most part – failed to assist the Australian dollar to recoup yesterday’s losses with price action ranging between 103 and 103.5 US cents overnight. The local unit took at hit in the ensuing period of yesterday’s local rates decision with price action making a break to the downside of 104 US cents. Stevens and Co made the largely unexpected move to cut by 50bps, bringing the official cash rate down to 3.75 percent to represent the largest single cut since the height of the financial crisis. The ensuing statement offered little indication the move was the start of a series of cuts suggesting further surveillance of economic conditions is required to ascertain the viability of further easing. In short, weaker than expected growth coupled with subdued inflationary pressures has afforded the RBA with the scope to ease monetary policy.

Locally, the focus today will turn to the HSBC Chinese manufacturing PMI release at 12.30 AEST. Although yesterday’s official release came in just shy of consensus estimates, it represents the fifth consecutive month of gains easing fears of a hard landing scenario from the region.  While the official release is weighted towards larger manufacturers, today’s HSBC equivalent is generally viewed as a gauge of manufacturing activity from small to medium enterprises. At the time of writing the Australian dollar is buying 103.3 US cents

Chris Gore

FX Commentary – 1st May, 2012

European debt fears remained a primary focus overnight with Spain in the firing line after Standard & Poor’s downgraded 16 Spanish banks following a downgrade of Spanish debt by the ratings agency on Friday. As widely anticipated, official growth data overnight confirmed Spain is now in recession with the economy contracting 0.3 percent in the first quarter to represent a yearly contraction of 0.4 percent. Alarmingly, the economic horizon in Spain appears to be taking on a darker shade of grey given the need for austerity at a time when almost a quarter of the population is unemployed.

After peaking slightly above 104.7 US cents yesterday, the Australian dollar came under mild pressure overnight with the downside capped above the 104 US cent region. Key data in focus today will first come from China with Manufacturing PMI on the docket at 11 am followed by the house price index at 11.30 am. The main event for the Aussie in local trade will be the RBA rate decision due for release at 2.30 pm which is expected to see Stevens and Co cut benchmark rates by 25 bps to 4.0 percent. With expectations of a 25 bps rate cut well and truly baked into the market Aussie dollar direction will be guided by the ensuing statement and of course if the RBA succumb to external pressure to cut by 50bps. Former RBA Governor Bernie Fraser has weighed into the debate suggesting a need to shock the market by cutting rate beyond market expectations. Although a valid argument, the last cut of more than 25bps was at the height of the global financial crises suggesting a move that is reserved for times of significant adversity. At the time of writing the Aussie dollar is buying 104.2 US cents.

Chris Gore