By Jim Vrondas, OzForex

Currency markets breathed a sigh of relief following the release of the European bank stress tests. After nudging 1.2600 against the greenback last week the euro started the new week on a positive note, pushing above 1.2700 seemingly buoyed by the results.

Of the 130 banks tested across the region 25 failed, with the ECB identifying a gap of 24.2 billion euros in capital required as of the end of 2013. When you distil this down further the results seem more benign with 19 billion already raised this year, the aggregate shortfall is reduced to 6 billion.

The markets will now focus more specifically on the five major banks that need more than 200 million euros and must submit a capital plan, no doubt more headlines will follow.

Stronger European banks no medicine for growth

The credibility of the tests are quite rightly being questioned but on the positive side the result is significant because it emphasises the large capital raising and de-leveraging efforts the banks have undertaken since the last stress tests in 2011. The good news is that bank spreads have tightened making them more stable – for now.

Although the banks are in a stronger financial position the European economy is still not looking that flash. The economic slowdown appears to be spreading from the peripheral to the core with signs of weakness in Germany and fears of a deflationary spiral across the region still evident.

With the ECB only just beginning to print money the banks will no doubt be encouraged to “give” more money away, but there are still question marks around how much of this money will reach the real economy and whether it will positively impact growth.

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It’s a huge week ahead on the data front for the Australian economy. We have building approvals, GDP, retail sales and trade balance all out — can any one of these sway the Aussie dollar one way or another?

GDP is obviously particularly critical as it’s a key measure of economic growth. The market is expecting a pull-back from first quarter +1.1 per cent result to a second quarter reading of +0.4 per cent. This would bring the annualised rate down from 3.5 per cent to 3 per cent, but it is somewhat of a lagging indicator.

The beauty of this week’s releases is that we get a broad reading on the domestic economy, with data providing some insight across a number of fronts. Building approvals are important for construction activity and general confidence in the economy; so too are retail sales and the state of the consumer.

I can’t see any of these moving the Aussie out of this range unless we get a softer-than-expected GDP reading of say 0.2 per cent or less for the quarter — in this scenario we could see a re-test of strong support between 92c and 92.50c.

RBA decision due

Will today’s Reserve Bank of Australia meeting have any impact on the currency this time? Well we know the RBA has been struggling to exert real influence over the Aussie, despite continued attempts to talk it down. It’s not the only one concerned about the local unit’s strength: BIS Shrapnel recently blamed the high dollar for sapping the strength of Australia’s economic recovery.
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As the US dollar rally starts to gather momentum, the euro is approaching its lowest levels in almost a year.

Divergence between the FOMC and ECB interest rate outlooks has been the main driver behind the move that has seen the euro fall 6 per cent since early May. The wedge between the two is only getting wider, with comments from both US Federal Reserve Bank chair Janet Yellen and European Central Bank president Mario Draghi dragging the euro lower over the weekend.

Change of tone in the US

Most of the focus from the Jackson Hole symposium over the weekend has been on remarks made by Janet Yellen. Her comments on the North American economy appear more neutral than hawkish as some have suggested.

They are, however, less dovish as the market has come to expect, and it was a reference to interest rate hikes potentially coming “sooner than market participants currently expect” that sparked a flurry of demand for the greenback. Although the timing on US interest rates is unclear, Yellen’s tone is to be expected, especially from a central bank edging very slowly towards monetary policy tightening.

Economic data takes centre stage

Looking beyond the headlines, it is clear there are still some considerable risks ahead for the US economy. The Fed is looking at much more than just the unemployment rate for a reading on the employment market.
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AUD/EUR Fundamental Outlook
AUD/EUR continued gaining ground in July, gaining another +0.9% overall for the month. The gain in the cross was in part due to asset flows and risk appetite favouring the Aussie over the Euro, the interest rate differential and as both economies reported mixed economic numbers. Economic data out of Australia was on balance better than Eurozone numbers, although weakness was evident in Retail Sales, Building Approvals and the Trade Balance.

Traders will be looking to the ECB rate decision on the 7th, as well as the RBA’s Monetary Policy Meeting Minutes for a better perspective on the direction of the cross. Due to weakness in the Eurozone, the rate differential and improving numbers in Australia, the outlook for the cross is positive in the near and medium terms but neutral longer term.

AUD/EUR Technical Chart Outlook

After making a 0.6314 low in late January, AUD/EUR has since been rallying correctively. The cross made yet another recent high at the 0.7035 level on July 23rd after breaking up out of a mildly declining consolidation range on the 21st.

The outlook for AUD/EUR over the coming month is mildly bullish short term and more bullish in the medium term while the channel top line break is sustained to set up a 0.7780 breakout target.
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The Australian dollar drifted higher against the greenback today, heartened by a modest recovery in the euro as a negative reaction to overnight news of Portugal’s credit downgrade fizzled out.
Trading, however, was lacklustre ahead of Australian employment data on Thursday and US non-farm payrolls report on Friday. Analysts polled by Reuters expect a rise of 15,000 jobs in Australia and 90,000 jobs in the United States.
The dollar rose as high as $US1.0734, from $US1.0687 late in New York, after stops around $US1.0715 were taken out. It closed locally at $US1.0711.

AUSTRALIAN DOLLAR – The Pound Australian Dollar exchange rate (GBP/AUD) is 1.5260

The Australian Dollar has taken large strides forward against the other majors on the day, largely thanks to a much better-than-anticipated US Non-Farm Payrolls figure, which was released earlier this afternoon. The job creation figure showed that economic conditions are improving quickly in the world’s largest economy, causing an increase in global appetite for risk. NEAR-TERM OUTLOOK – POSITIVE.


The Pound continued its mini-revival during today’s session following higher than expected Producer Price Index data. The figures added to speculation that a UK interest rate hike may not be as far off as had been previously anticipated. NEAR-TERM OUTLOOK – NEUTRAL TO POSITIVE.

US DOLLAR – The Pound Dollar exchange rate (GBP/USD) is 1.6420

This afternoon’s Non-Farm Payrolls figure showed that 244,000 new jobs were created in the States last month versus expectations of 185,000. This has had the dual effect of bucking the recent dip in risk aversion, which should lead to Dollar weakness, whilst at the same time providing increased confidence about economic fundamentals in the States. NEAR-TERM OUTLOOK – NEUTRAL.

EURO – The Pound Euro exchange rate (GBP/EUR) is 1.1330

The Euro gave up a little more ground against both the Pound and the US Dollar today as the markets continued to digest ECB President Jean Claude Trichet’s comments from his press conference of yesterday afternoon. Trichet stated that a weaker US Dollar was desirable to aid the global recovery, leading many analysts to conclude that he will help achieve this goal by actively weakening the Euro. NEAR-TERM OUTLOOK – NEUTRAL TO NEGATIVE.

NEW ZEALAND DOLLAR – The Pound New Zealand Dollar exchange rate (GBP/NZD) is 2.0662

The New Zealand Dollar has moved in step with the Australian Dollar again today as global risk sentiment picked up. Monday sees the release of key NZ Housing Sector Data which will provide further direction for the remainder of the week. NEAR-TERM OUTLOOK – NEUTRAL.

CANADIAN DOLLAR – The Pound Canadian Dollar exchange rate (GBP/CAD) is 1.5777

The Canadian Dollar re-traced some of the ground it has lost during recent sessions on the day thanks to significantly better than expected Canadian employment data. The CAD was further assisted by some highly positive job creation data in the US, due to strong trading links between the two economies. With little Canadian data of note due for release next week, the CAD may continue to trend higher. NEAR-TERM OUTLOOK – NEUTRAL TO POSITIVIVE.

LONDON, March 15 | Tue Mar 15, 2011 5:34am EDT
(Reuters) – The Australian dollar extended falls against the U.S. dollar on Tuesday, losing two percent on the day, while the Swiss franc gained as fears about a nuclear crisis in Japan drove investors to slash exposure to risk.

The Australian dollar fell to a six-week low of $0.9877

The euro fell 1 percent against the Swiss franc EURCHF= and the yen.

Australia’s dollar traded near its highest level in a month against the U.S. currency as stocks and commodity prices rose amid signs the global economy is picking up, increasing demand for higher-yielding assets.

The so-called Aussie gained for a third day against the yen before data which economists said will show U.S. companies added jobs for a 12th consecutive month and European producer prices increased in December. New Zealand’s dollar, known as the kiwi, was close to the highest level in 10 weeks as whole milk powder prices rose to an eight-month high and before data forecast to show employment increased in the fourth quarter from a year earlier.

“There’s a risk-on mood spreading across the markets on the back of the improving global economy,” said Takuya Kawabata, a researcher in Tokyo at Research Institute Ltd., a unit of Japan’s largest foreign-exchange margin company. “The Aussie and kiwi are supported by the higher stock and commodity prices.”

Australia’s dollar traded at $1.0117 as of 4:23 p.m. in Sydney from $1.0111 in New York yesterday, when it touched $1.0149, the highest level since Jan. 4. The currency bought 82.47 yen from 82.26 yen.

New Zealand’s dollar fetched 78.08 U.S. cents from 78.14 cents yesterday, when it reached 78.26, the strongest since Nov. 22. It was at 63.65 yen from 63.57 yen.

U.S., European Data

Companies in the U.S. added 140,000 jobs in January after a 297,000 rise in December, according to the median estimate of economists in a Bloomberg News survey before ADP Employer Services reports the data today.

Europe’s producer prices rose 5.2 percent in December from a year earlier, economists surveyed by Bloomberg News said before the European Union’s statistics office data today. That’s the fastest pace since October 2008. Prices advanced 0.7 percent from the previous month, according the survey’s median estimate.

The MSCI Asia Pacific Index of regional shares climbed 1.4 percent today while the Standard & Poor’s 500 Index of stocks advanced 1.7 percent yesterday and the Thomson Reuters/Jefferies CRB Commodity Price Index rose 0.2 percent.

The New Zealand dollar gained for a second day versus the yen before data that may show employment increased by 2 percent in the fourth quarter from a year earlier, according to economists surveyed by Bloomberg News. The statistics New Zealand figures are due tomorrow.

Commodity Prices

Demand for the kiwi was also bolstered as Auckland-based Fonterra Cooperative Group Ltd., the world’s largest dairy exporter, said whole milk powder prices gained 7.6 percent from two weeks earlier, reaching the highest since June 1, according to auction results published today. A broader index of 17 export commodities rose for a fifth straight month in January to a record, ANZ National Bank Ltd. said yesterday.

“Rising commodity prices certainly portend a strong fundamental support for the New Zealand dollar,” said Mike Jones, currency strategist at Bank of New Zealand. “That’s something we expect to support a generally rising trend to the middle of this year.”

Benchmark interest rates are 4.75 percent in Australia and 3 percent in New Zealand, compared to as low as zero in the U.S. and Japan, attracting investors to the South Pacific nations’ higher-yielding assets. The risk in such trades is that currency market moves will erase profits.

The dollar fell toward a two-month low against the euro before Federal Reserve policy makers begin a two-day meeting amid speculation accelerating U.S. growth won’t be enough to prompt a tightening of monetary policy.

The greenback weakened versus 12 of its 16 major peers before data this week forecast to show home prices dropped by the most since December 2009 while the U.S. economic expansion quickened. Australia’s currency slid after a government report showed consumer prices rose at the slowest pace in almost two years. The yen was near a two-month low against the euro as Asian stocks advanced amid signs the global recovery is building momentum, boosting demand for higher-yielding assets.

“The Fed still has concerns about high unemployment, very subdued core inflation and a generally fragile outlook,” said Mike Jones, a currency strategist at Bank of New Zealand Ltd. in Wellington. “A reiteration of that may provide some headwinds for the U.S. dollar and U.S. bond yields.”

The dollar declined to $1.3661 versus the euro at 12:47 p.m. in Tokyo from $1.3638 in New York yesterday, when it touched $1.3686, the weakest level since Nov. 22. It traded at 82.45 yen from 82.53 yen. The U.S. currency fell to 0.9479 Swiss francs from 0.9491 after earlier reaching 0.9471, the least since Jan. 5. The euro was at 112.63 yen from 112.54 yesterday, when it rose to 112.91, the most since Nov. 23.

Fed Chairman Ben S. Bernanke will keep the benchmark interest rate unchanged at zero to 0.25 percent at the central bank’s meeting on Jan. 25-26, according to economists in a Bloomberg News survey. Unemployment, at 9.4 percent in December, is well above the 5 percent to 6 percent level that most Federal Open Market Committee members peg as their long-term aim.

U.S. Data

Housing in the U.S. also continues to struggle as foreclosures mount. Home prices in 20 cities for the 12 months through November fell 1.6 percent from a year earlier, the biggest decline since December 2009, according to a Bloomberg News survey before the S&P/Case-Shiller index is released today.

U.S. gross domestic product rose at a 3.5 percent annual pace in the fourth quarter, up from a 2.6 percent rate in the previous three months, according to the median estimate of economists surveyed by Bloomberg News before a Jan. 28 report.

“As the market remains wary that the U.S. dollar can transition to a growth currency, the fourth quarter GDP print will have to come in on or above expectations to support the U.S. dollar,” Amelia Bourdeau, a currency strategist in Stamford, Connecticut, at UBS AG wrote in a note to clients.

Bond Sale

The euro rose against a majority of its most-traded peers before a European Financial Stability Facility bond auction that may garner increased demand.

The Luxembourg-based EFSF is selling as much as 5 billion euros ($6.8 billion) of five-year notes backed by guarantees from euro members, funds that will help pay for Ireland’s bailout. A successful sale of EFSF debt may prompt renewed calls for common European securities. While backed by most of the same nations that would be involved in a euro bond, the EFSF’s securities have achieved AAA ratings through credit enhancements designed to boost their appeal and keep down yields.

“We expect demand to be strong, as there is a shortage of AAA paper in Europe,” Marc Chandler, global head of currency strategy at Brown Brothers Harriman & Co. in New York wrote in a note to clients. The euro’s advance yesterday “will embolden the short-term speculators and suggest scope for another two cent advance,” he wrote.

The MSCI Asia Pacific Index climbed 1 percent before reports today that may show French spending rose a second month and Spanish producer-price inflation accelerated. A composite index based on a survey of euro-area purchasing managers in the manufacturing and services industries rose to 56.3 in January, the highest in six months, from 55.5 in December, Markit Economics said yesterday in an initial estimate.

‘Better’ European Data

“The data certainly looks to be doing much better not only in the U.S., but also in Europe,” said Khoon Goh, head of market economics and strategy at ANZ National Bank Ltd. in Wellington. “At the moment, risk appetite is ‘on’ and the yen typically doesn’t perform too well. If you look at the price action over the past week, the market is preferring the euro versus the greenback.”

Consumer spending in France gained 0.3 percent in December from November, when it rose 2.8 percent, a Bloomberg News survey of economists showed before the national statistics office Insee report. Prices of goods leaving Spain’s factories, mines and refineries climbed 5.0 percent in December from a year earlier, compared with 4.4 percent in November, a separate survey showed before the National Statistics Institute report.

The Australian dollar declined for the first time in three days after government figures showed consumer prices rose 0.4 percent in the fourth quarter, compared to the median estimate for a 0.7 percent gain. The so-called Aussie fell 0.3 percent to 99.49 U.S. cents and 82.03 yen.

The euro traded near a two-month high against the dollar and the yen before a report that economists said will show new industrial orders in the 17-nation region quickened in November.

The single currency was close to the strongest in two weeks versus the pound after European Central Bank President Jean- Claude Trichet said that policy makers will “closely” monitor energy and commodity prices, signaling possible higher interest rates. Australia’s dollar fell toward a seven-week low against the greenback after a government report showed producer prices rose the least in a year.

“Eurozone rates are higher versus the U.S. and the countries that were a cause for concern have rallied strongly,” said Tony Allen, global head of currency trading in Sydney at Australia & New Zealand Banking Group Ltd., Australia’s third- largest lender by market capitalization. “We’re in a bull move for euro.”

The euro traded at $1.3605 as of 1:35 p.m. in Tokyo from $1.3621 last week in New York, after advancing to $1.3647 earlier today, the strongest since Nov. 22. The single currency was at 112.59 yen from 112.48 yen, after climbing to 112.71, the highest since Nov. 23. The euro bought 85.22 British pence from 85.13 pence, after rising to 85.31, the most since Jan. 5. The dollar was at 82.77 yen from 82.57.

Industrial orders in the euro area rose 1.9 percent from the prior month, when they gained 1.4 percent, according to a Bloomberg survey before the report today. A composite index based on a survey of euro-area purchasing managers advanced to 55.6 in January from 55.5 in December, a separate survey showed before today’s data from Markit Economics.

Trichet’s Rhetoric

Trichet this month toughened his rhetoric on inflation after it accelerated to 2.2 percent in December, breaching the ECB’s 2 percent limit for the first time in more than two years. The change in tone prompted some economists to bring forward forecasts for rate increases and helped drive the euro more than five cents higher against the dollar since Jan. 12.

“We are profoundly attached to our mandate,” Trichet said in a Wall Street Journal interview in response to a question on whether his Jan. 13 comments were over-interpreted. “Clearly, in particular on the side of energy and commodity prices we have a number of developments that we will continue to monitor closely.”

Aussie Falls

Australia’s currency fell against most of its major counterparts after the statistics bureau said producer prices climbed less than economists forecast.

Prices paid to producers rose 0.1 percent in the fourth quarter, compared with the median forecast for a 0.5 percent gain. The statistics bureau will publish its consumer price index tomorrow. Today’s figures cover a period before floods devastated parts of northeastern Australia.

“A similar low-inflation picture is likely to get repeated in consumer prices,” said Adrian Foster, Hong Kong-based head of financial-market research for Asia at Rabobank Groep NV. “I’d look for a sell-off in the Aussie toward the 97.60 cent area.”

Australia’s currency dropped 0.2 percent to 98.81 U.S. cents, after declining to 98.04 cents on Jan. 12, the lowest level since Dec. 9.

U.K. Growth

The pound fell against the dollar, paring this month’s gain, before a government report that economists said will show U.K. economic growth slowed last quarter.

Sterling has strengthened 2.2 percent this month after inflation moved further above the government’s 3 percent limit, spurring bets the Bank of England will boost rates sooner than previously thought.

Gross domestic product rose 0.5 percent, compared with a 0.7 percent increase in the third quarter, according to economists in a Bloomberg survey before tomorrow’s report.

“The markets are a bit premature in expecting the Bank of England to hike rates anytime in the next few months,” said Mitul Kotecha, Hong Kong-based head of global foreign-exchange strategy at Credit Agricole CIB, said in an interview with Bloomberg Television. “That might just see a little more downside risk to sterling.”

U.S. Dollar Trading (USD) strong data and weak commodities sent the Dollar higher across the board. Weekly Jobless Claims dropped to 404k vs. 445k previously. December Home Sales at 5.28m vs. 4.88m previously. In US stocks, DJIA -2 points closing at 11822, S&P -1 points closing at 1280 and NASDAQ -21 points closing at 2704.

The Euro (EUR) held strength better than most with the market bounded between 1.34-3500. News that the Irish PM had called a snap election was overlooked as was a moody downgrade warning of Portugal. EUR/USD traded with a low of 1.3395 and a high of 1.3525 before closing at 1.3460. Looking ahead, January IFO Business Climate forecast at 109.9 vs. 109.9 previously.

The Japanese Yen (JPY) bounced aggressively on strong US jobs and housing data to test Y83 in a widely noticed sigh on strength. Y83.50 has capped the major so far this year and will need to be broken to excite the bulls. Overall the USDJPY traded with a low of 82.04 and a high of 83.15 before closing the day around 82.90 in the New York session.

The Sterling (GBP) was sold back on weak stock markets with UK economic data also weighing. January CBI orders slipped to -16 vs. -3 forecast. Overall the GBP/USD traded with a low of 1.5835 and a high of 1.6013 before closing the day at 1.5910 in the New York session. Looking ahead, December Retail Sales are forecast at -0.3% vs. 0.3%.

The Australian Dollar (AUD) was crushed in the US session as copper fell over 3% and the USD surged on strong data. The tone and mood towards the Aussie has changed markedly with the market finding itself caught long AUD against many pairs. Overall the AUD/USD traded with a low of 0.9830 and a high of 0.9982 before closing the US session at 0.9850.

Oil & Gold (XAU) was crushed lower by the strong USD and EURO. Overall trading with a low of USD$1342 and high of USD $1372 before ending the New York session at USD$1347 an ounce. Oil led the commodity sell off down $2 a barrel. WTI Oil Closed -$1.90 at $89.60 a barrel.

The US dollar continued its downward trend against most major currencies after data showed rising gas prices and meager consumer sentiment figures. Consumer’s view of the US economy fell 2.4%, after average gasoline prices rose above $3.00 a gallon. The Michigan sentiment index reported consumer sentiment fell to 72.2 from 74.5 in December and a survey of current economic conditions dropped to 79.8 from 85.3 in the prior month.

Despite the negative effect of higher gasoline prices, the survey reported consumer expectations rose to 68.2 from 67.5 in December, while the 12-month economic outlook index rose to 87, which was its highest since 2009. Additionally, the Commerce Department reported retail sales climbed 0.6% in December and 6.6% over the entire year, the largest 12-month gain since 1999.

The euro rallied further against the USD after comments from European Central Bank chief Jean-Claude Trichet raised expectations of an interest rate hike. The euro bank-to-bank lending rate jumped and the euro hit a one-month high of $1.3458 EUR/USD after Trichet warned about inflation in a recent interview. However, many analysts say that the euro may gain resistance above $1.35 levels given the nervousness over the large amount of debt supply from weaker Eurozone economies this year.

The British pound gained further against the USD supported by anticipation that UK interest rates may also rise in the coming months. The Bank of England kept rates unchanged yesterday, but rising inflation has led to speculation that rates may rise as soon as May of this year. The Office for National Statistics reported output prices rose 4.2% in December, surpassing expectations of a 3.9% rise. Bolstered prices were due to rising oil and food prices which increased pressure on the BOE to contain consumer price inflation, which is forecasted to rise towards 4% in the coming months

The Japanese yen traded slightly higher against the USD after a dip in US consumer sentiment. Domestically, Japanese wholesale prices reported the third straight month of price increase, which was 1.2% in December, higher than the median forecast of a 1.0% rise. Analysts say the rise is unlikely to lift Japan out of their current deflation as the weak domestic demand makes it difficult for companies to pass increased material costs onto consumers.

The Canadian dollar initially weakened against the US dollar, but managed to recover some ground as oil held in at $90 a barrel. Analysts will look towards Bank of Canada’s interest rate decision next Tuesday. Focus on the tone of central bank chief, Mark Carney will be closely watched for further direction in the USD/CAD currency pair.

The Australian and New Zealand dollars fell against the USD after China’s central bank raised lenders’ reserve requirements for the fourth time in two months. As China’s inflation is expected to stay elevated in the coming months, local bank reserve requirements rose by 50 basis points which brought fears of a slowdown in the Chinese economy. The Aussie is sensitive to China’s growth expectations as trade links remain strong between the two countries.

Australian Dollar: The Australian Dollar declined from 0.9960 to 0.9920 against the US Dollar yesterday after the release locally of the Unemployment and Participation Rate. The release indicted that the Unemployment Rate fell from 5.2% to 5.0% and that the number of jobs created to the economy totalled 2,300 compared with expectations of 25,200. This result along with the effects to economic growth from the floods in Queensland may have on the local economy have put any potential interest rate raise by the RBA on hold for the next several months. Offshore the Australian Dollar traded between 0.9940 and 1.0018 as traders made the return to riskier assets following some weaker than expected US data.

We expect a range today of 0.9900 to 1.000


New Zealand Dollar: The New Zealand Dollar held up above the 0.7600 cents mark yesterday as a return by the markets to high yielders continued. During the Asian session the Kiwi traded between 0.7625 and 0.7700 as the market once again sold the big dollar down. Sparking the rally in the Kiwi was a report out of the US that showed Unemployment Claims for the week rose 35,000 to 445,000 and again highlights the difficulties facing the US economy in the short to medium term. With no data due out of the land of the long white cloud the dollar will take direction from offshore events and happenings.

We expect a range today of 0.7650 to 0.7750


New Zealand Dollar: The New Zealand Dollar held up above the 0.7600 cents mark yesterday as a return by the markets to high yielders continued. During the Asian session the Kiwi traded between 0.7625 and 0.7700 as the market once again sold the big dollar down. Sparking the rally in the Kiwi was a report out of the US that showed Unemployment Claims for the week rose 35,000 to 445,000 and again highlights the difficulties facing the US economy in the short to medium term. With no data due out of the land of the long white cloud the dollar will take direction from offshore events and happenings.

We expect a range today of 0.7650 to 0.7750


Majors: The European Central Bank left the official cash rate at 1% last night when it held its first meeting of 2011. In the accompanying press conference it alluded to the fact that the ECB would not hesitate to raise interest rates in the Euro Land in order to fight inflation. The EURO rallied hard against the Greenback after the announcement with the EURO charging through the 1.33 mark to eventually hit an intraday high of 1.3377. Adding to the US Dollars recent run of poor form was the release Stateside of Unemployment Claims which increased 35,000 from 410,000 to 445,000, the biggest one week jump in about six months. Despite a positive reading in the US Trade Balance and PPI, traders favoured the GBP and EURO with risk potentially back on the table.

The Australian dollar is at a record high against the euro, propelled by rising fears for the European currency.

The dollar was recently at 74.64 euro cents, an all-time high, up from 74.47 this morning and well above the 10-year average value of about 59 euro cents. The euro’s slide comes as investors fret over the finances of Ireland.

“The story of Ireland is very much in focus,” said New Zealand-based senior trader Stuart Ive at currency house HiFX.

Mr Ive said that the Irish parliament would have to vote on the controversial 85 billion euro ($113 billion) International Monetary Fund/European Union bailout for the nation.

AUD/EUR 2000-2010

The European Central Bank late last week said 136 billion euros had been pumped into the Irish banking system before the separate bailout was announced.

“There’s still a lot of concern about this because of the uncertainty aspect,” said Mr Ive.

The dollar hit a post-float record against the greenback last month, hitting 101.5 US cents.

The Australian dollar has brushed off China’s 5.1 per cent November inflation rate announced on Saturday, which builds the case for higher lending rates in the all-important Chinese economy. Any sign of a slowdown in the commodity-hungry nation is expected to lower the value of the Australian dollar – seen as a proxy for Chinese growth.

Recent moves to curb the pace of lending in China have not hurt the Australian dollar.

Mr Ive said as the year wound down, most investors would prefer to invest in the Australian dollar, given the anxieties around the European debt crisis, which has sparked discussion of member countries leaving the monetary union.

Mr Ive said he did not expect the Australian dollar to fall against the euro until commodities prices fell, which would weigh on the local currency. The value of commodities is closely linked in the minds of investors to both China’s growth and the value of the Australian dollar.

The euro has been in crisis since May when fears that Greece could default on its sovereign debt nearly triggered a global market panic. The euro has remained weaker as worries about its future gathered.


Overnight, the head of the International Monetary Fund Dominique Strauss-Khan warned that the Greek economy needed fundamental structural reform in the next few months in order to woo investors back to buy its sovereign debt.

With expectations for the world’s economy to grow by 4 per cent next year, Commonwealth Bank chief currency strategist Richard Grace said Australia’s economic health was relatively strong compared to Europe.

That widened what is known as the interest rate differential, or the gap between the central bank interest rates associated with each currency. Interest rate settings are another driver of a currency’s value.

“The interest rate differential between Australia and the euro zone is at pretty robust levels,” Mr Grace said.

Australia’s cash rate is 4.75 per cent, while the European Central Bank’s rate is 1 per cent.

10 December 2010

Charlie Lay, Joanna Tan, Radhika Rao, Gregory See


- China: Nov M2 growth remained firm at 19.5% y/y from 19.3% in Oct. M1 growth was unchanged from Oct at 22.1% y/y. As for Nov new loans growth of another robust number at CNY564bn from CNY588bn in Oct, there are few signs of a slowdown in the monetary numbers.

- Philippines: IMF raised Philippines’ GDP forecast to 5.0% from 4.5% earlier, with 2010 projection unchanged at 7%. Said was necessary for the authorities to start normalizing policy soon; important to rationalize fiscal incentives; expects deficit to fall within target this year.

- Philippines: Treasurer Tan said the govt received strong offers of > PHP 100bn for new 2035 bonds; expects demand for new 2020 bonds to touch PHP 50bn as part of peso debt swap. Swap offer ended today, pricing on 14 Dec, followed by settlement on 16 Dec.

- India: Oct Ind Prod rebounds to 10.8% y/y, above consensus and above Sep’s 4.4%; Manufacturing rose 11.3% y/y.

- India: RBI Dep Gov Chakrabarthy’s remarks that RBI could raise rates despite the pause outlook; added that monetary policy was still accommodative with inflation as a major concern and real rates in negative.

- India: Planning agency’s Ahluwalia echoed concern over inflation, with < 10% annual growth likely in FY 11.

- India: Data from the RBI showed that authorities had bought USD 450mn in Oct to limit slippage in USD/INR on hefty inflows ahead of Coal India IPO. Curiously, Thu's report also showed that the RBI had sold USD 25mn in Dec and bought USD 155mn (Mar'10), USD 110mn (Jun'10) and USD 260mn (Sep'10), with prior bulletins not reflecting these purchases.


- UK: U.K. house prices increased to the highest in more than two years in November as the market showed signs of reaching a peak, research company Acadametrics Ltd. and LSL Property Services Plc said in an estimate released today.

- EU: Germany would like to discuss European Central Bank President Jean-Claude Trichet's succession at the next euro-area finance ministers meeting in January, Financial Times Deutschland reported, without saying where it got the information. - BBG

- US: The United States and Japan wrapped up seven days of joint military exercises Friday, as tensions simmered on the Korean peninsula. - CNN

- US: House Democratic leaders left a Dec. 6 White House meeting assured that President Barack Obama hadn't sealed a deal with Republicans that would betray nearly a decade of campaign promises not to extend tax cuts for the wealthy. - BBG

- Australia: Wet weather this week in eastern Australia, the fourth-largest wheat exporter, may have cut 60 percent of the crop in three states to feed quality, Australia & New Zealand Banking Group Ltd. estimated. - BBG


USD/Majors: Equities were a mixed lot, reflecting cautious market sentiments. Greenback strength held up well. China's firm Nov M2 and new loans growth added meat to the theory that inflation would exceed 4.4% and reinforced the need to come down hard on inflation. EUR traded sluggishly, while cable managed to advance higher. AUD upsides were capped, meeting heavy offers at 0.9870 on anticipation that its trading partner would tighten policy very soon. An increase in copper prices lent a supportive tone to the commodity heavy Au ssie.

JPY Crosses: JPY crosses were mixed as firm China Nov data had little impact on currency levels. Investors had already priced in their expectations for a rate hike from PboC this weekend. USD/JPY slid below its day's trading range, EUR/JPY tumbled as the risk-driven Euro fell against the sheltering Yen. GBP/JPY and AUD/JPY managed to hold on to their robust levels, though overly bullish moves are capped.

USD/Asians: Fleeting EUR rally provided saw USD/AXJ bears some breathing space in early Europe, though proved short-lived on weak French data into late Far East Asia. USD/regionals back up into traded range by close, with weekend's China CPI data and likelihood of rate/RRR hike keeping risk-appetite under wraps. Equity markets had an unimpressive end to the week, with Friday's price action of mixed hues - JKSE slumped >1.0% while SENSEX made up lost ground on bargain-hunters up 1.3% at last look. (Córdoba) – Even though the Euro weakness eased this Wednesday, the improved market sentiment boosted commodity currencies and pushed EUR/AUD to set fresh lows, going as deep as 1.3559 where the pair printed a fresh all time low by the end of the New York session.

EUR/AUD steadily declined through the day, losing around 190 pips and posting the third consecutive daily fall. The pair closed at 1.3581, 1.22% below its opening price.


Within the first hour of trading this Thursday, the Aussie has dragged the price back towards the 1.3565/60 zone where the pair holds near its record low at time of writing.

On the downside, next support could be found at 1.3550 and the 1.3500 area, while on the upside, immediate resistances might be located at the 1.3610/20 zone ahead of 1.3670.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

From Ozforex:
Australian Dollar: The Aussie rallied for a second day grappling with the US Dollar at 0.9900 offshore. Comments from Irish Finance Minister Brian Lenihan suggest the Green Isle may be drawing close to accepting aid from the EU and IMF which strengthened the Euro overnight. Lenihan said on Irish broadcaster RTE “The big difficulty is that the banks grew to such a size that they became too unmanageable for the state itself, that’s why we have to consider external assistance to stabilize the banking system.” Better than expected US economic data sustained investor optimism keeping the Aussie above 0.9850 US Dollars throughout the evening. This morning the Aussie opens at 0.9890.

We expect a range today of 0.9860-0.9930

New Zealand Dollar: New Zealand producer prices outpaced estimates with PPI Inputs growing 0.7% and Outputs expanding 1.2% in the 3rd quarter. Improved risk sentiment swung the Kiwi higher against the Greenback gaining 1% to 0.7783 overnight. The Philadelphia Fed survey for manufacturing in November soared to 22.5, the highest level in 9 months, from 1.0 previous suggesting ‘’firms remain optimistic about growth over the next six months.” The Kiwi opens slightly off its high this morning at 0.7770 versus the US Dollar ahead of today’s Credit card spending report.

We expect a range today of 0.7740-0.7800

Great British Pound: In the UK, retail sales figures printed on the mark growing 0.5% in October. However government borrowings increased by 9.8 billion, the largest October budget deficit since 1993. The increase in public finance cost highlighted the difficulty faced by the Conservative government to implement the austerity cuts proposed. Upon release of the news the Pound dipped below 1.5900 against the US Dollar before rallying above 1.6050 briefly later in the evening. Speculation that Ireland will receive international aid boosted demand for the Sterling as Ireland’s central-bank governor commented he expects the country to seek a “substantial” bailout easing investor concerns. This morning the Pound opens higher at 1.6046 USD. Meanwhile the Pound sits at 1.6214 and 2.0620 versus the Aussie and Kiwi.

We expect a range today of 1.6150-1.6240

Majors: The Euro rose above 1.3600 against the US overnight as reports Ireland may ask for an international bailout came to light. Irish central bank Governor Patrick Honohan said he expected the agreement to amount to ‘‘tens of billions’’ as EU, IMF and ECB officials start to study Ireland’s books. The Euro rose to 1.3667 against the US as fears eased over the Irish debts despite reporting an increase in the EU’s September current account deficit. Meanwhile improvements in Philadelphia Fed’s manufacturing reports helped the US Dollar rise to 83.77 against the Yen.

NEW YORK, Nov 17 (Reuters) – The euro edged higher against the dollar on Wednesday as tepid U.S. inflation data supported the Federal Reserve’s quantitative easing program, which is a signal for investors to sell the greenback again.

Talk that Ireland may soon receive help to fix its banking and sovereign debt problems also lifted the euro, although the currency’s upside could be limited because of concerns problems could spread to other euro zone economies.


The euro earlier slid to a low of $1.3460 on trading platform EBS, not far from a seven-week trough hit on Tuesday at $1.3446. Key support lies at $1.3436, the 50 percent retracement of the August to November rally, and a break could open the way for a drop toward the low $1.30s, traders said.

“With today’s CPI data kind of confirming that the Fed is doing the right thing on QE, the Federal Reserve is unlikely to back off,” said Greg Anderson, senior currency strategist at CitiFX in New York.

U.S. consumer prices rose less than expected in October and the increase in the year-on-year core rate was the smallest on record.

“As a result, we’ve seen yields stabilizing and it looks like they’re headed lower, which is good for risk sentiment.”

In early afternoon trading, the euro EUR= was up 0.3 percent at $1.3528. The single currency has lost about 3 percent this month as investors have cut long positions on peripheral debt worries.

The market’s focus was mainly on Ireland, whose high borrowing costs and large deficit have kindled fears of a Greek-style crisis where budget problems in one country weigh on the entire euro zone.

Nervousness grew after European clearing house LCH. Clearnet doubled its margin requirement on Irish government bonds to 30 percent of net positions, citing higher Irish yields over German benchmarks.


However, speculation that a resolution of Ireland’s problems is close helped the euro. Irish Prime Minister Brian Cowen on Wednesday said the country is currently not in a “threatening situation” and there are “sensible, precautionary discussions taking place” at the moment.

Price action on Friday has been very risk negative, with the higher yielding currencies getting hit hard on the back of carry liquidation. This has weighed heavily on global equities and commodities prices as well. Fortunately, we have been very well positioned for these moves and have managed to capitalize off of the market reversals. We have recently booked profit on and exited a Euro/Sterling short from 0.8880 at 0.8470, and currently hold an open short position in Kiwi/Dollar from 0.7920. Our latest trade is just getting going now, and we are looking for a solid close on Friday trade to formally encourage the reversal prospects in Euro/Aussie. The Australian Dollar is the weakest major currency on the day and this certainly is a welcome development.

Relative Performance Versus USD Friday (As of 9:10GMT)

On Thursday we established a fresh long position in the Eur/Aud cross after citing what we believed to be a very oversold market. We also offered our fundamental outlook for the Australian Dollar, and concluded that the economy looked to be reaching a bubble like state, with aggressive monetary policy, booming commodities and an overheating China, all seen potentially reversing course and ultimately weighing heavily on a currency that was trading by post-float record highs versus the US Dollar and cyclical highs against most of the major currencies. Indeed the position has finally begun to accelerate in our favor (long Eur/Aud @1.3725), and the latest driver for the move has come from an unlikely source.

More often than not, we find ourselves on the opposite end of the table with regard to our outlook in the markets relative to most of the other big institutions. This specifically applies to Goldman Sachs, who we feel has been quite aggressive with their advocacy for ultra-accommodation and additional QE from the Fed. However, Goldman has come out on Friday with a recommendation for its clients to square up their long positions on China. We couldn’t agree more with this call, and feel the Chinese economy is at risk for a major cooling off. Fears of inflation have prompted actions to raise rates, and these measures will undoubtedly curb growth. This should ultimately weigh more significantly on the Australian economy and Australian Dollar, which has been used as a proxy by many for their bullish China bets.

As such, while we can’t make any promises, and are well aware that markets can easily move against us, we love the idea of being long the cross, with the overwhelming confluence of technical and fundamental evidence simply too hard to ignore. We realize that Goldman has not come out and recommended a short on China or Australia, but the mere action of recommending a liquidation of existing long positions, is exactly what we would hope for (China equities under pressure today), so that we can initially ride the wave of a pullback on the liquidation from these trades. At that point we will have hoped to have captured a little profit, and then we can start to look for market participants to begin to consider the establishment of fresh Aussie short positions to really get things moving in our favor.

Euro Quickly Returning to the Top Headlines as Yields for Sovereign Debt Soar, Auctions Materialize Concern
There was economic data for euro traders to work with Tuesday; but its influence was modest. Between the final readings of German CPI data and business sentiment statistics; there was little to truly garner a sense of regional growth and inflation. Far more interesting is the fiscal picture of the entire European Union. Irish bond prices dropped an 11th day as EU Commissioner Rehn said the country couldn’t remain a low tax economy – another blow to its ability to attract capital. In Greece, the Finance Minister voiced concerns that budget cuts could chock growth; but he did see a successful 52-week bond auction. We’ll see if Portugal is as lucky with a 1.25 billion euro debt sale Wednesday morning.

British Pound Tempers its Response to Data as Focus turns to Wednesday’s BoE Quarterly Inflation Report
Economic data was questionable for the British pound Tuesday. The deficit improved slightly from a record low; the NIESR GDP estimate was still positive but is falling quickly and factory activity is quickly standing in as the last bastion of support with a fifth consecutive improvement. The upcoming BoE quarterly inflation report will have more influence with updated inflation and growth forecasts to guide stimulus speculation.

New Zealand Dollar Overvalued According to RBNZ Governor Bollard
Lamenting the high level of his currency and the impact it is having on the New Zealand economy, RBNZ Governor Alan Bollard suggested the kiwi was overvalued. Furthermore, in his dovish commentary, the policy official said the currency is being driven by the Fed’s stimulus pump and domestic activity and credit demand remain weak. The market will decide whether it is willing to believe these comments.

Australian Dollar Gains Weight as Investor Optimism Retreats, Consumer Confidence Tumbles
Risk appetite trends are the primary source of strength/weakness for most asset classes out there; but it is especially influential for the Australian dollar as the FX market’s favored yield currency. Adding a further unfavorable slant to the general appetite for risk, the Aussie dollar’s standing as a faultless high-yielder was diminished by a 5.3 percent drop in the Westpac consumer confidence survey. High rates have their impact.

Japanese Yen Slides against the Dollar Even as Risk Falls Back
Fundamental roles and correlations change over time. For the dollar, the appeal of a safe haven is growing more and more dubious. The same can be said of the yen. However, where the dollar is already under significant pressure; the Japanese currency is near multi-year and record highs. Is reality catching up to the low yield, deflationary and stimulus-friendly currency? With USDJPY rising as risk slides, we could be.

CURRENCY: Having started a corrective move the NZD may well continue this towards the 0.77USD territory ably assisted by a weaker EUR and AUD.

RATES: Trading in NZD rates was light in the London session, and AUD bonds outperformed. This should help stem any global inspired pressure on rates to rise on the day, although market sentiment is a touch fragile.

REVIEW CURRENCY: As expected the NZD undertook a corrective move yesterday. It was assisted by several onshore and offshore factors and achieved a minimum technical retracement level overnight.

GLOBAL MARKETS: Small ranges in fixed income, equities and FX. Bank bill futures were under pressure globally, following heavy selling in the front 3 Eurodollar futures contracts. This included short sterling futures, which sold off 6-7 points, not helped by an article in the Sunday times suggesting that inflation is going to be a problem for the BoE for an extended period..

KEY THEMES AND VIEWS euro sovereign debt concerns in focus. After being fixated with QE for some time, having taken delivery of it, markets quickly tired of it, and with no major data out overnight, attention shifting back to that other trusty old chestnut, European sovereign debt. Spreads on Greek bonds had been widening for a few weeks now, but have retreated in the past 24 hours as PM Papandreou’s party looks set to win local authority elections.

The same can’t be said of Irish debt, with 5yr CDS spreads widening to a record high as the Irish government opens its books for inspection by the EU. The developed economies may be gingerly emerging from recession, but the market’s attitude toward debt just doesn’t seem to want to go away. This is something we need to be aware of in NZ – our fiscal position may be the envy of many, but as yesterday’s Crown accounts showed, we’re not out of the weeds yet, and we cannot rely on a recovery to correct the fiscal deficit. The improving economy will help, but restraint is also required.

Overnight Comments/Events

* Trichet says QE II was not aimed at weakening the USD. Speaking at a briefing after chairing the BIS Global Economy Meeting of central bankers, ECB President Trichet said that “What I have noted as part of the consensus was the idea of a solid anchoring of inflation expectations that was inspiring the sister institution”. He added that all participants “mentioned the fact that they were not pursuing weak currency policies and that’s something that’s very important”.

* Chinese finance minister Zhu Guangyao said that QE might “shock” emerging market economies by flooding them with liquidity, adding that the Fed did “not fully taken into consideration the shock of excessive capital flows to the financial stability of emerging markets”.

* Geithner confident that world leaders can agree on a framework to rebalance the world economy. Speaking in India ahead of the G20 meeting later this week in Seoul, US Treasury Secretary Geithner said “We’re going to try to build a closer agreement for cooperation on exchange rate questions and on growth”. He was “very confident” an agreement can be reached, adding that he expected world leaders to agree to allow the IMF to provide guidelines at the G20 meeting.

NZD: Lacking local data A continued focus on offshore movements should see the NZD topside limited again today. Further tests of support are likely although getting through the initial level at 0.7820 (last week’s significant break point) may not occur today.

Expected Range: 0.7833 – 0.7903

NZDAUD: Step one An easier path lower for this cross given the obvious differences. Stronger ANZ October job ads data released yesterday was enough to hold the AUD up against the NZD but it too suffered against a correcting USD. Expect a deeper test of support for this cross but getting through 0.7761 should not occur today.

Expected range: 0.7761 – 0.7820

NZDEUR: Eight is not a lucky number If you are a holder of Irish Government bonds from yields as low at 6.20 in mid October. Continued concerns on this front have ensured that EUR weakness has kept pace with the moves of the NZD and this should again be the case today.

Expected range: 0.5633 – 0.5693

NZDJPY: Stable JPY? A strengthening USD was unable to improve much against the JPY helping to fend off moves higher for this cross. Support at 63.50 has held at this point and should do so again today.

Expected range: 63.50 – 64.45

NZDGBP: Living the high life Continued moves around 0.49GBP should be enough to exhaust this cross in the near term. Short-term sellers of NZD above 0.49GBP will cap moves today with an expected move closer to 0.48GBP later this week.

Expected range: 0.4852 – 0.4898

The Euro set fresh 9-month high against the US Dollar, but a late-Friday reversal warns that the single currency may be on the cusp of a much larger correction following substantial gains. US Federal Reserve Chairman Ben Bernanke sent the euro and other major currencies significantly higher against the US Dollar on a speech in which he openly discussed the need for further monetary policy accommodation. The Chairman’s thinly-veiled references to Quantitative Easing confirmed market suspicions and forced the USD lower, but it is interesting to note that the Euro was unable to hold its gains and actually finished the day below its open. Given such a bearish single-day reversal, we suspect that the EURUSD may have set an important top in its sharp push towards 1.4150 through Friday morning trade.


The US dollar fell against other currencies on Tuesday after a handful of reports underscored worries about the weakening US economy.

The dollar has declined against the euro during the past several months despite ongoing worries about the debt levels of European governments and banks.

The dollar also fell against currencies of countries that are big commodity exporters, such as the Australian dollar. The Australian currency traded at its highest level versus the dollar since July 2008.

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