• Market appetite remains key despite an economic role reversal.
• Sovereign murmurs out of Europe undermine the Euro.
• QE II a hit, but not yet a success.

The AUD has been strong this week, hitting parity and convincingly so with a new high of 1.0181 established against the Greenback. This was off the back of equity markets rallying over the week, ensuring that investors were seeking opportunity and potential in higher yielding currencies like the Aussie dollar. On the data front, we’ve seen surprisingly strong moves out of the States with economic data there resembling a revival while the local news reflected something closer to a Welsh forward pack. Across the board the news was strong in the US and in particular jobs data showed more than just the Green shoots of a recovery. Nonfarm Payrolls, the galvanising piece of data which sets the tone at the begging of the month, far outweighed expectations at +151K versus an expected +61K. Locally, the data out was painfully understated with Retail Sales (0.3%), the Trade Surplus (1.76B), ANZ Job Ads (0.6%) and Westpac Consumer Confidence (-5.3%) all showing mediocre figures. The only redeeming features came in the form of AiG Performance of Construction Index (44.0), Home Loans (1.3%) and Investment Lending (1.7%), which showed better than expected figures.

In Europe, there is renewed pressure regarding peripheral countries raising Government debt as sovereign bond yields widened significantly this week. This has focussed largely on Ireland which is often targeted by the markets for excessive debt and is clearly high on the default list. This is likely to remain a source of risk for clients exporting to Europe while providing potential upside for Euro buyers if central European governments voice their displeasure on the level of cutbacks to government expenditure and tax reform. Locally, Treasurer Wayne Swan performed his own “austerity measure” by cutting the budget by $10billion to compensate for reduced tax revenue via the strong Aussie dollar.

The US Federal Reserve QE II set sail last week with the announcement of a 600B purchase of market securities, an unorthodox means to curb the cost of debt in an effort to spur the US economy higher. One of the most interesting developments after the announcement was the scathing critique poured onto the US central bank for its efforts in undermining the US dollar. Although a weakened USD emerged as a result, this was not the primary objective of the Fed which is focussed on increasing lending for job creation and higher inflation. Central bank in China, Germany and Brazil led the charge in undermining Ben Bernanke with Commerzbank (Germany) saying it was a “policy error” and a Chinese official saying it was owed “some explanation”. If the Chinese officials needed anymore explanation they only needed to look at the titillating heights of US Unemployment, still at 9.6%.

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