NZD
Last week the Reserve Bank of New Zealand slashed its official cash rate by a more than expected 150 basis points to a new record low of 3.50 %.  That will not be the last cut we see with the RBNZ prepared to cut further citing the “tool box is by no means empty”.  Data out this week is expected to endorse market sentiment that the OCR will continue to fall particularly with this week’s labour market data set to show the unemployment rate rocketing higher.

Other figures released last week was overseas merchandise trade (December) a $347 million monthly trade deficit takes the annual deficit to $5,615 million and residential consent issuance fell 6.0 % to a new record low.

AUD
Producer prices rose by a hefty 1.3 % in the December quarter with the annual rate up to 6.4 %.  This was the largest quarterly jump in the decade-long history of this component.   The December CPI came in largely as expected falling 0.3 % in the quarter with the annual pace slowing to 3.7 % yoy from 5 % yoy.  The fall in the headline rate was due to an 18 % fall in petrol prices, while motor vehicles (-2.4%) deposit and loan facilities (-1.9%) and pharmaceuticals (-4.7%).

The week ahead:

NZD
Wednesday 4th – Visitor Arrivals (Dec), ANZ Commodity Price (Jan)
Thursday 5th – Unemployment Rate (Q4)

AUD
Tuesday 3rd – RBA Cash Rate Announcement
Wednesday 4th – Building Approvals (Dec) mom, Retails sales (Dec)
Friday 6th – RBA Quarterly Monetary Policy Statement, Foreign reserves (Jan)

GBPNZD
The UK formally entered a recession in the fourth quarter of 2008 as the economy contracted for a second successive quarter.  Output fell by a larger than expected 1.5%, its largest quarterly decline since the second quarter of 1980 and enough to push the annual growth rate down from 0.3% to -1.8%.

The sharp collapse in manufacturing activity has been a global phenomenon in the fourth quarter and reminds us that the credit crunch has fed through to the real economy.  The problem is no longer simply in financial services and in response to the deteriorating outlook, the Bank of England is expected to cut by a further 50bps this week.

Movements in this pairing last week were all one sided and went to Sterling.  Trading opened on Monday just above the GBPNZD 2.65 level and closed on Friday just above the GBPNZD 2.80 level.   The question this week is does Sterling have enough fire behind it to hold onto its gains?

The week ahead in the UK:
Tuesday 3rd – PMI Construction (Jan)
Wednesday 4th – Nationwide Consumer Confidence (Jan)
Friday 6th- Bank of England Interest Rate Announcement, PPI Input & Output (Jan) mom, Industrial production (Dec) mom

GBPAUD
Commodity currencies were hit last week as the safe haven currencies took the front foot and the Australian Dollar was no exception.  The GBPAUD pairings movements were similar to the GBNZD rate last week, the rate kicked off the week in the GBPAUD 2.12’s.  Sterling then dominated and appreciated against the AUD throughout the week with the rate in the 2.23’s at close of play on Friday.

We have seen a correction in the rate from its high of GBPAUD 2.28 at opening on Monday of this week and it is now back in the 2.23’s.  This week leading up to the interest rate announcement in the UK on Thursday it is quite possible that we will see Sterling continue to weaken after its big moves of last week.  For data out in the UK this week please refer to GBPNZD above.

EURNZD
The German Ifo survey followed the ZEW in showing some improvement in confidence in January.  The headline business climate index rose from 82.7 to 83.0 against expectations for a small fall as the forward-looking expectations component rose from 76.9 to 79.4.

The moves weren’t quite as clear cut as the GBPNZD rate last week.  Despite the New Zealand dollar putting up somewhat of a fight against the Euro last week the rate still moved from in the 2.47’s up into the 2.52’s at end of play on Friday.  Key data to watch out for this week is the interest rate decision in the Euro zone, if the market hasn’t already priced in an interest rate cut we might see some EUR favoured movements.

The week ahead in the Euro zone:
Wednesday 4th – PMI Services, Retails sales (Dec) mom
Friday 6th – ECB Interest Rate Announcement, Trichet Speaks at ECB Monthly News Conference

EURAUD
The first half of last week the EURAUD rate was reasonably stable, trading between the 1.97 – 1.99 band that was up until Wednesday when Euro then started its climb and broke above the EURAUD 2.0 level.  With interest rate decisions out from both sides this week we might see somewhat of a stalemate and the rate hover around the EURAUD 2.0 level.  For data out in the Euro zone please refer to EURNZD above.

NZDUSD
The US Federal Reserve left rates on hold this week at 0.0-0.25 % which comes as no surprise to us all.  One interesting development was the hint that the Fed might be getting concerned about deflation.  The FOMC said “…inflation could persist for a time below rates that best foster economic growth and price stability in the longer term”. As light at the end of the dark recession tunnel for the first time, the Fed also said that it expected a gradual recovery to begin later this year.

The New Zealand Dollar has fallen over 12 % over January already and sentiment is still certainly against the NZD, especially with ongoing global uncertainty the USD will continue to benefit from safe haven flows.

Last night the NZDUSD rate dipped below the 0.50 level for the first time in six years and it is quite possible the New Zealand Dollars saving grace was due to the fact that a lot of workers from the City financial centre in London could not get into work due to heavy snow.  If the trend is to continue we might well see the NZDUSD rate continue to move south at a gradual pace breaking below the 0.50 level again.

The week ahead in the US:
Wednesday 4th – Pending Home Sales (Dec) mom
Thursday 5th – ADP Employment Change (Jan)
Friday 6th – Initial Jobless Claims (w/e Feb 1), Non-Farm Productivity (Q4)

AUDUSD
Last week the USD had the same movements against the Australian Dollar as it did with the Kiwi.  The beginning of the week was fairly uneventful and lacking movement until Wednesday when the rate dived down to close on Friday in the AUDUSD 0.63’s.  If further poor global data continues to be released which is more of a certainty than a probability the Australian Dollar will remain on the back foot for the time being.  For data out in the US this week please refer to the NZDUSD rate above.

AUDNZD
The battle of the commodity currencies was a draw last week with the rate closing on Friday in the 1.25’s the same level as what it had opened on Monday.  With the attractiveness of the NZD’s yield advantage quickly fading the AUDNZD rate moves in the short term could predominantly favour the Australian Dollar.
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Please feel free to contact me (renee.doughty@worldfirst.com) if you have any questions or thoughts regarding these updates or if you are interested in a particular event in the calendar.

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Disclaimer: The above comments are only our views and should not be construed as advice. You should act using your own information and judgement. Although information has been obtained from and is based upon multiple sources the author believes to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute the author’s own judgement as of the date of the briefing and are subject to change without notice.
Any rates given are “interbank” i.e. for amounts of £5million and thus are not indicative of rates offered by World First for smaller amounts. E&OE. Definitions of jargon/market terms can be found in our Glossary of Foreign Exchange Terms.