Foreign Exchange - Australia Weekly Update - Monday, September 22, 2008 4:09 - 0 Comments

World First NZD/AUD Weekly Update – 22nd September 2008

NZD

Last week wasn’t so much about data released but more to do with resurfacing credit crunch problems in the US and risk aversion.

The early part of the week saw the NZD lose significant ground against its pairings as the shockwaves of the investment bank Lehman Brothers going into bankruptcy hit the global markets.  Risk aversion tactics were sought as investors withdrew their funds from Kiwi Dollar, and JPY and CHF were the main benefactors viewed as ‘safe havens’. 

The tide changed three further times throughout the week giving us one of the most ‘roller coaster’ weeks we have seen in the markets in many a moon.  On Wednesday during the Asian trading hours the high risk appetite had resumed and the NZD gained back lost ground, however Thursday saw a renewed problem US side with the main concerns being over AIG (one of the world’s largest financial insurance companies) needing help, but also Merryl Lynch & Co having to be absorbed by Bank of America, and Morgan Stanley negotiating for assistance with Wachovia.  The credit crisis is the bad smell in that just won’t go away and investors once again shied away from ‘high risk areas’ so the NZD was out of favour.

The end of the week saw the tide change again – AIG was deemed to have too many fingers in too many pies to be allowed to go the same way as Lehman’s, so the Fed stepped in to help.  The Fed also proposed, along with other central banks putting steps in place to stabilise the global markets, first and foremost by adding further liquidity.

The released data last week from NZ seems insignificant compared to everything else that happened but Monday’s manufacturing data implied it dropped in Quarter 2.  This leads us on to a quick look at the NZ economy and general outlook.  Many analysts think that given the continuing global slowdown we are likely to see another 50 bps cut at the RBNZ’s next meeting at the end of October, and that the OCR will be lowered to 6.0% or less over the coming months, currency strength permitting.

AUD

Last week, although quiet on the Australian domestic data front, was certainly not quiet in the markets.

As with the NZD early last week saw the AUD depreciating in value rapidly off the back of the bankruptcy of the Lehman Brothers investment Bank and the threat that AIG would go the same way.  The effects were felt across the global markets as investors employed risk aversion tactics.  The AUD being a ‘high risk’ investment was heavily sold, and lowering commodity prices did nothing to help support it. 

By mid week the AUD recovered some of its lost ground on the news that AIG would receive a loan from the Fed – and it seemed the appetite for high risk investments had resumed.  However the investor risk appetite remained fragile and Thursday saw further lost ground for the AUD, as there was more speculation to the health of the US financial system.

The end of the week saw another turnaround to what must have been some of the biggest intra-week moves against and for the AUD in months.  Friday saw risk appetite back up as the Fed and other central banks including the BoE, ECB and BoJ, announced coordinated action to increase market liquidity and ease current problems.

The outlook for Australia is that it looks likely that the RBA will cut interest rates again in October by 25 bps (they meet on 7th Oct), although economists are becoming more mixed in their opinions rather than the 88% chance of another cut given immediately after the last one in early September.  Analysts are also penciling in that if an October cut occurs the RBA will pause there and wait to see how the data pans out for the remainder of the year with a view to resume the cutting cycle later in the first quarter 2009.

The week ahead:

NZD

Tuesday 23rd: Westpac Consumer Confidence (3Q)

Friday 26th: Gross Domestic Product (2Q)

AUD

Monday 22nd: New Motor Vehicle Sales (MoM and YoY Aug)

GBPNZD

The pairing started last week at 2.69 rising to the peak on Tuesday at 2.755 before dropping again on Wednesday to 2.69 again.  Thursday saw another spike up to 2.75 but by Friday we were back down to 2.66 where it has remained leading into this week.

The wide fluctuations can be largely explained by risk aversion following the problems in the US but it is also worth having a quick look at the data and news in the UK.

Last Tuesday’s CPI figure in the UK jumped to its highest level in 16 years.  In his letter to the Chancellor, Mervyn King stated that he believes that CPI will stay stubbornly above the bank’s 2% target well into 2009.  The MPC undoubtedly are still split in the opinion as to how they should react given growth is still low.  The general consensus however is that we will see the Bank of England move to cut interest rates by the end of the year.

The banking problems weren’t only in evidence stateside last week.  In the UK Lloyds TSB had their offer to take-over the troubled HBOS accepted.  As an indication of the demise of HBOS, the UK’s largest mortgage lender, the price Lloyds will pay is less than ¼ of the share price a year ago.

Sterling was also supported by the news that the Bank of England would extend by another 3 months the ‘Special Liquidity Scheme’ it has been running that allows banks to swap toxic mortgage debt for government bonds.  This is a direct turnaround from a week ago when Mervyn King all but ruled out such a move in testimony to Parliament.

Going forward it is very hard to say where the rate will go.  We still think there is an element of stalemate between GBPNZD given that neither economy is fairing too well.  If anything NZ is doing slightly better if only in predictions alone – the BoE expect 2009 to be a year of recession in the UK whereas the RBNZ are slightly more optimistic in their outlook for New Zealand, but only time will tell.  Obviously if further credit crisis troubles arise, we could see the NZD depreciate in value very quickly but just as we saw last week this can be reversed equally as fast.  That aside we think that in the current climate Sterling seemingly doesn’t have the legs to push the rate above 2.75 so this may prove to be the peak for the year, and good levels to buy at in the short term should we see the rate back above 2.7.

The week ahead in the UK:

Tuesday 23rd: BBA Mortgage Approvals (Aug)

Wednesday 24th: CBI Distributive Trades Survey (MoM Sept)

GBPAUD

GBPAUD started last week at 2.195 but climbed to a peak of 2.275 on Tuesday.  Wednesday saw the rate move back down to the low 2.2’s but Thursday gave us our peak for the week at 2.31.  From here we traded back down to finish the week at 2.20 where it has remained through to today.

As with GBPNZD last week’s depreciation in the AUD was brought about by investors withdrawing their funds from ‘high risk’ areas.  The wide swings in the rate gave us the peak for the year so far for GBPAUD but we didn’t stay there for long and the desire for investment in AUD has resumed, at least for now. 

If the rate moved simply off the back of UK and Australian released data one would expect the rate to continue around the 2.15 – 2.2 level, rising and falling with the predicted cuts in respective interest rates.  However more chaotic and unpredictable forces are at work and in times when the fourth largest US investment bank can go bankrupt anything can happen.  Risk aversion is obviously a key phrase right now (and much overused in this update!) so we can expect the rate to jump out of this range if further shocks hit the market.

For data released in the UK this week please see GBPNZD above.

EURNZD

EURNZD started last week at 2.15 and rose to the peak since 2001 at EURNZD 2.19 on Tuesday.  By Wednesday we were back down at 2.14, peaking again shortly on Thursday to 2.17 but down again by Friday to finish the week at 2.1.

As with all NZD’s pairings there were some wide swings in the EURNZD rate.  It seems that it may be too soon to say the dust has started to settle on what was a very eventful week but if that’s the case then we are likely to see the rate trading below the peaks of last week. 

The released data from the Eurozone was actually pretty weak.  Labour costs, the Zew Survey and Trade Balance all came out lower than previous and only the CPI figure for August came out stronger than expected.  Most analysts are in agreement that the Eurozone is heading for recession but how deep and protracted a period of negative growth it will be is hard to gauge. 

Looking forward in terms of the rate one would imagine that for now the negativity from both areas is enough to keep the rate trading between EURNZD 2.05- 2.15 but unless there are further credit crisis shockwaves the rate may have a hard time breaking to higher levels.

The week ahead in the Eurozone:

Monday 23rd: ECB Trichet’s Speech

Tuesday 24th: German PPI (Sept), Eurozone PPI (Sept), Eurozone Industrial Orders (YoY July)

Wednesday 25th: Eurozone Current Account (July), Germany IFO Business Climate and Expectations (Sept)

Thursday 25th: Germany Gfk Consumer Confidence Survey (Aug), Germany Import Price Index (MoM Aug)

Friday 26th: Germany CPI (MoM and YoY Sept)

EURAUD

Last week saw the EURAUD spike to the peak it has seen since mid 2003.  On Monday we started at EURAUD 1.75 rising on Tuesday to 1.8050.  Wednesday saw it back down in the mid 1.7’s at but Thursday brought about the peak at 1.82 before it fell back for the end of the week to the 1.74’s.

Another pairing and another frantic rising and falling week for the rate.  The high was short lived and we may settle back into the low 1.7’s this week if the turbulence coming from the US has dissipated.  Credit crisis aside we may well see the rate continue to trade at current levels for a while as both Australia and the Eurozone face a similar set of economic problems even though the RBA have made it to the ‘rate cutting party’ earlier than its European counterparts.

For data released in the Eurozone this week please see EURNZD above.

NZDUSD

The NZDUSD started last week at 0.67 and moved to the low for the week at 0.65 on Tuesday, however thereafter it was the USD’s turn to depreciate and we saw the rate reverse some of its recent gains and finish the week at 0.6870 where it has remained through to today.

Although last week’s problems in the market stemmed from the US, the USD didn’t depreciate in value as much as other currencies.  Initially the movement was against NZD in the NZDUSD pairing as investors removed funds for safer areas.  However as the week went on further scrutiny was placed on the US financial system;  having enjoyed a month now of growth, due to other economies troubles, analysts have probably jumped the gun a bit in suggesting the US economy and the USD was on the road to recovery.  This week and coming weeks will see all US data fine combed and we expect the USD to come under pressure which could lead the Fed to cutting interest rates despite the decision to leave them on hold last week.

The week ahead in the US:

Tuesday 23rd: House Price Index (July), Washington Post Consumer Confidence (Sept)

Wednesday 24th: MBA Mortgage Applications (Sept), Existing House Sales (Aug), Fed’s Bernanke testifies.

Thursday 25th: Durable Goods Orders (Aug), New Home Sales (Aug)

Friday 26th: GDP 2nd Quarter, GDP Price Index, Personal Consumption Expenditure, Reuters/Michigan Consumer Confidence.

AUDUSD

The early part of the week saw the AUD on the back foot and then fortunes reversed.  On Monday we started the week at AUDUSD 0.82 before hitting the low on Tuesday at 0.7870 and from there the USD depreciated to leave us at 0.83 for the end of the week.

Although risk aversion against the AUD was the order of last week it was not in favour of USD – other currencies such as JPY and CHF benefited more.

The 2% fall at the beginning of the week for the AUD against the USD was halted to a degree by the market thinking the Fed would cut interest rates overnight on Tuesday – subsequently less ground was lost than against other pairings.

It looks increasingly likely that the Fed will cut interest rates again by the end of the year.  Despite the past 3 months being ones of reasonable growth for the USD, as the rest of the world’s economic and financial conditions deteriorated, the focus is now back on the US and their struggling financial system which suggests the USD will start to come under pressure especially if the Fed don’t cut rates.

However this does not mean that the AUD will capitalise on USD weakness, as global economic growth will continue to be poor and commodity prices will likely be jumpy and probably most significantly investor’s appetite for high risk areas will be lower given last week’s rocky path so expect some further wild fluctuations in the exchange rates.

For data released in the US this week please see NZDUSD above.

AUDNZD

AUDNZD started last week at 1.23 and from there traded downward to hit the low on Thursday, for the week and for the past 5 months, at 1.1850 before finishing the week at 1.20.

During a week that saw large volumes of both currencies being sold, bought, sold and bought again its surprising the AUDNZD rate moved at all given they are in the same boat.  However due to a long period of AUD strength during the mid part of this year it stands to reason in a climate when both economies are feeling the pinch of the global slowdown the rate will head back to more level ground.  We doubt the downward movement of the rate will be quick but in accordance with when the respective central banks cut interest rates we expect to see the currency concerned be put on the back foot.  For now 1.20 – 1.24 is likely to be the range.

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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.

If you would like to discuss your currency exchange requirements then please don’t hesitate to call our Southern Hemisphere Office on our New Zealand Free phone number 0800 666114, or Australian Free phone number 1800 701540 or direct on 0064 7839 6114.

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