The Euro Strides Ahead

• The AUD moved lower against the USD and EUR for the week driven largely by rejuvenated Eurozone confidence. AUDUSD fell from a high of 1.0575, to a low of 1.0385 and regained support to 1.0470. AUDEUR was the big loser, falling two cents from a high of 0.7957 to 0.7763. The GBP weakness continued, AUDGBP dipped to 0.6584 before recovering to 0.6648 (all rates at time of writing).
• Australian Producer Price Index (PPI) will be released this Friday. The figure is a quarterly measure of inflation for producers and therefore an indicator of future price increases. Australian Building Approvals will be released on Monday, and will be the final Australian data release for December before the RBA’s first interest rate decision of 2013 on Tuesday.
• As stated in last week’s update, although data has been softer out of Australia, we do not view it as severe enough to prompt a rate cut on Tuesday. The RBA’s December statement included neutral rhetoric that suggested the end of the 2012 easing cycle for the moment, and that the effects of previous cuts were yet to show.

• The rebound of the Chinese economy was further confirmed last Thursday when the HSBC Flash Manufacturing PMI, a measure of manufacturing activity in China, was released last week at 51.9; indicating expansion when over 50. The reading is the highest since March 2011.
• The AUD has become less and less driven by fundamental data, in recent months as worldwide monetary easing has supported demand for relatively high yielding currencies. This was evident last week when the AUD dropped almost a cent against the USD in the day following the strong Manufacturing PMI figure.
• Another Chinese Manufacturing Index conducted by Fung Group will be released this Friday, 51.1 is expected after 50.6 last month.

• The Reserve Bank of New Zealand will set the benchmark interest rate tomorrow in its first decision of 2013. The rate is expected to be held at 2.50%, where it has been since March 2011 when the Christchurch earthquake prompted a 50 basis point cut.  

• Please see below for specific currency commentary.

• The AUD lost some support last Thursday, dropping a cent against the USD despite strong Chinese data. The dip seemed to be a delayed reaction to soft Australian inflation data released on Wednesday that was largely ignored by the market on release.
• The first estimate of U.S. fourth quarter GDP will be released tomorrow, with 1.1% annualised growth expected. The figure is the broadest measure of economic activity and will be a strong driver of risk sentiment worldwide.
• The Federal Open Market Committee (FOMC) will also issue its monthly monetary policy statement tomorrow. No change in policy approach is expected, the board will likely reiterate its current stance of quantitative easing to boost economic growth.

• U.S. Non-Farm Employment Change, a measure employment growth, will be released on Friday evening. 155,000 new jobs were added last month and a further 161,000 are expected this month. The unemployment rate is expected to be 7.8% where it has been steady since September, amounting to 12.2 million unemployed people of whom 4.8 million are long term unemployed.  The FOMC have stated that a 6.5% unemployment rate is their target for quantitative easing.

• The EUR strength continued in leaps and bounds this week AUDEUR falling to a low of 0.7717 from 0.7946. The EUR hit a 13-month high of 1.3498 against the USD.
• The AUD weakness is attributed to the unwinding of EUR funded carry trades. A carry trade is that where an investor sells a low yielding currency and purchases a high yielding currency. The European Central Bank remain relatively hawkish, do not intend to ease monetary policy, compared to the central banks of the US and Japan. This means investors favour selling USD and JPY to fund carry trades, this has kept AUDUSD and AUDJPY well supported.

• The EUR strength has been similar against other high yielding currencies. This week, EURCAD gained from 1.3170 to 1.3603 and EURNZD climbed from 1.5749 to 1.6116, respectively.
• Further adding to Eurozone confidence, better than expected PMI data for the region was released last week. Importantly, German Manufacturing PMI was 48.8 from 47.1 expected and German Services PMI was 55.3 from 52.0 expected.
• The Spanish unemployment rate has risen to 26.0% or 5,965,400 people. While the daunting figure had no significant market reaction, it highlights the severity of economic conditions in the country. Solely to gain some perspective, the Spanish workforce is roughly the size of Australia’s entire population, the figure equivalent to 26.0% of our entire population looking for work.

• The woes continue for the U.K as GDP growth returns to negative territory in the fourth quarter of 2012. The figure of -0.3%, released on Friday, is the first estimate of quarterly GDP growth. The figure lead to further weakness of the GBP across the board.

By Chris Chandler