NEWS / Foreign Exchange

AUD highs not tested

Geopolitical events spark a round of risk aversion

Reports that the US are planning a strike on Iran early April meant for a jittery start to Wednesday morning with oil spiking from 62.93 to 68.09 early NZ time. As the rumours gained momentum risk aversion reared its head and market participants dumped NZD, AUD and most Asian currencies. The NZD weakened from 0.7175 on the open to 0.7130 on the NZ close. Comments from Fed chairman Bernanke overnight indicated that there was no shift from a mild tightening bias to neutral and that inflation risks remain to the topside. Bernanke??™s comments gave the USD a boost and by consequence the NZD was forced lower to 0.7087 overnight, the NZD is testing the low as we open this morning.

AUD highs not tested

The AUD failed to continue higher and create a new 10-year high on Wednesday unlike the past few days this week. Risk aversion stemming from the British naval officers taken by Iran and rumours of an imminent strike on the same country by the US lead to the market trimming AUD longs and forcing it lower. AUD/USD traded a high of 0.8090 early yesterday and drifted lower for most of the local session to 0.8050. Bernanke??™s comments overnight added momentum to the slide, the low was traded at 0.8037. We open at 0.8050 this morning.

Rumours, risk aversion and oil

The local session was relatively eventful yesterday with rumours circulating that UK forces had tried to recover the servicemen held by Iran. There was also talk of a surprise attack on Iran which triggered a bout of risk aversion. Oil was also a big mover on the day ??“ initially spiking on the New York close and Sydney open. The move was shortlived however and traded the rest of the local session around USD64 a barrel. This saw USD/JPY slip from 118.00 to 117.70 and EUR/USD rally. Weakness in Asian equity markets saw USD/JPY under further pressure in early afternoon falling to an intraday low of 117.08. GBP/USD pushed lower overnight on the back of slightly weaker than expected data but found good support at 1.9600. The USD had a volatile offshore session as comments filtered through from Fed Chairman Bernanke??™s testimony. The initial outtake was that the speech was hawkish and saw the broad USD retake some of the ground lost in recent sessions.

US Fed chair Ben Bernanke not panicking! His testimony did not reveal anything like the concern about the economic outlook that some analyst forecasts, former Fed chairman Greenspan??™s ???probability of recession??? comments and recent Wall St reaction to housing data imply. He certainly touched on all the key areas of concern, but managed to put a positive spin on them. His conclusion was ???Overall, the economy appears likely to continue to expand at a moderate pace over coming quarters... the drag from residential investment should wane. Consumer spending appears solid, and business investment seems likely to post moderate gains.???

And regarding the FOMC statement... Bernanke said the reason that ???any additional firming??? was dropped from the last FOMC statement and replaced by ???future policy adjustments??? was that the FOMC wanted to move away from giving explicit guidance re possible future rate direction. This is part of the Fed??™s ongoing revision of its communications strategy. He said the FOMC still sees the predominant risk as one of higher inflation, and the changed wording was not about ???shifting to neutral???, rather it was ???building more flexibility??? into the statement.

US durable goods orders up 2.5% in Feb, but... Durable goods orders posted only an insipid Feb bounce after posting their second steepest plunge in fifty years in Jan. Excluding the volatile aircraft component and a partial recovery in autos (up 1.3% after falling 9.2% in Jan), orders were down slightly last month. More disappointingly, core capital goods orders posted a further 1.2% fall on top of their 7.4% collapse in the previous month.

Euroland money supply growth hit at an all-time high of 10.0% yr in Feb. With German inflation blipping higher from 1.6% to 1.9% yr, Euroland CPI risks are to the upside.

UK Q4 GDP growth was revised down from 0.8% to 0.7%, although annual growth was unrevised at 3.0%. Also in Q4, the current account deficit was a record ??12.66bn. A 0.4% rise in house prices in March pulled the annual rate down from 10.2%yr to 9.3%yr.