An outline of the events shaping the moves behind major currencies throughout last week
Last week the single currency closed the week lower, in line with most of its major rivals, and was mostly weighed by the uncertainty over Spain and the global economic recovery.
Spain has been cause for uncertainty in the markets as the government delays an official request for financial aid. Market expectations suggest that a Spanish EFSF/ESM request seems inevitable; however Madrid and Berlin seem to prefer having the request delayed as much as possible. Caution is necessary on markets, because despite recent improvements, instability in Europe might last longer than expected. The lack of tangible signs of recovery or of improvement in the Euro Zone has weighed on the euro against its major rivals. Against the dollar, the euro closed last week at 1.2852, close to the lows of 1.2829 seen last week.
The Spanish Prime Minister, Mariano Rajoy, pledged to meet Spain’s deficit target by announcing a fifth austerity package last week, which amongst others included a new tax on lottery winnings and a cut in ministries’ spending.
Last week as well data out of the Euro Zone showed that the flash estimate for HICP, a measure of inflation, defied expectations for a decline mainly due to a rise in energy prices. The EU’s statistics office Eurostat said HICP flash y/y jumped to 2.7% from 2.6% versus consensus for 2.5%.
Spain has been in the spot light over the last weeks due to their reluctance to request financial aid. A formal request for EFSF/ESM aid could trigger the European Central Bank’s new bond-buying plan and could help lower borrowing costs for Spain. How does this affect the US Dollar? This delay (in requesting aid) has increased uncertainty putting pressure again on the region as borrowing costs for Spanish debt rose and consequently raised the demand for the greenback.
Last week, on Tuesday, the US Dollar was also lifted after the publication of the US consumer confidence index hit the wires. Data showed that the index hit a seven-month high at 70.3 for the month of September; the figure was well above the consensus or expected numbers. This consumer confidence data helped sustain a bullish recovery for the US Dollar against all of its major rivals.
This week, investors will be eyeing the minutes of the FOMC meeting scheduled for Wednesday.
The Office for National Statistics announced last Thursday that the British Gross Domestic Product (GDP) for the 2nd Quarter improved to -0.4%; slightly better than the previous and expected -0.5% as data showed that the construction and manufacturing components continued to weigh on the economy. On a yearly basis, GDP contracted to -0.5% from the previous and expected -0.5%.
This last macro-economic data could be suggestive that the British economy may be starting to recover, or at least shrug off the effects of the Euro Zone debt crisis and the British government's austerity measures.
This week, the British Pound lost ground against the US Dollar, falling almost 0.85% to 1.6112. The British Pound was mainly affected by investors anticipating a faster and a stronger economic recovery from the US, at least when compared to the United Kingdom. These anticipations also benefitted from the consumer confidence index in the US which hit a seven-month high at 70.3 in September.
Against the euro, the British Pound continues to find support, gaining around 0.62% on the week. The was at 0.7955 and is benefitting from the on-going concerns in the Euro Zone, and also from the slight improvement in the British GDP for the second quarter of this current year.
In Asia the credit rating agency, Fitch, lowered its forecast for growth in China for this current year, citing a “deteriorating global growth outlook”. The credit rating agency also envisaged that China’s economy will expand by 7.8 percent, compared with an earlier, higher, estimate of 8 percent.
The Aussie and Kiwi remained supported last week on the back of investors speculating on an imminent economic stimulus from China aimed at sustaining growth.
A later announcement from the Chinese authorities that stated they were embarking on a 365 billion Yuan stimulus (equivalent to $58 billion) in the financial system confirmed these anticipations and favored a bullish move on both these currencies.
China is Australia’s biggest trading partner and New Zealand’s second-largest export market. Demand for the currencies was also supported after Spain announced its fifth austerity package.
Gold also gained momentum last week, closing at $1’773 and getting closer to a major resistance level at $1’800, on the back of speculation for fresh stimulus from governments to boost global economic growth. The dilution effect of this kind of stimulus plans pushed investors to reconsider gold as a safe-haven.