Double Shot Interview: HiFX's Dan Bell reviews the week's commodities and currencies turmoil; looks ahead on China economy, US jobs and NZ$, US$, A$, Pound, Euro

Bernard Hickey talks with HiFX Senior Dealer Dan Bell about the week's extraordinary commodities and currencies moves, and looks at what might shift global currency markets in the week ahead.

The week was dominated by a major selloff in commodites on Thursday that had hit record highs earlier in the week.

The oil price slumped almost 10%, gold fell 8% and the silver price fell by a quarter. See more here in Bernard Hickey's 90 seconds at 9 am on Friday.

 

Bell said the decision by the CME Group futures exchange to increase the margin requirements for silver traders helped triggered the biggest slump in the precious metal's price since 1980, which also unnerved wider commodities markets.

Also, the European Central Bank's decision to leave interest rates on hold and suggest it would not hike rates next month was a factor behind the broad selloff in commodities as the US dollar surged against the Euro.

"A correction was due. What we've seen in the last 24 hours is the speculative froth has been taken out of the markets," Bell said.

The euro has fallen from its high of around US$1.50c to around US$1.45c. The New Zealand dollar has fallen from around 81 USc to 78.5 USc over the last week, while the Australian dollar has come back sharply from post-float highs of over US$1.10c to as low as US$1.05c as investors stepped back from the 'commodity currencies'.

Kiwi/Aussie cross

Meanwhile the New Zealand dollar has lifted somewhat versus the Australian dollar off its 20 year lows of around 73 USc.

The Reserve Bank of Australia left its cash rate on hold on Tuesday and was not as hawkish as some had expected, putting the Aussie dollar under some pressure vs the Kiwi and other currencies.

"Since that less than hawkish statement and a much weaker than expected retail sales number (-0.5% vs consensus of +0.6%), the Aussie dollar has underperformed relative to the Kiwi and the Kiwi/Aussie cross rate is back around 74c today."

Australia's retailers and heavily indebted consumers are being stressed as interest rates have risen.

"It is still the lucky country, but it's not as smooth sailing as some people think."

Kiwi/Pound cross

Meanwhile weak economic growth in Britain continues to keep it under pressure, although rates are expected to rise this year, making the pound more attractive relative to the Kiwi, where the Reserve Bank is expected to leave our interest rates on hold until as late as the first half of 2012.

The Bank of England left its official rate on hold at 0.5% this week and factory output data showed an economy on its knees.

"Our expectation is that despite the weaker-than-expected growth outlook for the UK, the Bank of England will start raising rates some time this year," Bell said.

The Kiwi/pound cross has dropped from almost 49p to around 47.5p by the end of the week.

Chinese slowdown?

Bell said China is expected to continue to tighten monetary policy to slow its economy and dampen inflationary pressures.

Markets would watch for Chinese inflation figures on Wednesday.

"There are inflationary issues in China, particularly in asset price inflation in their property market. Over the next two years hopefully they can get things under control, but clearly there are inflationary risks there and if they raise rates too much the world is saying that may slow their growth path down."

US jobs focus

Non farm payrolls figures from the world's largest economy are due late on Friday night and will be watched closely by markets for signs economic recovery is bedding in.

The markets were expecting a gain of around 190,000 to 200,000 jobs and an unemployment rate of around 8.7/8.8%.

(Updated). Non farm payrolls rose 244,000, but unemployment rose to 9%. Seee more here at Reuters.)

Dan Bell is the Senior Dealer at HiFX, a UK-headquartered foreign exchange dealer with significant operations in Australia and New Zealand. It has a dealing room in Auckland. See more detail here.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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4 Comments

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FYI Seems the Aussies said this afternoon they're in a mood to tighten rates as early as next month...

http://www.bloomberg.com/news/2011-05-06/rba-sees-need-for-higher-rates-at-some-point-to-slow-australia-inflation.html

The outlook “suggests that further tightening of monetary policy is likely to be required at some point for inflation to remain consistent” with a goal of 2 percent to 3 percent in the medium term, the central bank said.

“The dramatic upward revision to both the level and profile of inflation speaks of a bank that has more than just one tightening on their mind,” said Glenn Maguire, chief Asia economist for Societe Generale SA in Hong Kong. “We believe the RBA will raise the cash rate by 25 basis points in August, November and February next year before it will be satisfied that a formidable inflation pulse is contained.”

The RBA forecast growth in the year through to the final quarter of 2011 at 4.25 percent, unchanged from its February estimate. Consumer prices will rise 3.25 percent over the period, from a previous prediction of 3 percent, and core inflation will quicken to 3 percent from 2.75 percent, it said.

Australia’s currency advanced to $1.0721 at 12:56 p.m. in Sydney from $1.0649 before the statement.

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Will the Reserve Bank of Australia crash Australia's housing market?

Houses and Holes over at Macrobusiness has a few thoughts after today's more hawkish statement from the RBA

http://macrobusiness.com.au/2011/05/will-the-rba-crash-housing/

 

The two losing sectors in Australia’s rebalancing – non-resource exports and housing – are showing strain.

So the bind is this. For months, the RBA has been embarked on a project that I call the Great Disleveraging. It is trying to shift Australia’s growth model from its former driver of growth in consumer and mortgage debt towards the business investment surrounding resources. It is doing this by forcing down the rate of growth of household debt through jawboning and mildly restrictive rates. It is also aiming to keep inflation within its mandated limits. The problem is, the housing market and mortgages are rolling toward outright deleveraging (this week both UBS and Goldman warned clients another rise threatens a crash) even as inflation is simmering. 

The question we need to ask - not just for the June meeting but those beyond it - is will the RBA let housing get disorderly in the name of controlling inflation?

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This is curious too from someone who should know on Europe via FTAlphaville and FT.com

Mario Blejer: Europe is running a giant Ponzi scheme
One of the pillars upon which the euro was established was the principle of “no bail-out”, writes Blejer, a former governor of Argentina’s central bank and director of the Centre for Central Banking Studies at the Bank of England . When the sovereign debt crisis hit the eurozone this principle was ditched. As Greece, Ireland and Portugal were unable to service their unsustainable levels of debt, a mechanism was instituted to supply them with the financing necessary to service their obligations. In fact, the situation resembles a pyramid or a Ponzi scheme.

http://www.ft.com/cms/s/0/ee728cb6-773e-11e0-aed6-00144feabdc0.html

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here's a sobering update about the PIIGS debt as at the end of this latest week ...

2 year Greek sovereigns are yielding 23.821% pa  !!

10 year sovereign bond yields:
- Portugal = 9.086%
- Ireland = 9.902%
- Italy = 4.642%
- Greece = 15.194%
- Spain = 5.221%

As a ready reference, here are some other end-of-week 10 year sovereign yields ...

- New Zealand = 5.70%
- Australia = 5.43%
- UK = 3.38%
- Brazil = 12.73%
- Germany = 3.17%
- Japan = 1.15%
- USA = 3.15%