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'.
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."
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.
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.