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The Euro in particular was under pressure when Papandreou warned of debt issues similar to those of Greece may hit other countries with a domino-like effect. Investor confidence was further shaken when Fitch maintained their negative outlook on Portugal, a country which might be downgraded by the ratings agency should fiscal consolidation be insignificant. Other than the Greek PM's warnings of similar debt crises developing around the world, the markets were given a welcome break this week as there were no major developments from the Mediterranean nation.
This may be the calm before the potential storm next week, however, when the EU's extension period for Greece to prove their austerity measures comes to an end. One can expect EURUSD to break out of the mid-term range it found itself in this week of between 1.3550 and 1.3800.
China figures, Gold oversell
The economic calendar from the past week has been light to say the least, but perhaps the most interesting macroeconomic data came from China. Yet again the growth and inflation numbers were robust; the Chinese trade balance expanded to $7.61nb (versus expectations of $7.15bn), Y-o-Y PPI increased to 5.4% (versus expectations of 5.1%), Y-o-Y CPI increased to 2.7% (versus expectations of 2.5%), Y-o-Y Retail sales surged to 22.1% (v exp 18.1%), and finally new Yuan loans were strong at 700.1bn (v expectations of 600bn).
Usually such bullish numbers are followed by selloffs on comments inflationary fears or actions by the People's Bank of China, such as their hiking of the reserve ratio requirement (as we saw last month). However this time around there has been no such signs from the PBoC and we saw the majors, commodities and equity markets gain on the favourable news. The figures will certainly make the PBoC have a relook at their base borrowing rate in the near future or explore additional monetary measures to keep inflation levels low in a country which continues to be the engine room of the global recovery.
Perhaps one of the more over-sold products this week has been Gold, which came under selling pressure after comments from Yi Gang, head of the State Administration of Foreign Exchange in China said that official gold holdings jumped from 400 tons to 1,054 tons (less than 2% of China's foreign reserves). More interestingly, he went on to say that China will be careful in purchasing gold since any price increases would hurt domestic consumers and that over the last 30 years gold had failed to provide a solid rate of return. The precious metal slipped to a two week low of $1,103 before consolidating and closing out the week lower, just above the important psychological level of 1,100.
Global rate decisions
We had two further rate decisions this past week from the Reserve Bank of New Zealand and the Swiss National Bank, both of which were unchanged. Although the RBNZ's decision to keep rates on hold at 2.5% was widely expected, the statement and subsequent commentary was altogether more dovish, and extinguished some of the prior enthusiasm which buoyed the NZD this year. The statement repeated comments that the central bank would look at introducing hikes in mid 2010, but said higher funding costs would reduce the extent of further rate rises. Governor Bollard was also on the wires saying that he saw the future normal level of the cash rate as not conducive to the carry trades; which will no doubt dampen expectations in the rest of the year.
The SNB maintained the official interest rates at 0.25% and sounded overly dovish considering the momentum in inflation (although the official forecast supported this attitude). However, interestingly the SNB came out with guns still blazing on the issue of CHF strength. The central bank stated it would act "decisively" to defend unwarranted CHF appreciation against the EUR. Clearly judging the EURCHF price action (made a high of 1.4620), the market expects that it's only a matter of time before the SNB eases off the trigger and continues to sell EURCHF on rallies. We believe this is the correct strategy and expect it's only a matter of time before inflation outpaces official expectations and the SNB will swiftly run out of reasons to protect the CHF.
Looking towards the week ahead, we can expect the markets to break out of this mid-term range they've settled into with a slew of market moving fundamental data due out this week; Euro-Zone employment and CPI numbers, the FOMC rate decision and US inflation figures. Finally, traders will need to keep a close eye on any new developments regarding Greece's latest financial tragedy, a tragedy even Homer could have never envisioned.
Staff
