Markets to trade in mixed range

Last week's economic calendar was loaded with macroeconomic fundamental drivers and with the Greek debt issues still lingering in the background, the markets found themselves in a mixed to largely lower range against the dollar.

We had interest rate decisions from the Reserve Bank of Australia (RBA), the Bank of Canada, the Bank of England and the European Central Bank and although the later three remained unchanged, the RBA increased their base borrowing rate by 25 basis points to four per cent. A raise was expected and the subsequent comments from the RBA Governor indicate the bullish mood surrounding the domestic economic conditions down under. This was later reconfirmed with a better than expected Q4 GDP year- on-year number showing an expansion to 2.7 per cent from 2.4 per cent. Growth and inflation forecasts remain in line with the RBA's targets and although we aren't expected policy tightening every month, we can expect to see the RBA move to normalising their interest rates between 4.25 per cent and 4.75 per cent in 2010.

Although the AUD/USD ran out of steam after testing (and breaching) the important 0.9050 level, the pair remained one of the few shining star this week, closing the week 0.5 per cent against the greenback. In the medium to long term, forecasts for AUD/USD in 2010 remain sceptical as such. With central banks around the world beginning to tighten their respective monetary policies, the ever deteriorating Greek issue (and the erosion of risk appetite that goes with it), along with inflationary concerns stemming from Australia's largest trading partner, China, one wouldn't be too sceptical with the thought of shorting AUD/USD.

Turning to the eurozone, the Governing Council decided to leave the key ECB interest rate unchanged at one per cent. Trichet's speech showed that the Governing Council are content with the economic recovery taking place in the euro area although it will remain uneven (as seen with the eurozone Q4 quarter-on- quarter GDP number which came out at 0.1 per cent after growing 0.4 per cent in the third quarter). The assessment of inflationary pressures remains low in the medium term, close to two per cent. More interesting were Trichet's views on how "inappropriate" it would be for the IMF to aid Greece. This situation has found Trichet and the ECB stuck in between a rock and a hard place, on one hand they are trying to steer Europe through one of the worst hit post war recessions all whilst showing the world that Europe can deal with its on issues, in house. Earlier in the week Greece put forward new austerity measures of $6.5 billion (Dh23.87) through a combination of increases in VAT to 21 per cent, trimming of salary bonuses by 30 per cent, tax hikes on luxury goods and fuel and the freezing of pensions. These moves have been largely applauded throughout Europe's largest economies, but not in Greece.

Turning to the UK, the pound hit a 10-month low (1.4783) against the dollar, before rallying to close its third straight week lower at 1.5137. The pound came under intense selling pressure early in the week, largely triggered by political fears of a hung parliament in the upcoming UK elections in June.

Expectations are there for the markets to trade in a mixed range against the dollar this week and we could see a build up in risk sentiment on the back of the better-than-expected jobs report from the US. Downside pressure could stem from recent comments by the Greek Prime Minister, who warned that the current Greek debt issues could spread and create a global financial crisis with a domino like effect. These comments saw the Euro slipping below 1.3600 despite signs of support for Greece by some EU members. We have a relatively light economic calendar this week with the central bank decisions from the Reserve Bank of New Zealand on Wednesday and the Swiss National Bank interest rate decision on Thursday. We may see some volatility in the markets on Friday when we have the euro zone industrial production figure followed by advance retail sales data from the US.

 

- The writer heads the DGCX Futures and Options trading desk at ACM ME DMCC. The views expressed are his own

 

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