5/6/2011

What a week! There was a lot of excitement this week as the docket remained chock full of events helping to reshape the FX landscape. Aside from three central bank announcements, traders had to deal with US unemployment data and a major pullback in commodities. Here’s a quick look at how this past week’s events shaped up.

Central Bank Announcements: Three central banks released interest rate decisions this week – the European Central Bank, the Bank of England and the Reserve Bank of Australia. Although there was no change in benchmark rates, currency traders were able to gather further information regarding the near term direction of these rates. Given subsequent statements by two of the three, it looks as if the ECB will be delaying their rate hike temporarily. Instead of raising interest rates, ECB President Trichet will continue to monitor the EU economy – always mindful of rising prices. It also helps that the Euro has appreciated by more than 5% in the first 4 months of 2011 (helping to lessen the blow of rising commodity prices). Across the continent, the Reserve Bank of Australia is also delaying their expected round of hikes. But, they may be the first to react as policymakers – according to the central bank’s statement released last night – are estimating higher inflation through much of the next two years. Current inflation estimates point to an above 3% average over the next couple of years. So, expect the RBA to raise rates before the ECB, fueling further support for the AUD.

Employment Data: The US Labor Department reported that US companies added 244,000 positions in April, creating just under 800,000 private jobs in the past three months. But, the national employment rate increased to 9% – an unexpected result. Nonetheless, the increase in the jobs number is a good sign for the world’s largest economy as it supports the notion of stability in a rather unstable sector of the economy – the labor market. This jump will also no doubtedly raise speculation that the US recovery may be underway, making it easier for the Fed’s end to its $600 billion stimulus – taking place next month. Will this be the beginning of a greenback rally?

Commodity Plunge: Commodity markets pulled back – helping to drag down commodity currencies like the CAD, AUD and MXN. The main culprit: Margin requirements. In a span of only 8 days, the CME raised margin requirements 5 times, making it increasingly expensive to trade silver. As a result, the commodity is now trading lower by almost 28% in a matter of 4 days. This downturn can only last temporarily before buying is likely to enter the market and support a bit of a pullback to higher highs.