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RBNZ Raises Rates, Promises More, Carney Comments Propel Pound Higher

This is a weekly review of the forex week ending Friday the 13th 2014. The Euro lost 100 pips against the US Dollar this week even though no major news came out of the old continent. On the other side of the globe, the Reserve Bank of New Zealand raised interest rates for the third time this year and promised to do more going forward!

Euro Falls on No News

The single currency fell 49 pips on Monday, from 1.3641 to 1.3592. Both the French and German banks were closed in observance of Whit Monday. The only fundamental report released from the Zone on Monday was the Sentix Investor Confidence, a minor news item. Data showed a miss of expectations of 13.5 to 8.5. 1) The Sentix Investor Confidence indicator measures the level of a diffusion index based on surveyed investors and analysts. The Euro extended the losses on Tuesday, closing the day a further 46 pips lower to 1.3546. Just like Monday, it was a slow news day. The French Industrial Production for the month of April came in line with the median forecast that called for growth of 0.3%. The Italian Industrial Production however beat expectations by printing at 0.7 percent. The data had little impact on the Euro as most of the losses transpired after mid-day.

On Thursday we had a whole slew of medium impact news items coming from the old continent. First, at 2:45 AM EST, the French CPI for May came in flat, delivering a slight miss of the 0.1% gain forecast. 2) Few hours later, the Industrial Production for the Eurozone surprised analysts by a large margin, beating the 0.5% estimate by growing at 0.8%. 3) The data for the previous month was revised lower however, from – 0.3 to – 0.4 percent.

Data on Friday came in line with analysts estimates. The final measure for the May German CPI printed exactly at the – 0.1 percent forecast. The Eurozone’s trade balance is still in the green. The figures for the month of April show a surplus of 15.9 Billion Euros. The previous month’s numbers got notched up from 15.2 to 15.4 Billion.

On the technical front, after the losses during the first two days Europe’s common currency stabilized and stopped bleeding pips. Eventually the single currency closed the week at 1.3541, 100 pips below its Sunday open. Here is a chart of this week’s price action in the EUR/USD.

RBNZ Raises Rates, Promises More

On its meeting held on June 11th, the Reserve Bank of New Zealand raised interest rates by 25 basis points from 3 to 3.25 percent. While the hike move was expected by analysts, the monetary policy statement that accompanied the decision was not. 4) This is the third rate rise by the RBNZ this year and the Bank hinted that more may be in the pipeline.

‘’It is important that inflation expectations remain contained and that interest rates return to a more neutral level’’

Governor Graeme Wheeler said in Wellington after the decision. The rate rise keeps the Bank on target for the 3.75% figure Wheeler mentioned few months ago. Back in March, Governor Wheeler indicated that rates may rise by 125 basis points to 3.75 percent in 2014. Analysts are forecasting New Zealand rates at the 3.50% level by year end.

The Kiwi initially spiked down from 0.8537 to 0.8516 on the RBNZ move but the currency pair quickly reversed the temporary losses and rallied, reaching a new high of 0.8622 just five minutes after the decision. The NZD/USD continued the rally for the rest of the day, closing at 0.8686 on Thursday. Friday saw the island nation’s currency lose some ground to close the week at 0.8663. The recent rally puts the May swing high at 0.8778 at risk. Further up, the 0.8841 high reached back in 2011 will provide significant resistance.

Aussie Gains Despite Data Misses

It was a good week for New Zealand’s neighbors to the West too. Despite most of the data disappointing this week, the Aussie closed 73 pips higher on Friday at 0.9400 flat. But let’s start from the beginning. On Monday, the Business Confidence indicator published by the National Australia Bank remained at 7, same as last month. 5) Job Advertisements in the island nation are down by 5.6%, as indicated by ANZ. Last month’s figures got cut from +2.2% to +1.9%. To finish off the trifecta of bad news, Home Loans for the month of April showed zero growth, missing the + 0.3% analyst estimate. And yet, despite the misses, the AUD/USD gained 13 pips on the back of the news. The currency pair continued the rally until the end of the day and closed at 0.9372, 19 pips in the green. On Tuesday, Westpac Consumer Sentiment printed a gain of 0.2 percent. There were no forecasts for the data, last month the Sentiment came in at – 6.8 percent.

And now we come to the big ticked item on Wednesday, the Aussie Jobs Report. The Australian Bureau of Statistics said that the number of employed people fell by 4,800 in the month of May, delivering a shocking miss to forecasts for a gain of + 10,300. The unemployment rate remained at the previous 5.8% level. 6)

The AUD/USD initially spiked down 32 pips to hit a low of 0.9348. But continuing its trend of ignoring bad news, investors bought up the ‘’cheap’’ AUD after the Jobs Report. Soon the currency pair had reversed all the losses and was trading barely changed 30 minutes after the news. Few hours later, the Aussie rallied and closed the day at 0.9426, up 47 pips.

BOJ Stands Pat, Currency Trades Mixed

The Japanese Yen traded mixed in the last 5 trading days, rallying against most majors but losing ground against the Pound and the Australian and New Zealand Dollars. The Japanese Current Account finally swung in positive territory, after printing red for over 6 months. The figures released by the Ministry of Finance show a surplus of 130 Billion Yen in the month of April. 7) While the data came in the green, it still missed forecasts that called for a surplus of 230 Billion.

The final Japanese GDP figures are in and they show that the country grew by 1.6% in the first quarter of 2014, beating the 1.4 analyst estimate. Last quarter’s 1.5 percent figure was left unchanged. Data on Monday continued the positive spin as the Consumer Confidence for May rose to 39.3, beating both the forecast at 37.7 and previous month’s 37 number. On Tuesday, the BSI Manufacturing Index came in substantially below the 14.1 estimate at – 13.9. Wednesday saw more red as the Core Machinery Orders printed at – 9.1 percent, as did the Revised Industrial Production for April at – 2.8 percent.

The major news event out of Japan this week was of course the Bank of Japan Monetary Policy Meeting. The Bank decided to stand pat and refrained from making any changes in either rates or monetary policy. 8) The BOJ maintained the level of stimulus at 60 to 70 Trillion Yen per year, as expected by analysts. The Bank did up its forecasts regarding the growth of overseas economies. ‘’Overseas economies are recovering’’ the statement reads, last month, the BOJ used the phrase ‘’starting to recover’’. The non-move by the BOJ had little effect on the Japanese currency.

UK Unemployment Falls, Carney Warns on Rates

UK’s Claimant Count Change Report showed that in May, the number of people claiming unemployment benefits fell by 27,400, slightly more then the – 25,000 forecast figure. In addition, last month’s numbers were revised for the better, from – 25,100 to – 28,400. But we’re not done yet! The unemployment rate also went down, from 6.8% to 6.6%, beating the 6.7% estimate. 9)

As could be expected, the data propelled Sterling higher. The GBP/USD rallied from 1.6748 to 1.6761 in one minute, then proceed to gain 25 pips extra to close the hour at 1.6786. By the end of trading on Wednesday, the UK currency had gained 30 pips compared to its open and closed at 1.6785.

Thursday unexpectedly became one of the most important days for the Pound this year. BOE Governor Marc Carney used his speech at the Annual Mansion House Dinner in London to deliver a message on rates. Carney told reporters that the first interest rate increase from the 0.5% level ‘’could happen sooner than markets currently expect.’’ However the Governor added that the subsequent pace of rate increases will be gradual and limited, because of headwinds like the strength of the UK currency and the weak euro-area economy. 10)

‘’Caution over the path of rate increases once they begin is also needed because we start at a point from which interest rates cannot easily be reduced. The effects of an excessive or an excessively rapid tightening of monetary policy could prove damaging and difficult to undo.’’

Sterling loved the comments. The GBP/USD shoot up 50 pips in one minute after the publication of the speech. Cable then proceeded to rally a further 100 pips to reach a swing high of 1.6990 on Friday. From here, the island nation’s currency retraced some of the gains and closed the week at 1.6966. Against the Japanese Yen, the Pound gained 99 pips in the one hour post-speech and a further 122 pips on Friday. The GBP/JPY closed off the week at 173.10.

Canada’s Manufacturing Sales Fall to – 0.1%

It was a mixed week for Canadian news. On Monday, the Housing Starts for the month of May showed a gain of 198,000 in the annualized number of new residential buildings. 11) Analysts were ‘’gunning for’’ a +185,000 figure. On Thursday, Canada’s New Housing Price Index printed at 0.2%, just shy of the 0.3 market bet. The only major news item this week for the Loonie was the Manufacturing Sales for April. Figures released by Statistics Canada showed a fall of 0.1 percent. 12) This contrasts sharply with market estimates that went as high as + 0.9%. The data had very little impact on the USD/CAD. The currency pair was trading at 1.0854 before the report. Thirty minutes later, the USD/CAD was quoted just 2 pips higher at 1.0856.

US PPI Goes Red, Retail Sales Disappoint

The US Dollar had a varied performance against the majors last week. This was mainly due to the fact that no important news came out of the world’s largest economy during the last 5 trading days. The USD gained against the Euro and the Swiss Franc but lost ground against the Japanese Yen and the Pound.

The first major report was Thursday’s Retail Sales. Data showed that while sales rose by 0.3%, this was still lower then the 0.5% analyst estimate. 13) The miss at the Core Retail Sales was even greater, 0.1 versus 0.4 percent. The weekly Unemployment Claims, released at the same time (8:30 AM) revealed that the number of individuals who filed for unemployment insurance for the first time increased by 317,000 this week, slightly over the 306,000 analyst estimate. 14)

Friday’s Producer Price Index printed at – 0.2 percent, the forecast called for growth of 0.1%. The Core PPI also went negative to – 0.1 percent vs a forecast for + 0.2 percent. 15) The market’s move on the data was limited. The Dollar lost 10 pips versus the Euro and 9 pips versus the Japanese Yen in the immediate reaction. The response to the preliminary University of Michigan Consumer Sentiment was also muted. Although to be fair, the data barely missed the median forecast of 83.2 by coming in at 81.2. In addition, April’s figure got jotted slightly up from 81.8 to 81.9. 16) The EUR/USD traded barely changed 30 minutes after the report. The single currency closed on Friday at 1.3541, exactly 100 pips down for the week.

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