Weekly Forex Currency Review 05-02-2010

Watch us trade “Live”! Watch our Top Tier Traders make ($500 - $2000) a day
in “real time” and learn how to easily duplicate the process!  Click Here for more information -

Structural considerations will remain an important factor in the short-term with persistent fears over the outlook for government debt and the possibility of debt defaults. The dollar will be in a position to gain further short-term defensive support, but is also liable to approach levels where longer-term selling may be a feature.             

Key events for the forthcoming week

Dollar:

Confidence in the US economy should remain generally firm in the short-term after generally favourable data. There will still be unease over developments within the non-manufacturing sector and confidence could deteriorate suddenly given the underlying stresses. There will be scope for some further near-term defensive dollar demand given the overall lack of confidence in the global economy with Euro-zone fears particularly important. The dollar will, however, be approaching levels where it may be seen as an attractive level to diversify away from by international central banks and this may stifle further gains.

The dollar maintained a generally firm tone during the week and the advance against European currencies accelerated on Thursday. There was a wider deterioration in risk appetite as equity markets came under significant selling pressure. The lack of confidence was fuelled in part by fears surrounding possible sovereign debt defaults with the dollar gaining important defensive support.

The US manufacturing PMI data was stronger than expected with the key index rising to 58.4 for January from a revised 54.9 the previous month and followed a string of solid survey evidence surrounding manufacturing.

The other economic data was generally close to expectations with the ADP report, recording a 22,000 decline in private-sector jobs for January after a revised 61,000 drop for the previous month. The ISM index for the services sector rose to 50.5 for January from 49.8 previously. There was some relief that the index moved above the 50 threshold, but it is still weak in historic terms and illustrates that the services sector will be a source of vulnerability.

The ISM employment index edged higher, but remained trapped substantially below the 50 level. The jobless claims data was higher than expected with an increase in initial claims to 480,000 in the latest week from 472,000 previously. The data created some doubts over Friday’s monthly payroll data, although the correlation is not always strong. There was also a greater mood of uncertainty given that there will be annual benchmark revisions released with Friday’s data.

The latest Federal Reserve loan survey did suggest that credit conditions had stopped tightening which will maintain some optimism that the decline in investment will end.

US Treasury Secretary Geithner repeated his support for a strong dollar policy, but this failed to have a significant impact.

Get our Daily Trade Signals and Grain Newsletter along with a copy of the CBOT Introduction to Agricultural Futures and Options Book for Free! The grain trading professionals at MF Global can guide you in the right direction with your trading. Click here to Get your Free Grain Trading Kit Today

Euro-zone structural vulnerabilities will continue to be key focus in the short-term and there will be persistent fears over the weaker peripheral economies. There will be speculation over a debt default, although the more likely outcome is that there will be some rescue package which will compromise medium-term confidence in the ECB and economic region. There will also be speculation of pressure on the central bank to delay any monetary tightening measures. 

The Euro remained firmly on the defensive during the week with strong selling pressure on the currency. Selling intensified late in the week with lows below 1.37 against the dollar and lows below 122 against the yen.

Initial support from approval of the Greek budget deficit reduction plan was countered by a generally pessimistic tone from EU member Almunia who stated that the Greek position was very difficult. A decision by the Greek unions to back a strike also undermined confidence in the government’s ability to deliver spending cuts.

The very fragile sentiment was illustrated by the Euro falling sharply on rumours of a Spanish credit-rating downgrade and confidence is likely to remain fragile.

The ECB interest rate decision was in line with expectations as rates were left at 1.0%. The comments from Bank Chairman Trichet also suggested that rates would be left on for the next few months.

The comments on monetary policy tended to be overshadowed by budget and debt fears surrounding the weaker Euro-zone economies with a further focus on the Greek situation. Trichet commented that many member countries had large and sharply-rising fiscal imbalances which did little to bolster investor sentiment towards the region. As sovereign debt fears increased, the Euro was subjected to heavy selling pressure as sentiment deteriorated.

Yen:  

The Japanese currency will still tend to gain some support when international risk aversion rises, especially if there is further speculation surrounding sovereign credit rating downgrades or defaults. There will also be a further lack of confidence in other major currencies which will provide net yen support. Underlying confidence in the Japanese economy will also remain generally weak and the yen is not well placed to make strong gains given its own vulnerabilities.

Trends in risk appetite have tended to dominate the yen for much of the week and the Japanese currency has gained strong support from a deterioration in global confidence. Equity markets were subjected to strong selling pressure while there was also a sharp retreat for commodity prices which curbed demand for carry trades.

The yen strengthened to highs beyond 89 against the dollar and also strengthened to near 122 against the Euro. US Treasury Secretary Geithner’s comments that the yuan could strengthen soon also boosted the Japanese currency.

There was evidence of importers selling the yen which helped the dollar rally back to the 89.60 region. There will also be pressure for the Bank of Japan to curb yen gains and there is the potential for some verbal intervention.

There was further speculation over a slowdown in the Chinese economy on continuing monetary tightening. In this environment, there were further reservations over a policy of aggressive yen selling which provided important protection to the currency, especially as commodity prices fell.

Domestically, the latest labour-market data recoded a sharp downturn in overtime earnings which will tend to undermine consumer spending trends and overall confidence in the economy will remain fragile which will curb yen support.

If your looking for a high cash flow positive property with tens of thousands of pounds equity from the start, then Belgrave Group offers you a complete hands free ‘zero hassle’, investment package with yields upto 25% per annum from just £ 21,995 all in.  Click Here.

There will continue to be serious fears over the UK structural outlook and confidence could deteriorate rapidly as political stresses increase ahead of a general election which is likely to be held during May.  Sterling will also tend to lose ground if there is a sustained deterioration in international risk appetite. The Bank of England decision to suspend quantitative easing for now may offer support, although market expectations could swing sharply over the next few weeks given policy uncertainty. Significant Sterling gains look unlikely.

Sterling weakened against the dollar during the week with 3-month lows below 1.57 against the dollar, but it was able to hold its ground against the Euro as the Euro remained under wider pressure.

The PMI manufacturing data was significantly stronger than expected with an increase to a 15-year high of 56.7 in the January survey. The index for the services sector was significantly weaker than expected with a decline to 54.5 for January from 56.8 previously. Although still above the 50 threshold, the data reinforced fears over underlying vulnerability as credit conditions remain tight.

There was a rise in the Nationwide consumer confidence index while there was also an improvement in the construction PMI index. Nevertheless, it remained trapped below the 50 level and there was also evidence that the consumer sector was still brittle with greater caution over spending.

There have been forecasts that the government borrowing targets will be exceeded and there will also be speculation over an indecisive election result later in 2010 which could delay additional fiscal measures.

The MPC left interest rates on hold at 0.50% and also decided to halt the GBP200bn quantitative easing programme. The decision was in line with market expectations, but there had been some speculation over a further expansion of the bond-buying programme and there was an initial Sterling rally following the decision.

Policy uncertainty will continue to be a key market feature, especially as the bank stated that it could re-consider the policy if the economic recovery faltered.

Swiss franc:

The Swiss currency is likely to gain some further defensive support from fears over the Euro-zone economy and there will be the possibility of firm buying support if Euro fears intensify. There will also be some franc support if there is a sustained deterioration in global risk appetite. Speculation over National Bank intervention to curb franc strength will still be a very important market feature and the key feature is likely to be a sustained increase in volatility.

There was increased franc volatility during the week as a deterioration in global risk appetite clashed with renewed speculation over National Bank intervention. The dollar pushed to a high near 1.08 as volatility increased sharply.

Fear of central bank action remained an extremely important market influence, especially after the strong speculation of action during the previous Friday.

A renewed Euro decline below the 1.47 level and a brief slump to below 1.46 triggered strong speculation over intervention by the National Bank and the Euro pushed sharply higher in Asian trading before renewed losses.

The Swiss franc continued to benefit from fears surrounding the Euro-zone and there was evidence of defensive capital inflows.

Click Here

The Australian dollar was subjected to heavy selling pressure for the week as a whole and dipped to lows below the 0.8650 level against the US currency.

The Reserve Bank of Australia held interest rates unchanged at 3.75% compared with expectations of a further increase to 4.00% and this triggered a very sharp sell-off in the Australian currency with a decline to lows near 0.88 against the US dollar from highs above 0.8920 immediately ahead of the decision.

The domestic data was mixed as a rise in building approvals was offset by a decline in retail sales. The services-sector PMI index also dipped to below the pivotal 50 level.

The Australian dollar performance will remain linked strongly with trends in risk appetite. Further declines are realistic, although heavy selling pressure from current levels may be avoided unless the housing sector deteriorates sharply.

Canadian dollar:

The Canadian dollar had a slightly weaker tone against the US dollar for the week as a whole, but it was generally resilient as underlying confidence in the fundamentals provided support with losses held to around 1.0770 against the dollar.

The currency was undermined by weaker commodity prices, but it was not prone to sovereign ratings fears which provided important protection.

The relative debt situation should continue to limit further Canadian dollar losses in the near term even if it remains generally on the defensive.

Indian rupee:

The rupee was slightly weaker during the week as a whole, although it was resilient for much of the time and held close to 46.50 on Friday.

Risk appetite weakened significantly late in the week and this was an important negative factor for the currency. There was some evidence of net capital outflows

The rupee is liable to remain more on the defensive in the short-term on subdued capital inflows and weaker risk appetite, although fundamental support should continue to limit losses.

You can now manage your positions directly from your web browser, whether you use PC or Mac.  Test-drive VT Trader™ Web with your free practice account! Click Here

The Hong Kong dollar was on a firmer footing for much of the week as equity markets gained ground, but there were renewed stresses later in the week and it weakened back through the 7.77 level against the US dollar.

There will further speculation over weaker capital inflows if global confidence deteriorates, but the Hong Kong dollar should be able to resist substantial losses.

Chinese yuan:

There was no evidence of the Chinese authorities sanctioning any shift in exchange rate policies during the week and there is very little chance of a policy shift during the New-Year period

There was further international speculation over a policy shift relatively quickly, but the foreign minister stated that the yuan was fairly valued.

The latest PMI data was firm which reinforced expectations that policy could be tightened further within the next few weeks. 

The authorities will still want to resist pressures near-term currency-policy changes given the preference for protecting exports, but underlying speculation over a change will intensify following the new-year holiday period.