Weekly Forex Currency Review 05-03-2010

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The issues of yields and debt issues will continue to be very important market issues in the short-term. The dollar will continue to gain some degree of support from expectations that the US economy will out-perform the Euro-zone in the short-term, especially as underlying Euro-zone debt fears are likely to persist.             

Key events for the forthcoming week

Dollar:

The US economic data has continued to have a mixed tone, but there will be further expectations that the US economy will out-perform the Euro-zone over the next few months.  Bond-yield spreads also remain more in the dollar’s favour which should continue to provide support for the dollar. Confidence in the fundamentals will remain weak which will tend to curb buying support and there will still be the risk of longer-term diversification away from the dollar which will tend to limit appreciation.

The dollar had a more mixed tone during the week as it failed to sustain a strong advance against the European currencies after briefly moving to a 10-month high against the Euro. There was still firm dollar buying support on dips.

The US ISM manufacturing data was slightly weaker than expected with a dip to 56.5 for February from 58.4 the previous month. The data was still relatively strong compared with the past 12 months and there was a further increase in the employment component which maintained hopes that there would be a recovery in manufacturing employment within Friday’s payroll data.

The ADP report recorded a decline in private-sector employment of 20,000 for February following a revised 60,000 decline for January with the headline figure broadly in line with expectations.

The ISM data for the services sector was stronger than expected with an increase to 53.0 for February from 50.5 the previous month. The employment component remained below the 50 level, but did show an improvement for the month.

The Fed’s Beige Book reported that economic conditions had improved in most regions while the decline in unemployment had eased, but hiring plans were still limited and commercial real-estate markets were still weak.

The US jobless claims data was in line with expectations with a decline to 469,000 in the latest week from a revised 498,000 the previous month. The pending home sales data was weaker than expected with a 7.6% monthly decline following a series of robust reports during the second half of 2009.

Fed Governor Kohn announced that he would resign from the Federal Reserve in June and this may lead to speculation over a slightly more hawkish tone from the Fed as regional banks will have a stronger presence on the FOMC committee while chairman Bernanke will tend to be more isolated.

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The additional budget tightening by Greece will help underpin confidence in the very short-term, but the improvement could prove to be very fragile and underlying sentiment towards the region is still liable to be weak, especially if political tensions increase and tensions intensify within Spain.  There will also be fears that the economic rebound will be disappointing over the next few months which will sap currency support. 

The Euro recovered firmly in mid-week following reports of fresh budget cuts by the Greek government. Underlying sentiment towards the region and currency was still very fragile and advances quickly attracted selling pressure.

The Greek government confirmed that it would make a further EUR4.8bn in budget cuts in order to curb the budget deficit and this helped maintained a slightly more confident tone towards the Euro. There will, however, still be fears that there will be a high degree of internal opposition to the budget cuts.

The central bank interest rate decision was in line with expectations as interest rates were left on hold at 1.00%. The bank continued the gradual removal some of the longer-term liquidity measures which had been introduced during the crisis, but the 7-day and 30-day liquidity auctions will be maintained until at least October which illustrates that the bank will continue to take a cautious stance.

ECB President Trichet also commented that IMF support for Greece would not be appropriate and these remarks tended to renew unease over the debt situation surrounding Greece. Overall Euro sentiment was still generally very fragile.

Yen:  

There has been a shift in yield support away from the Japanese currency and this will be important in curbing yen support if the trend in maintained over the next few weeks. There will also be speculation of intervention to weaken the currency while there will be pressure on the central bank to loosen monetary policy further. The Japanese currency will still tend to gain some support when international risk aversion rises and heavy selling looks unlikely.

The yen strengthened to 10-week highs near 88 against the dollar during the week before hitting fresh selling pressure with losses back through the 89 level.

The Japanese currency drew initial support from a cutting of short positions and speculation over capital repatriation.

Yield trends were also important during the week and Japanese Libor rates dipped to below US rates for the first time since August. This was significant in boosting US support on yield grounds and the dollar advanced during Thursday.

There were fresh expectations that the Bank of Japan would announce a further loosening of monetary policy which also curbed support for the Japanese currency.

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Underlying confidence in the economy will remain weak in the short-term. There will be a potentially destabilising mix of fears surrounding the budget deficit compounded by the risk of political inertia ahead of and following the general election which is likely to be held in May. The recent economic data should provide some degree of support, especially with the Bank of England holding policy steady. The main feature is likely to be a sustained increase in volatility over the next few weeks with advances quickly attracting selling pressure.

Sterling was subjected to renewed selling pressure on Monday and there was very heavy selling in the middle of the European session as a break of the 1.50 support level lead to an acceleration of downward pressure with stop-loss and speculative selling apparent. There was a decline to 10-month lows just below the 1.48 level against the dollar before a recovery. The Euro pushed to a high near 0.91 against the UK currency.

There were further concerns over the UK government debt situation and the fears were amplified by an opinion poll which suggested a high risk of a hung parliament in the general election which is likely to be held in May. An indecisive outcome would make it more difficult for the budget deficit to be reduced.

UK insurance group prudential confirmed that it was in advanced talks to buy AIG Asian operations for GBP23.5bn and this was also a negative factor for Sterling given expectations of heavy capital outflows.

The latest PMI data for the services sector was also stronger than expected with an advance to 58.4 for February from 54.5 the previous month. This was the highest figure for three years which should provide some degree of support for the UK currency.

The construction PMI index remained below the 50 level which maintained unease over the building sector, but the release did not have a substantial impact and there was a slightly more optimistic tone in the survey.

The Bank of England held rates on hold at 0.50% following the meeting which was in line with market expectations. There was no expansion of the quantitative easing programme from the GBP200bn level while the bank did not release a statement.

Swiss franc:

The Swiss currency will continue to gain defensive support from fears over the Euro-zone economy and there is still the possibility of firm buying support if Euro fears intensify. Any sustained deterioration in global risk appetite would also tend to underpin franc demand. Speculation over National Bank intervention to curb franc strength will still be a very important market feature and volatility levels are liable to remain higher given that intervention rumours will remain a key feature.

The dollar pushed to a high near 1.09 against the Swiss franc during the week, before retreating rapidly to lows below 1.0650. There was solid dollar buying on dips which allowed a move back towards 1.08 late in the week.

There was a fundamental lack of confidence in the Euro-zone which continued to provide support for the franc against the Euro with the Euro unable to move far from the 1.46 region

The Swiss PMI index was stronger than expected with an increase to 57.4 from 56 the previous month. The GDP data was also stronger than expected with a 0.7% increase for the fourth quarter after a revised 0.5% gain the previous quarter.

National Bank member Jordan continued to warn that franc appreciation would be blocked. There was further speculation over bank action to push the franc weaker.

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The Australian dollar was able to maintain a generally firm tone during the week, but struggled to extend gains much above the 0.90 level against the US dollar.
 
The Reserve Bank of Australia increased rates to 4.00% at the latest policy meeting which was in line with market expectations. The Australian GDP data was also in line with expectations with a 0.9% quarterly increase which reinforced expectations that there would be further interest rate increases over the next few months.

There were also fears that there would be further monetary tightening measures by the Chinese government which also had a negative impact on confidence surrounding the Australian dollar.

There will be expectations that interest rates will be increased again over the next few months, but the Australian currency is liable to remain constrained by global economic fears, especially given expectations of further Chinese tightening.

Canadian dollar:

The Canadian dollar was able to secure a stronger tone over the week as it gained support following the US dollar’s inability to sustain gains early in the week with a peak near 1.03 against the US currency.

There was confidence in the Canadian fundamentals which provided support, especially given the on-going stresses surrounding sovereign debt issues and the government proposed a generally tight budget for 2010.

The Bank of Canada strengthened its assessment of the economy and also raised inflation forecasts which strengthened the case for an increase in interest rates within the next few months.

The Canadian dollar should remain generally resilient in the short-term given the degree of confidence in the fundamentals and expectations of higher interest rates.

Indian rupee:

The rupee had a generally stronger tone during the week with a notable degree of optimism surrounding regional currencies.

The rupee strengthened to 6-week highs near 45.80 against the dollar, but gains tended to stall later in the week as there was a more hesitant tone in the local stock market while the US currency was also broadly firm.

The rupee will find it difficult to appreciate significantly in the short-term even if confidence in the region lessens the potential for selling pressure on the currency.

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The Hong Kong dollar edged stronger against the US currency during the week with gains to the 7.7625 area against the US dollar.

Confidence in regional equity markets was stronger over the first half of the week which provided support for the local currency, although there was a more cautious mood towards the end of the week. There was also speculation over further tightening by the Chinese authorities.

There is still likely to be a relatively high degree of regional policy uncertainty which is likely to lessen the potential for Hong Kong dollar selling.

Chinese yuan:

The Chinese yuan remained confined to tight ranges during the week with the dollar near 6.835 while there was also little movement in the NDF market.

There was further speculation over a policy shift by the Chinese authorities, especially with the National Congress in session over the forthcoming week.

The central bank stated that it was paying close attention to price pressures which maintained some speculation that the bank would look to tighten policy further in the near term.

Speculation over a yuan revaluation or gradual appreciation of the currency by re-starting the crawling peg appreciation is likely to remain a key short-term market feature in the short-term.