Weekly Forex Currency Review 07-05-2010

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 -

Euro-zone vulnerability will remain an extremely important market focus in the short-term. There will be fears that contagion will continue to effect European currencies and could also spread to undermine wider risk appetite. These fears could continue to be important in providing near-term dollar support despite the underlying US vulnerability.                 

Key events for the forthcoming week

Dollar:

The US data will maintain expectations that the economy will out-perform the Euro-zone over the next few months. There will still be important longer-term fears over the budget and debt outlook, especially as the US AAA credit rating is not secure from a longer-term point of view. For now, the European structural fears will tend to over-shadow the US weaknesses and the dollar can also gain some defensive support if global risk appetite remains weaker. There is also still the potential for a closing of carry-related positions funded through the dollar, but strong gains from current levels are probably unlikely.

The dollar secured significant net gains over the week with particularly strong gains against the European currencies as European units dipped to the lowest level since the second quarter of 2010. The US currency gained from weak Euro-zone confidence and defensive support as risk appetite deteriorated. The US ISM manufacturing index was slightly above expectations with an increase to 60.4 for April from 59.6 the previous month. This was the highest level since June 2004 and there was a further significant improvement in the employment index

The report for the services sector was unchanged from the previous month at 55.4 for April which was slightly below expectations. The employment component was marginally lower than the previous month and also below the 50 level. The data overall maintained expectations of a solid payroll figure on Friday, but did not lead to expectations of a stronger figure which tended to curb further dollar support.

The ADP report registered an increase in private-sector employment of 32,000 for April from a revised 19,000 gain the previous month. The latest US jobless claims data recorded a decline to 444,000 in the latest week from 451,000 previously which did not have a substantial impact as markets remained focussed on the European situation. It is possible that only a very large employment gain may trigger a big independent dollar reaction on Friday.

There was an increase in the 3-month Libor rate during Thursday which also raised some concerns that financial contagion was spreading and the dollar gained strongly against the Euro as Wall Street fell sharply.

Trade Forex, Indices and Shares with zero commissions and 1% margin. Live dealing prices stream into GCI's state-of-the art trading software. Just click on a price to trade currencies, S&P 500, Dow Jones Industrials, DAX 30, Nikkei 225, IBM, Vodafone, Microsoft, and much more. To register for a free demo account Click Here

The Euro-zone structural outlook will remain a very important focus in the short-term. Governments will find it very difficult to contain the contagion threat, especially as market rumours are likely to remain a key feature. The ECB will also be an important focus and there will be fears that the bank’s independence could be compromised in order to protect the Euro. A serious lack of confidence in the Euro could expose the currency to serious selling pressure, although with some prospect of a corrective recovery.

During the weekend, Euro-zone Finance Ministers did secure a deal over a EUR110bn Greek support package over the next three years, but the Euro failed to gain strong support with selling pressure above 1.33. Over the remainder of the week, the Euro was subjected to heavy selling pressure and weakened to a 14-month low against the US dollar while the currency also suffered major losses on the main crosses.

The ECB announced that it would suspend the collateral requirements for Greek debt. This was a necessary step given the recent credit-rating downgrades and risk of further actions by the agencies, but there were some fears that the ECB could be forced to compromise its longer-term mandate for stability.

There were also a series of market rumours during the week which undermined Euro confidence. There were reports from within Germany that the Greek package would be insufficient over the next three years as a whole. There was also a media report that Spain was seeking a EUR280bn support package to support its own economy. These rumours were denied by Spanish and IMF officials, but overall confidence remained weaker with officials finding it difficult to contain the contagion threat Credit-ratings agency Moody’s warned that it could downgrade Portugal’s debt rating in a review which will take place over the next three months. There were substantial protests against austerity measures within Greece which reinforced fears that fiscal tightening within the country would be unsustainable.

The financial sector was also an important focus with fears of renewed stresses within capital markets and renewed losses within the banking sector which could trigger a renewed credit crunch.

There had been some speculation that the ECB would cut interest rates at the latest council meeting, but rates were left on hold at 1.0%. In the press conference following the meeting, Trichet stated that there had been no discussion of the bank buying bonds. Trichet stated that there was no possibility of Greece defaulting on its debt.
Yen:  

Trends in risk appetite will remain important and the Japanese currency will gain some further support if there is a sustained downturn in equity markets. The yen will tend to be vulnerable on yield grounds, especially if there is a firm US employment report. There are also fears over the Japanese economic fundamentals given warnings over the credit-rating outlook while the Bank of Japan will be under pressure to maintain a highly-expansionary policy. Overall, the yen is not well placed to sustain gains given the yield considerations.

Risk appetite deteriorated sharply during the week as a whole which triggered fresh demand for the Japanese currency. The dollar retreated very sharply to lows below 88.50 against the yen  as Wall Street plunged while the Euro remained under severe pressure with lows below the 111 level. Some degree of calm returned later in the session with the dollar moving back above the 90 level.

There were only limited domestic incentives with markets closed for the first three days of the week. There were underlying doubts surrounding the Japanese fundamentals which curbed yen support, especially with the government due to release its fiscal plans next month which could influence the long-term credit ratings.

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.

The indecisive election result will maintain market fears that credible action on the budget deficit will be delayed. There is certainly a risk that confidence surrounding the UK fundamentals will deteriorate rapidly, especially as political constraints on the credit-rating agencies will be removed. Sterling will also tend to lose support if there is a sustained deterioration in international risk appetite. The persistent lack of confidence in the Euro-zone economy will provide some degree of protection, but Sterling is still likely to make much headway given the underlying vulnerability and could be subjected to heavy selling pressure. 

Sterling weakened sharply against the dollar during the week with 12-month lows below 1.46 as risk appetite deteriorated sharply. In contrast, the UK currency pushed to a 14-month high against the Euro before a partial retreat as volatility spiked higher.

The UK construction PMI index rose sharply to 58.2 for April from 53.1 which maintained some degree of optimism over near-term economic prospects. The PMI index for the manufacturing sector was also strong at a 15-year high.

In contrast, the consumer and business lending data was much weaker than expected which will maintain unease over medium-term prospects and the risks of a renewed credit crunch, especially with corporate lending falling. The services-sector PMI index was also weaker than expected at 55.2 from 56.5 the previous month which will undermine economic sentiment to some extent.

Exit polls from the General Election suggested that there would be an indecisive result and the results confirmed that no single party would secure a majority. There was also the possibility that prolonged negotiations would be required to form a government. Underlying confidence remained very fragile, especially with the fact that sovereign debt fears have increased with fears that a stable administration would not be achievable and this undermined Sterling sentiment.

Swiss franc:

The Swiss currency will continue to gain defensive support from a general lack of confidence in the Euro and Euro-zone economy, especially after a further round of credit-rating downgrades. The National Bank will still be an important focus and there will be expectations that the bank will not defend specific levels which could trigger further near-term franc gains. The franc could also gain some degree of support if there is a sustained deterioration in risk appetite. The dollar will find it difficult to secure further strong gains in the short-term.

The dollar pushed to a high near 1.1250 against the Swiss franc on Thursday, but then weakened to lows near 1.10 as there were huge franc gains on the crosses before the dollar consolidated close to the 1.1120 area.

The Euro has been stuck close to 1.4320 against the Swiss currency for days, underpinned only by National Bank intervention. During Thursday, the central bank effectively stopped intervening in the markets and this put the Euro under severe selling pressure. The Euro weakened to a low close to the 1.40 level which was a record low for the Euro before some stabilisation.

Volatility levels are likely to remain higher in the short-term and there will still be the potential for defensive inflows into the Swiss currency on Euro-zone fears.

DO YOU OWN THE RIGHT STOCKS?

Analyze Your Stocks FREE! – Click Here

The Australian dollar was again blocked close to the 0.93 area against the US dollar and then came under significant selling pressure. Risk appetite deteriorated and commodity prices also fell which undermined support for the Australian currency. As equity markets plunged, the Australian dollar dipped to a low below 0.88 before a limited recovery.

The Reserve Bank of Australia met expectations with a further 0.25% increase in interest rates to 4.50% and the statement was broadly optimistic over the economy.

There was a solid rise in building approvals according to the latest data. In contrast, the retail sales report was weaker than expected with a 0.3% increase in retail sales for the latest month which curbed expectations of higher interest rates.

The Australian dollar moves will be influenced strongly by trends in risk appetite. Volatility is liable to be higher and the currency should be able to resist heavy selling pressure from current levels.

Canadian dollar:

The Canadian dollar was unable to make any impression on US dollar support levels close to parity and then fell sharply with lows beyond 1.07 on Thursday in frantic trading. Risk appetite deteriorated sharply as equity prices fell and commodity prices also came under pressure. There was a cautious recovery to near 1.0550.

There was a substantial increase in building permits and gains for the PMI index, but the data releases did not have a major impact as global events dominated.

Volatility levels are liable to remain higher in the short-term and the currency will find it difficult to regain ground unless there is a sustained improvement in risk appetite.

Indian rupee:

The rupee came under selling pressure during the week and dipped to a two-month low near 45.70 against the US dollar. Risk appetite was significantly weaker as equity markets fell sharply and the local bourse weakened to a 2-month low which undermined demand for the rupee, although losses were contained.

There was suspected central bank intervention to prevent excessive rupee volatility and there was also evidence of exporters taking advantage of currency weakness to sell dollars.

The rupee should be able to avoid heavy losses, but will find it difficult to regain ground in the near term unless risk appetite stabilises. 

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

The Hong Kong dollar weakened to lows near 7.7820 during the week as risk appetite continued to deteriorate and equity markets were subjected to heavy selling pressure.

The US dollar was generally firmer which sapped demand for the local currency and there were some fears of capital outflows as regional bourses fell.

Volatility levels are liable to remain higher in the short-term and the Hong Kong dollar will be vulnerable to some capital outflows if risk appetite remains weaker.

Chinese yuan:

The spot yuan rate remained broadly steady against the dollar, although there was a further sharp advance against the Euro as the European currency came under sustained pressure.

The PMI data continued to suggest a solid expansion, but overall confidence was weaker amid further declines in the local equity markets.

International debt concerns tended to undermine the yuan in forward markets. There was also speculation that renewed risk aversion, allied with a stronger dollar, would delay any move to let the yuan strengthen. The authorities have certainly placed a greater premium on stability during times of international financial stress.

Speculation over an adjustment to the yuan regime within the second quarter will still be significant. A stronger US currency and market instability will certainly lessen the potential for a near-term move by the Chinese authorities.