Weekly Forex Currency Review 09-05-2008

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Overall strategy: The relative prospects of the US and global economy will remain a key market focus in the short-term. Some optimism over at least a limited US recovery and unease over Euro-zone trends, allied with a perception that the authorities will look to stabilise the dollar, should provide some degree of support to the US currency. There is unlikely to be strong gains from current levels given the underlying economic fears.                     

Key events for the forthcoming week

Dollar:

The recent US data releases have generally been stronger than expected and, although still weak, will reinforce some degree of optimism that there is scope for a rebound in the economy. There will also be further expectations that the Federal Reserve will not cut interest rates again in the short-term which will help underpin the dollar. With improved capital inflows, there is scope for some further net US dollar recovery, but it will be difficult to secure strong gains given that underlying economic fears will persist. Sentiment could also quickly deteriorate again, especially if consumer spending drops.      
 
The dollar pushed to two-month highs against the Euro while it also secured net gains against the Chinese yuan which helped strengthen the trade-weighted index. The US currency was unable to hold the best levels and weakened to near 1.55 on Friday.

The US dollar was still influenced by last week's payroll report which recorded a smaller than expected employment decline of 20,000 for April while the unemployment rate fell to 5.0% from 5.1%.

The more positive data tone was reinforced by the PMI index for the services sector which rose to 52.0 from 49.6 the previous month and was above the level of 50 which signals expansion in the economy.

There were limited other US data releases over the week with pending home sales falling by a further 1.0% in March to give an annual decline of close to 20%, although the realtors group stated that there was some evidence of a recovery. Jobless claims dipped to 365,000 in the latest week from 383,000 previously.

Fed Governor Hoenig expressed concerns over the inflation outlook and there was further expectations that the Fed would leave rates on hold at the next FOMC meeting to assess economic conditions.

There was media speculation over European and US agreement to push for a stronger US currency, although there was no strong rhetoric over the need for a stronger currency from US administration figures during the week.

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There will be further fears over a sharp slowdown in the Euro-zone economy, especially with persistent evidence of deterioration in consumer spending. The ECB will retain a tough stance on inflation to discourage high wage settlements, but this restrictive policy will not support the Euro if there is clearer evidence of economic deterioration. There are also likely to be attempts to discourage further Euro gains as competitiveness becomes a more important issue. The net bias is likely to be for a weaker Euro even with buying support on dips.
       
The Euro continue to have a softer tone over the week with losses against most major currencies. There was a significant retreat against the yen with the Japanese currency strengthening through the 160 level which dampened Euro support on the major crosses. The Euro did recover significantly following the ECB council meeting.

The ECB left interest rates on hold at 4.00% following the latest council meeting. In the press conference following the decision, ECB Chairman Trichet again concentrated on inflation risks with a particular focus on wage settlements, although he also pointed to downside growth risks. There was no suggestion that the bank was considering a near-term change in interest rates and was in a holding pattern.

The Euro-zone data was generally weak which reinforced market fears over the growth outlook. The PMI indicator for the Euro-zone services sector held steady, but there were weak readings for France, Spain and Italy which increased concerns over divergence within the Euro area.

There was also a further 0.4% decline in retail sales for March to give a record annual decline of 1.6%. The latest Sentix indicator also recorded a renewed decline for April

The German data has held firm over the past few months, but there were recorded declines in factory orders and industrial production for the latest month which increased fears over a slowdown in the manufacturing sector.

Yen:  

There will be further concern over the domestic economy, especially with exports under some pressure, although global trends are still likely to dominate the near-term yen moves. The Japanese currency will gain ground if there is a renewed increase in financial-market fears and credit-related stresses with some capital repatriation. The Japanese currency will, however, struggle to make much headway unless credit-market tensions intensify. 
                    
The dollar was again unable to sustain gains above the 105.0 level against the yen during the yen and weakened to test support levels below the 104.0 level later in the week with a slide to 103.0 on Friday as equity markets weakened.

The domestic developments were very limited over the week with a series of holidays in Japan and markets remained fixated on international developments.

The yen secured temporary support when there was a sharp decline on Wall Street and some renewed increase in risk aversion in global markets as credit spreads widened.

There was further evidence of exporter dollar selling when the US currency pushed above the 105.00 level against the Japanese yen.

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There will be continuing fears over economic trends, especially after the weak PMI data for the services sector, while housing-sector difficulties are liable to intensify. The Bank of England's determination to resist aggressive interest rate cuts will reinforce theoretical yield support for the currency, but will only provide marginal backing unless there is a series of more positive data releases. There will also be strong expectations of a June rate cut. In this context, the UK currency will struggle to secure more than limited gains in the short-term and renewed credit-related stresses would be damaging for Sterling.
 
Sterling found support weaker than the 0.79 level against the Euro, but was unable to make any significant headway as rallies attracted selling pressure and there was renewed weakness on Friday. The UK currency also weakened to an 11-week low against the dollar with a low around 1.95.

The UK economic data remained weak throughout the latest period which undermined confidence in the currency.  The PMI index for the services sector fell to 50.4 in April from 52.1 the previous month which was the lowest reading four five years and suggested that the services sector was close to contraction.

Consumer confidence also deteriorated to a four-year low according to the latest Nationwide Bank data. The industrial data was also weaker than expected with a 0.5% industrial production drop for March, although there was still a small annual increase.

The Bank of England left interest rates on hold at 5.00% following the latest MPC policy meeting. As usual when there is no change in rates, there was no statement and the vote split will not be known for two weeks.

Swiss franc:

The economy is set to slow in the short-term as business conditions deteriorate and there will be further concerns over the banking sector which will expose the franc to some selling pressure. International trends will still tend to dominate in and some reassessment of global risk conditions will tend to stem selling with some increase in defensive demand for the franc as caution persists. The Swiss currency still looks unlikely to strengthen rapidly in the short-term.
 
The Swiss franc found support weaker than the 1.63 level against the Euro during the week and pushed back to 1.6150 as equity markets generally weakened. The US currency was again unable to hold above the 1.06 level against the franc.

Consumer prices rose by 0.8% in April, but this was slightly below consensus expectations and the annual inflation rate edged lower to 2.4% from 2.5%. The seasonally-adjusted unemployment rate increased to 2.6% in April from 2.5% the previous month which continued to suggest some economic slowdown.

The Swiss franc recovered some ground against the Euro as there was a downturn on Wall Street and some renewed increase in risk aversion, although overall credit-market related tensions were still at a reduced level compared with March.

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The Australian dollar again tested 24-year highs around the 0.95 level against the US currency before weakening towards 0.94. There was some retreat against the yen as risk aversion increased over the second half of the week.

The labour-market data was firm with a further 25,400 increase in employment for the month, although there was an increase in unemployment to 4.2% from 4.1%.

As expected, the Reserve Bank left interest rates on hold at 7.25% following the latest council meeting. The bank stated that there had been a significant slowdown in demand which increased speculation that interest rates would not be increased further.

The Australian dollar was again influenced by commodity price trends during the week with the currency tending to advance when gold prices strengthened as choppy trading conditions persisted.

The domestic uncertainties are likely to cap Australian currency gains even if there is a renewed increase in commodity prices.

Canadian dollar:

The Canadian dollar tested levels close to parity against the US dollar during the week as crude oil prices rose strongly to record levels and commodity prices remained an important currency influence.

There was further heavy resistance close to 1.00 level against the US currency and the currency weakened back towards the 1.02 level before consolidating near 1.01.

The Canadian data was mixed with a sharp drop in building permits and housing starts while there was a firm reading for the PMI index. The net impact was to lessen immediate fears over the industrial trends.

The Canadian currency is likely to face persistent and tough selling pressure close to the parity level against the US dollar in the short-term, especially as there is the threat of a sharp corrective decline in oil prices.

Indian rupee:

The rupee continued to weaken over the past seven days and fell to a 1-year low against the dollar at near 41.80 during Thursday before a slight correction stronger.

The rupee was again unsettled by high crude oil prices with direct dollar demand from oil importers while there were also fears over a further deterioration in the trade account following a widening of the deficit.

Investment flows also provided no significant support to the rupee with recorded 2008 net outflows in the region of US$2.9bn.

Rupee sentiment has deteriorated significantly and this will make it more difficult for the currency to make any significant headway in the short-term.  

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The Hong Kong dollar was again confined to narrow ranges over the week and was unable to make any significant headway against the US currency.

There was strong liquidity in local money markets which dampened immediate demand for the local currency, although the impact was measured.

There was still evidence of currency support close to the 7.80 level as arbitrage activity declined. The more cautious tone in regional currencies also had a negative impact on the Hong Kong dollar. Immediate speculation over a peg break eased as the US dollar attempted to rally, but medium-term uncertainty will persist.

The Hong Kong currency should be able to find near-term support close to the 7.80 level against the US currency as narrow ranges should prevail. 

Chinese yuan:

The yuan struggled to make any headway against the US currency and dipped sharply on Thursday with a move back to weaker than the 7.00 level before consolidating.

There was further unease over a potential slowdown in export growth and further speculation that the central bank would look to slow yuan gains and discourage speculative inflows. There were reports of an April trade surplus around US$16.7bn

In contrast, there were reports that consumer inflation increased to 8.5% in April from 8.3% which reinforced pressure for action to curb inflation

The IMF also called for the Chinese yuan to be strengthened further, illustrating that conflicting pressures on the currency will continue over the next few months.

There are likely to be increased doubts over the economy with unease over export trends and a possible reversal in speculative inflows. These factors are liable to slow yuan gains in the short-term. 

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New York, February 26, 2008  dbFX, the leading retail online  currency trading platform from Deutsche Bank, experienced the highest  volumes of trading during January 2008 since its launch in June 2006.

Nearly half of all retail trades executed during January over dbFX  were Euro / USD transactions, compared to an average of 15% in the three months prior to the market turmoil that began in August 2007. The surge in Euro / USD trading peaked on January 16th when 70% of  daily trading was between this currency pair.

Immediately after the FED's first interest rate cut of 75 base points on January 22nd , the U.S. dollar lost ground against the Euro as the Euro / USD currency pair accounted for 40% of trading on the following day, and nearly 50% on January 24th. As a result of the FED's cut, the next day's trading of the Japanese  yen was down against the world's other major currencies, most notably against the Euro where volumes were slashed by half to just 8% of daily trading volumes.

Trading of the Japanese yen against the U.S. dollar continued to decline and accounted for less than 10% of  January's total volume on dbFX, down nearly half against the previous  month's figures. dbFX has 34 currency pairs available to investors on  its platform.

Commenting on January's volumes, Betsy Waters, Director and head of dbFX Americas said, "Tumbling equity prices prompted investors to look  for asset classes where they could make money, and FX presented such  an opportunity. In January, we saw a 'flight to quality' in currency  trading."

Launched in 2006, dbFX is available in multiple languages and accessible in over 70 countries around the world. Deutsche Bank was  ranked the No.1 Foreign Exchange Bank in 2007 by Euromoney magazine  for the third year running. The platform can be accessed here