Weekly Forex Currency Review 12-02-2010

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 -

There will be no weekly Forex analysis on February 19th 2010.

The Week Ahead

Structural considerations will remain an important factor in the short-term with persistent fears over the outlook for government debt with the Euro-zone a particular focus. 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 seen on reserve diversification.             

Key events for the forthcoming week

Dollar:

Confidence in the US economy should remain generally firm in the short-term. There will still be unease over underlying stresses and confidence could deteriorate suddenly if there is evidence of renewed tensions within the banking sector. 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 still particularly important. The dollar will, however, be vulnerable to some underlying reserve diversification which will tend to lessen the scope for further US currency gains.

The dollar remained a generally firm tone during the week, although gains were concentrated against the Euro and the US currency was unable to sustain gains against the commodity currencies

The dollar was hampered initially by a larger than expected trade deficit of US$40.2bn for December as oil imports rose strongly. The wider deficit tended to trigger a downward revision to fourth-quarter GDP estimates, although the impact may prove limited.

In contrast, there was initial dollar support from Fed Chairman Bernanke’s testimony as he suggested that the Fed would need to increase the discount rate soon to help normalise market conditions. The remarks triggered increased expectations of a near-term policy tightening which boosted the US currency. Bernanke also stated that rates would need to stay low for a protracted period which dampened support for the dollar.

The latest US jobless claims data was stronger than expected with a decline to 440,000 in the latest reporting week from a revised 483,000 previously. There have been distortions caused by seasonal factors over the past few weeks and these may now have worked their way through the system. Overall confidence in the US economy remained slightly stronger over the week.

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. There will be fears that any support package for Greece will compromise longer-term fiscal control and could also lead to further difficulties within the other weaker countries. There may also be some speculation that the ECB could be pushed towards a cut in interest rates to help support the regional economy which will curb scope for Euro recoveries. 

The Euro remained under pressure during the week as confidence in the region remained weak as fears surrounding the Greek debt issue persisted.

The Euro gained initial support from speculation that there would be a support package for Greece. The European Commission suggested that financial assistance could be made available in return for austerity measures by the Greek government.

Following the summit meeting on Thursday, the EU stated that it would provide determined and co-ordinated action to support Greece if needed. There were no major details provided at this stage with further details set to be announced next week. The support would be dependent on committed budget action by the Greek government.

There was some disappointment over the lack of detail and also some fears that support would be blocked by the German parliament. In an initial reaction, the Euro fell sharply with a low close to the 1.36 level before a recovery back to the 1.3670 region. From a longer-term perspective, there will be continuing fears that support measures will cause moral hazard problems and weaken budget resolve within the Euro area as a whole.

There was unease over longer-term risks associated with any support measures that lack credibility as there would be fears of moral hazard with some speculation that the Euro could then be subjected to renewed selling pressure relatively quickly.

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. The yen still does not well placed to make strong gains given its own vulnerabilities and it may be difficult to secure a decisive trend.

The Japanese currency was confined to relatively narrow ranges during the week as markets struggled to find decisive direction for the Japanese currency. The dollar found support on dips towards the 89 level against the yen with resistance above the 90 level. The Euro dipped to 8-month lows below 122 before finding support.

Demand in the latest US Treasury auctions remained slightly lower than expected and this will tend to have some negative impact on the dollar, although the impact should be measured with the US currency still looking to gain underlying support on yield grounds.

Domestically, the latest machinery goods orders data was stronger than expected with an increase of 20.1% for December which was sharply higher than expected. The data series has been extremely volatile over the past few months, but may offer some degree of support for the yen on hopes of an improvement in the industrial sector

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 fears over the UK government-debt situation and confidence could deteriorate rapidly on fears that political factors will delay fiscal tightening. There will be reduced speculation over a near-term policy tightening by the Bank of England which will also tend to curb Sterling support. Sterling will also tend to lose ground if there is a sustained deterioration in international risk appetite. Sterling is liable to remain on the defensive, although it may be able to resist near-term substantial losses.

Sterling was subjected to volatile trading conditions during the week. Sterling weakened to lows near 0.8850 against the Euro before rallying back to near 0.87. Sterling weakened to re-test 3-month lows near 1.5550 against the dollar before finding support.

The Euro-zone vulnerabilities continued to have a mixed impact on the UK currency. The Euro-zone weaknesses could have a positive impact on Sterling as investors look to move away from the Euro. In contrast, persistent fears surrounding government debt and sovereign ratings would tend to be a negative factor for the UK currency as domestic vulnerabilities would be highlighted.

The latest economic data was mixed as the RICS reported a further increase in house prices for January while there was a weaker retail sales report from the BRC. The spending data is liable to have a bigger impact given doubts over the economic recovery and forthcoming reports will be watched closely.

The UK trade deficit was wider than expected with an 11-month high shortfall of GBP7.3bn for December which will tend to increase fears over the economic outlook. There was also a warning from ratings agency Fitch that the UK was the most vulnerable of the AAA-rated economies to a credit-rating downgrade.

There was stronger than expected industrial production data which provided some currency support.

The UK currency was then subjected to renewed selling pressure following the Bank of England inflation report. There was a slight downgrading of GDP growth forecasts within the data while the bank also expected inflation to fall back sharply to below 1.0% in the medium term from an initial peak above 3.0%.

The comments resulted in a downgrading of interest rate expectations which undermined the UK currency while there were also some fears that the bank was being complacent over medium-term inflation risks.

Swiss franc:

The Swiss currency is likely to gain some further defensive support from fears over the Euro-zone economy and there is still the possibility of firm buying support if Euro fears intensify. 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 as market rumours of bank action persist.

The dollar pushed to a high near 1.0780 against the Swiss franc, but failed to sustain the gains and retreated back towards 1.0720. The Euro retreated back towards 1.4650 against the franc as underlying confidence in the currency remained weak.

A lack of confidence in the EU support proposals surrounding Greece will tend to maintain defensive support for the Swiss currency against the Euro.

The latest Swiss inflation data was stronger than expected with prices declining by 0.1% in January to give a 1.0% annual increase. The higher than expected figure may have some impact in lessening National Bank fears over the implications of franc strength.

Click Here

The Australian dollar dipped sharply over the first half of the week with lows near 0.86 against the US currency. Risk appetite deteriorated which undermined demand for the currency while there were fears over further monetary tightening by the Chinese authorities.

The latest employment data was much stronger than expected with an increase in employment of over 50,000 for January while unemployment declined to 5.3% from 5.5%. The data reinforced expectations that the Reserve Bank would move to increase interest rates again and the Australian dollar moved sharply higher.

As risk appetite also improved, there were sharp gains for the Australian currency with a move back to the 0.89 level against the US dollar.

There will be expectations of higher interest rates in the near term, but the Australian currency could find it difficult to make further gains as underlying unease over the global economy persists.

Canadian dollar:

The Canadian dollar found support weaker than the 1.07 level against the US dollar and strengthened to highs just beyond the 1.05 level later in the week.

There were no major domestic fundamental releases during the week to influence the markets. There was a stabilisation in risk appetite which helped underpin confidence in the Canadian currency.

The Canadian dollar will find it difficult to make strong gains given the doubts over global economic demand, but it should prove broadly resilient given the lack of debt fears surrounding the economy.

Indian rupee:

The rupee dipped to 7-week lows near 47 against the US dollar during the week before a measured recovery late in the week.

The trends in domestic stock markets remained important and a cautious tone towards global markets undermined the currency. The latest data suggested net capital outflows of around US$1.8bn over the past 3 weeks.

The rupee will find it difficult to make headway in the short-term given that risk appetite is likely to remain generally fragile.

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 trapped in narrower ranges during the week as trading liquidity dipped ahead of the new-year holiday period with the spot rate close to the 7-77 level.

There were reduced fears over a near-term policy tightening by the Chinese authorities and this also provided some net support for the Hong Kong currency.

Market conditions will be very quiet in the near term which should tend to limit currency moves. Overall, the Hong Kong dollar should be able to resist substantial losses in the short-term.

Chinese yuan:

There were no significant moves in the NDF markets during the week. The spot rate did weaken to a 4-month low against the dollar, although there were very limited moves. As liquidity declined ahead of the new-year holiday, there was some increased dollar demand ahead of the break which pushed the yuan weaker.

The latest consumer inflation data was lower than expected with a rate of 1.5% for January from 2.0% previously which dampened expectations of further near-term monetary tightening

The central bank stated that the yuan would remain stable at a reasonable level. International pressure for a stronger Chinese yuan continued.

There is no evidence of a policy shift by the Chinese authorities at this stage, but underlying speculation over a change will certainly continue following the new-year holiday period.