Weekly Forex Currency Review 12-03-2010

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The dollar will find it difficult to make much headway from current levels unless unease surrounding the global economy intensify. Immediate fears surrounding the Euro-zone have eased slightly which will maintain the possibility of a short-covering rally for the Euro. Underlying confidence is still liable to be very fragile given the underlying stresses.             

Key events for the forthcoming week

Dollar:

The US economic data has continued to have a mixed tone, but there will be continuing 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 currency, especially if the Fed adjusts its language at the forthcoming FOMC meeting. Confidence in the fundamentals will remain weak, especially given the widening budget deficit which will tend to limit buying support and there will still be the risk of longer-term diversification away from the dollar.

The dollar was unable to break any major resistance levels during the week and this encouraged a general tone of consolidation with a generally slightly weaker tone for the currency as there was a lack of fresh buying incentives. In particular, commodity currencies had a firm tone over the week.

US initial jobless claims fell to 462,000 in the latest week from a revised 468,000 the previous week which did not provide any strong evidence on economic trends. The retail sales and University of Michigan consumer confidence data will be watched on Friday for further evidence on the strength of consumer spending, although the impact may be measured unless the data is substantially worse than expected.

The latest US IBD consumer confidence index was weaker than expected with a decline to 45.4 in March from 46.8 the previous month, in contrast to expectations for a modest increase.

US Federal Reserve policy was an important focus over the next week with the latest FOMC meeting due to be held on March 16.. There have been further comments from Fed officials suggesting unease with the terminology stating that interest rates will be left at very low levels for an extended period. In this environment, there were increased expectations of a change in the Fed’s language following the meeting, but markets were not expecting interest rates to increase.

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Sentiment surrounding the Greek budget has stabilised to some extent which may help alleviate immediate selling pressure on the Euro. The improvement in confidence could prove to be very fragile and underlying sentiment towards the region is still liable to be weak, especially if internal political tensions increase.   There will also be continuing fears that the recovery will falter during 2010 which will tend to sap currency support and firm buying looks unlikely. 

Sentiment towards the Euro remained generally weak, but the currency managed to avoid substantial losses and there was a rebound against the dollar after it held technical support levels below 1.35 with a recovery to the 1.37 zone.

There was some easing of selling pressure on the Euro from Greek debt concerns given the amount of Euro selling that had been seen over the previous few weeks.

There was still a continuing lack of confidence in the Euro-zone economy with fears that tensions surrounding Greece would spread to Portugal and Spain. Ratings agency Fitch was cautious over the medium-term outlook for Greece while there was also evidence of increased tensions within the Greek government which could derail plans for budget cuts. There were also strikes over budget cuts which maintained the underlying mood of uncertainty.

The economic data did not have a clear pattern, but there was a generally encouraging releases on the industrial sector which provided some degree of support.

Yen:  

There has already been a shift in yield support away from the Japanese currency and there will be further speculation over a further loosening of policy at the forthcoming Bank of Japan policy meeting. There will also be speculation over intervention to weaken the currency. There is scope for near-term capital repatriation ahead of the fiscal year-end while there will also be export selling on gains. With the potential for support when international risk aversion rises, heavy selling on the currency still looks unlikely.

The dollar found support below 89 against the yen and regained the 90 level later in the week while the Japanese currency was unable to sustain its best levels against the European currencies.

The latest Chinese consumer inflation data recorded an increase to a 16-month high of 2.7% which increased speculation that China would have to tighten monetary policy further in the near term to curb inflationary pressures and this curbed risk appetite.

In contrast, there was a downward revision to Japan’s fourth-quarter GDP data and weaker than expected figures on domestic demand increased speculation that the Bank of Japan would ease monetary policy at next week’s policy meeting. The yen had already lost support on yield grounds and the speculation was an important factor pushing the currency weaker.

There were also comments from Finance Minister Kan that intervention to weaken the yen could be an option and this was also a contributory factor to currency weakness.

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Underlying confidence in the economy will remain weak in the short-term. There will be persistent fears surrounding the budget deficit which will tend to compounded by the risk of political inertia during the election period. There will be further uncertainty over the strength of the economic recovery, especially after a run of generally weaker than expected data. Comments from the Bank of England will be watched closely and any hints of further quantitative easing would undermine Sterling. Overall, it will be difficult for the currency to secure any sustained relief.

Sterling sentiment remained weak, but the currency was able to find support below 1.49 against the dollar and moved back above the 1.50 later in the week as selling pressure subsided to some extent. There was also support weaker than 0.91 against the Euro during the week.

The latest UK industrial data was weaker than expected with a 0.9% decline in manufacturing output for January, contrary to expectations of a monthly increase, although the data is likely to have been distorted by bad weather conditions.

The NIESR estimated that GDP rose 0.3% in the year to February following a revised 0.6% increase the previous month. The data maintained expectations that the economy is recovering, but doubts over the economy’s strength also continued.

The latest RICS house-price index was weaker than expected with 17% of agents reporting higher prices in March from a revised 31% the previous month which continued to fuel doubts over the economy, although the latest BRC retail sales indicator was stronger than expected.

The latest trade account data was significantly worse than expected with the goods deficit widening to GBP8.0bn for January from a revised GBP7.0bn the previous month and this was the widest shortfall since August 2008. The decline in exports was a particularly disappointing feature and tended to damage underlying sentiment towards the economy and currency.

Credit rating agency Fitch also stated on Tuesday that the credit profile has deteriorated which increased speculation that the AAA sovereign credit rating could be lost in the medium term. Fitch stated that there was no immediate threat to the rating, but also sounded an important note of concern over the commercial banks.

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. There will be cautious optimism surrounding the growth Swiss outlook. The National Bank decision to maintain its opposition to excessive franc appreciation will tend to limit the scope for currency gains and volatility will spike again if there is any renewed intervention.

The dollar was unable to sustain a move above the 1.08 level against the franc and retreated back to the 1.07 area. The Euro was trapped near the 1.46 level against the Swiss currency throughout the week.

Swiss consumer prices rose 0.1% in February to give an annual increase of 0.9% which was slightly below expectations.

As expected, the Swiss National Bank left interest rates at 0.25% following the latest policy meeting. The bank revised up its 2010 GDP growth and inflation forecasts slightly and was slightly more optimistic over economic trends with a warning that interest rates could not be left at very low levels forever given the inflation risks.

The bank also repeated the statement from previous meetings on the Swiss currency. It commented that it would aim to act decisively to counter excessive appreciation of the franc, although there was no evidence of intervention following the meeting.

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The Australian dollar was able to maintain a generally firm tone during the week as rallies attracted buying support and it strengthened to a high near 0.92 against the US dollar as it found good buying support on dips.

The robust data on Chinese exports and imports underpinned confidence in the Australian currency on hopes for a buoyant trend in global trade and commodity prices were generally firm which provided support.

The domestic employment data was weaker than expected with a marginal increase in employment for February which sapped enthusiasm for the currency to some extent.

There will be expectations that interest rates will be increased again over the next few months and currency sentiment should remain firm for now. The Australian currency may still find it difficult to extend gains given the global debt profile.

Canadian dollar:

The Canadian dollar was able to maintain a firm tone over the week as it gained support following the US dollar’s inability to sustain gains and it pushed to a high beyond 1.0250 against the US dollar.

The currency gained support from confidence in the Canadian economy with continuing expectations that interest rates would increase this year.

Risk appetite also held relatively firm and commodity prices were also strong as crude-oil prices probed levels above US$82 per barrel.

The Canadian dollar should remain generally firm in the short-term given the expectations of higher interest rates. Resistance levels will be tougher to break towards parity.

Indian rupee:

The rupee was confined to relatively narrow ranges during the week and it consolidated near 45.60 against the dollar. There were reports of a substantial corporate dollar buying order related to an overseas acquisition which hampered the rupee.

Stock-market conditions were choppy, but the overall tone was relatively firm which helped underpin confidence and limit any rupee selling.

There was speculation that the Reserve Bank would intervene to prevent gains much beyond the 45.30 region.

The rupee will find it difficult to appreciate strongly, especially if the Reserve Bank signals its resistance to currency gains.

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The Hong Kong dollar edged stronger against the US currency during the week with gains to the 7.7590 region with mixed Chinese influences over the week.

There was continuing speculation that there would be medium-term appreciation for the Chinese currency which also helped underpin the Hong Kong dollar. There were also fears over further monetary tightening which tended to unsettle the currency on fears over capital outflows.

There will be mixed influences on the capital account from Chinese policy pressures, with the net risks suggesting only limited losses are likely.

Chinese yuan:

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

The latest consumer inflation data was stronger than expected with an increase to a 16-month high of 2.7% in the March release. The data reinforced speculation that further policy tightening would be required in the near term.

PBOC Governor Zhou also sated that the special yuan policy would be dropped eventually which was considered a signal that the currency would be allowed to appreciate, but there was still a high degree of uncertainty over the timing of any move given evidence of a robust policy debate within China.

Following the latest inflation data, speculation over a yuan revaluation or gradual appreciation of the currency by re-starting the crawling peg advance is likely to remain a very important short-term market feature.