Weekly Forex Currency Review 14-05-2010

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 -

The risk surrounding sovereign debt is liable to be an important market focus in the near term. The main focus is likely to be on Europe, but there will also be a high degree of unease over US and Japanese outlook. Despite doubts over the US fundamentals, fears over the outlook within Europe will continue to provide some significant dollar protection.                 

Key events for the forthcoming week

Dollar:

The US economic data will maintain expectations that the economy will out-perform the Euro-zone over the next few months. There will be important longer-term fears over the budget and debt outlook, especially as the AAA credit rating is certainly 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 there are further tensions in inter-bank markets. There is also still the potential for a closing of carry-related positions funded through the dollar, but strong US currency gains look unlikely.

The dollar weakened sharply against the European currencies at the start of the week, but hen regained ground and ended the week having more than made up initial losses as confidence in the Euro area deteriorated again. The Euro retreated to re-test 14-month lows just above the 1.25 level.

Dollar Libor rates continue to edge slightly higher over the week which maintained some fears over liquidity stresses and provided some defensive dollar support. The major central banks reinstated dollar swap lines to help boost liquidity

The US economic data did not have a major impact during the week. Initial jobless claims were in line with market expectations at 444,000 in the latest reporting week from a revised 448,000 previously. There was also a 0.9% increase in import prices for the latest month. The US trade deficit widened to a 15-month high of US$40.4bn for March.

There were no major comments from the Federal Reserve members on monetary policy and Treasury yields were generally lower.

Our integrated pattern recognition technology identifies patterns in real-time. 

Download the free demo - Click Here

The Euro-zone structural outlook will remain a key short-term focus. The substantial support package will help lessen the immediate threat of a debt default, but an underlying lack of confidence is liable to continue. There will also be fears that budget tightening will condemn the Euro-zone to a further period of very weak growth. The ECB will be an important focus and there will be fears that the bank’s independence has been compromised. There is certainly the risk of heavy selling pressure on the Euro, although measured losses look more likely.

Over the weekend, EU leaders agreed a support fund totalling EUR750bn in order to stabilise Euro-zone and Euro confidence. The bulk of the support is due to come from European Union members with the IMF also contributing funds.

The ECB also announced that it will buy Euro-zone bonds, contrary to the comments made following the previous week’s ECB policy meeting.

The GDP data for the Euro-zone as a whole was marginally firmer than expected at 0.2% for the first quarter. The economic data continued to have only a limited impact as structural uncertainties remained the dominant focus.

The Spanish government announced that there would be additional spending cuts in order to reduce the budget deficit to 6% of GDP in 2 years time from around 11.2% this year. The deficit-reduction plans maintained fears that Euro-zone demand would remain very weak over the next year. In turn, there were continuing expectations that the ECB will have to maintain a policy of very low interest rates.

There was also an announcement of budget cuts by the Portuguese government which is aiming to cut the deficit to 4.6% of GDP for 2011 from around 8% this year.

There were still underlying fears that the latest support package would not be sufficient to prevent medium-term debt restructuring. There was also further speculation that from a longer-term perspective the Euro was over-valued at current levels, especially if growth rates remain depressed.

Yen:  

Trends in risk appetite will remain important and the Japanese currency will gain some support if there is a sustained deterioration in confidence surrounding the global economy. In particular, increased strains in the banking sector would provide some degree of yen support. The yen will still tend to be vulnerable on yield grounds with the Bank of Japan keeping interest rates at extremely low levels. Overall, the yen is not well placed to sustain an advance even if there are intermittent sharp gains.

The yen proved generally resilient over the week with the dollar unable to gain any significant traction while the Euro remained generally on the defensive. Lower commodity prices tended to discourage carry trades and curbed selling pressure on the Japanese currency with reduced flows into currencies such as the Australian dollar.

There was some further speculation that the Chinese authorities will move to widen the yuan trading band and this underpinned the yen to some extent, although the direct impact was limited.

The capital account data showed that Japanese institutions sold JPY1.57trn in bonds in the lastest week and this did suggest an increase in structural fears and any further capital repatriation would underpin the yen. There were still concerns over the Japanese fundamentals and expectations that the Bank of Japan would keep interest rates very low.

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 formation of a coalition government should ease fears over a political vacuum and provide some degree of Sterling support. The focus will now tend to switch towards the economy and there will be expectations of a more aggressive fiscal tightening. Although such action should lessen the immediate fears of a credit-rating downgrade, there will also be unease over a persistent period of very weak growth. There will also be pressure for the Bank of England to maintain a policy of very low interest rates. Overall, Sterling is liable to weaken further, although losses may be measured given European fears.
 
Political developments remained important over the first half of the week and some speculation that a Labour-Liberal Democrat coalition government could be formed unsettled the UK currency

In the event, these talks broke down and a Conservative-Liberal Democrat collation was announced. There was a mood of relief over the prospect of near-term political stability and an ending of the political vacuum.

The UK unemployment data again recorded a bigger than expected decline in the claimant count of 27,100 for April after a decline of over 30,000 for March although the labour-market data again indicated a rise in unemployment. The UK industrial data was substantially stronger than expected with a 2.0% increase in production for March

The Bank of England left interest rates unchanged at 0.50% following the latest MPC meeting. The amount of quantitative easing was also left on hold at GBP200bn.

In its latest inflation report, the Bank of England stated that there were downside risks to the economy while there was still a high degree of excess capacity in the economy. The bank also stated that inflation was likely to be below the 2.0% level in two years time if interest rates moved in line with market expectations.

Bank Governor King welcomed the government plans to tighten fiscal policy at a faster rate and there will also be expectations that the bank will keep interest rates at a very low level in order to compensate for the fiscal tightening.

The UK trade deficit was weaker than expected with a goods deficit of GBP7.5bn for March from a revised GBP6.3bn the previous month as imports rose strongly.

The government announced a preliminary budget framework and there were indications that policy will be tightened more quickly than expected. There was unease that the economy could dip back into recession which undermined Sterling confidence and it retreated back to lows below 1.46 against the dollar.

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 if there are further credit-rating downgrades. The National Bank will still be an important focus and there will still be pressure for the central bank to curb substantial Euro losses. Given that the currency could also gain some degree of support if there is a sustained deterioration in risk appetite, substantial franc losses remain unlikely.

The dollar found support below 1.10 against the franc during the week, but was unable to challenge 2010 highs near 1.1250. The Swiss currency remained very strong on the crosses and strengthened to test Euro support around 1.40 which was a fresh record high for the franc.

There was a strong suspicion that the National Bank was intervening to prevent further gains for the Swiss currency as Euro sentiment remained frail.

The Swiss economic data remained generally firm with an annual increase of 0.8% for producer prices in the year to April. With firm readings for business and consumer confidence there was further speculation that the bank could decide against blocking franc gains.

DO YOU OWN THE RIGHT STOCKS?

Analyze Your Stocks FREE! – Click Here

The Australian dollar found support close to 0.88 against the US dollar during the week and strengthened to the 0.90 area before stalling. The local currency was held back by generally subdued risk appetite over the week as a whole.

The employment data was stronger than expected with a further 33,700 increase in employment for April which maintained a degree of optimism over the Australian economy. Confidence in the global economy was generally weaker and this hampered the Australian currency, especially when commodity prices fell.

The Australian dollar moves will be influenced strongly by trends in risk appetite. Volatility is liable to be higher and the currency is likely to have a generally defensive tone in the short-term.

Canadian dollar:

The Canadian dollar proved resilient during the week and strengthened to highs near 1.01 before a correction weaker.

There was confidence in the domestic fundamental outlook and there were also continuing expectations of an interest rate increase in June.

A decline in oil prices had some negative impact on the currency late in the week, especially as wider commodity prices were also generally weaker.

Volatility levels are liable to remain higher in the short-term and the Canadian dollar will find it difficult to advance without a sustained improvement in risk appetite.

Indian rupee:

Rupee volatility was a key feature during the week as there were substantial moves in many global asset markets. The currency dipped sharply to lows beyond 45.50 against the US dollar on Tuesday before recording a measured recovery.

There was underlying optimism over underlying capital flows and this helped protect the currency from underlying selling pressure even when global markets faltered.

The rupee should be able to avoid heavy losses, but will find it difficult to make much headway 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 found support beyond the 7.7820 level against the US dollar, but struggled to secure any significant recovery even when there was an improvement in risk appetite.

There was a further increase in US Libor rates which tended to undermine the Hong Kong dollar, especially as there were also doubts over the Chinese economic policies.

Volatility levels are liable to remain higher in the short-term and the Hong Kong dollar will find it difficult to regain much ground if risk appetite remains weaker.

Chinese yuan:

The spot rate remained broadly steady against the dollar, although there was a further net yuan advance against the Euro as European currencies remained generally weak.

The Chinese economic data recorded an increase in inflation to 2.8% for April from 2.4% the previous month which maintained fears that the Chinese central bank would need to tighten monetary policy further.

There was some degree of stabilisation in global equity markets, but there was still a lack of underlying confidence. In this environment, there were doubts whether the Chinese authorities would consider a change in the exchange rate regime at a time of high volatility.

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