Weekly Forex Currency Review 15-05-2009

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Markets will still be looking to take an underlying optimistic tone towards the global economy and risk appetite, but confidence is liable to falter to some extent as a substantial amount of improvement has now been priced in. All the major currencies will continue to have important vulnerabilities and this will make it difficult to secure decisive direction in the short-term with all facing barriers to strong gains.      

Key events for the forthcoming week

Dollar:

Underlying confidence in the US fundamentals will remain fragile with continuing fears that an escalating debt burden will result in a longer-term credit-rating downgrade which would be very damaging.  In the near term, the degrees of global risk appetite will remain very important for the US currency. The decline in Libor rates and easing of credit-related stresses should lessen defensive demand for the US currency. There is still the potential for dollar gains if fears over the global economy intensify again.  Overall, the US currency should be able to resist heavy selling pressure at this stage even if gains are limited.
 
The dollar proved resilient during the week and there were bouts of strength, but it struggled to make significant headway. Underlying confidence in the US fundamentals was weaker while defensive demand for the currency was generally weaker. Libor rates fell significantly over the week which suggested that dollar supply was improving and this curbed support for the currency.

The US retail sales data was weaker than expected with a headline decline of 0.4% for April while there was a core 0.5% decline. There was caution given the monthly volatility in data, but there were some fears that consumer spending will remain under pressure which would also tend to stifle any recovery in the economy as a whole.

Initial jobless claims were higher than expected with a rise to 637,000 in the latest week from a revised 605,000 the previous week. The data will maintain unease over the labour market, especially as the data has been showing some signs of improvement. Continuing claims also pushed to a fresh record high of 6.56mn for the week. The impact was, however, offset by the fact that much of the weekly increase in initial claims was due to layoffs related to Chrysler’s bank-ruptcy.

The US trade deficit was slightly lower than expected with an increase to US$27.6bn for March from a revised US$26.1bn the previous month. There was a further decline in exports and imports with exports declining by 17.4% over the year while imports registering a sharp 27%.annual decline.

The US federal budget recorded a deficit of US$20.9bn for April compared with a US$159.3bn surplus for the equivalent month last year. This was the first deficit for April since 1983, reinforcing the severe underlying deterioration seen over the past year and the need for huge debt issuance over the next few months.

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There will still be some optimism that the Euro-zone economy is stabilising, although confidence is liable to be slightly weaker following recent downbeat comments from policymakers. The comments from ECB officials will continue to be watched very closely in the short-term and further evidence of divisions within the council would tend to undermine Euro sentiment. The currency will also be subjected to selling pressure if quantitative easing is expanded. In contrast, a sustained improvement in risk appetite would underpin the currency. It will still find it difficult to make much headway.

The Euro struggled to secure significant gains over the week, but it resisted heavy losses as all the major international currencies struggled to secure strong support and held above last week’s support levels.
The Euro-zone industrial data was weaker than expected with a 2.0% decline for March following a 2.3% fall the previous month and this gave an annual decline of over 20%. German GDP fell by a record 3.8% for the first quarter.

ECB council member Kranjec stated that the central bank could increase the asset purchase scheme which also unsettled the Euro to some extent while fellow member Weber was also generally downbeat over recovery prospects, although Weber also rejected additional bond buying.

There was further evidence of underlying  tensions within the ECB as a series of officials continued to make contradictory comments on monetary policy. Markets were looking for bank President Trichet to take a tough stance on the council members and agree on a consensus line.

Yen:  

The yen will tend to gain renewed support if there is a fresh spike in risk aversion. Given the evidence of substantial short yen positions by Japanese investors, there is also the possibility of a heavy stop-loss selling which could trigger rapid yen gains. Nevertheless, there is still likely to be strong underlying selling pressure on the currency as markets still want to take a more positive stance towards the global economy. In this environment, volatility is liable to remain higher in the short-term.

The Japanese currency strengthened over the week with highs near 95 against the dollar and beyond 130 against the Euro.

Risk appetite was generally lower in the middle of the week with the Nikkei index weakening to a 2-week low. The yen also drew support from the sharp losses in commodity currencies and proved resilient even when international equities rallied.

The Japanese current account data recorded a sharp annual decline, although the impact was limited as the trade data had already been released.  The machinery orders data was stronger than expected with the monthly decline held to 1.3% for March.

There was a greater focus on the schedule of Treasury bond coupon payments with heavy payments due over the week. Fears that the capital would be repatriated back to Japan was significant in curbing dollar support. There was also speculation that there could be stop-loss selling of aggressive short yen positions which had been built up.

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The evidence continues to suggest that the economy is stabilising with a run of more favourable data. There is still a risk that this confidence will erode rapidly, especially as there are still substantial consumer debt fears. The short-term Sterling moves will still tend to be dominated to a large extent by trends in risk appetite and the currency will continue to gain support if confidence in the global economy improves.  The underlying debt fears will prove to be very toxic for the currency if fear becomes the dominant influence again.

Sterling pushed to challenge 2009 highs above 1.53 against the dollar, but was unable to sustain the gains and weakened slightly over the second half of the week. Sterling found support above 1.50 against the dollar and beyond 0.90 against the Euro.

The UK economic data generally offered support for Sterling during the week. The BRC reporting a 4.6% annual increase in retail sales, although this was probably distorted by the timing of Easter. The latest RICS survey also continued to record an underlying improvement in the housing sector as the pace of price declines slowed. 

The other UK data was also stronger than expected with a decline in the goods trade deficit to GBP6.6bn for March while there was a smaller than expected manufacturing production fall of 0.1%, the slowest rate of decline for 13 months. The headline claimant count data was also better than feared with unemployment rising by a further 57,100 in April. Although the ILO unemployment rate was higher than expected with an increase to a rate of 7.1% from 6.7%.

The Bank of England inflation report again had an important impact on Sterling, maintaining the recent trend of high volatility following the quarterly reports.

The bank warned in the report that the recession was liable to be deeper than expected while the recovery would be protracted and slow given the underlying stresses within the economy.  The projected inflation rate was 1.0% in two years time which suggested that the bank will not be looking for an early increase in interest rates. There were no substantive comments on the quantitative easing programme as the bank stated that it will need several months to assess how effective the policy is.

Swiss franc:

The Swiss economy is likely to remain very fragile in the short-term with domestic spending only recovering at a very slow pace. The National Bank policies will remain very important in the short-term, especially as the recent inflation indicators have been weaker than expected. Given the bank’s fears over deflation, there is likely to be strong opposition to renewed currency gains. Any further weakness in the US dollar would also increase pressure for wider franc advances to be resisted. 

The franc remained resilient during the week, resisting selling pressure against the Euro while it also challenged dollar support levels close to 1.10 with the dollar finding firm support close to this level.

Swiss producer prices fell 0.2% in April compared with expectations of a monthly increase. There was a 3.6% annual decline which tended to reinforce deflation fears, especially after the weaker than expected consumer inflation data last week.

National Bank member Jordan again warned that the bank wants to prevent further appreciation, maintaining the recent barrage of comments from officials. He also took a generally downbeat view on the short-term outlook with a waning that unemployment will continue to increase while the economy was likely to return to growth in mid 2010 at the earliest.

The franc weakened slightly against the Euro following the remarks, but still managed to resist heavy selling pressure.

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The Australian currency maintained a firmer tone and pushed to seven-month highs above the 0.77 against the US dollar during the first half of the week. The Australian currency drew support from the improvement in risk appetite, hopes for a global economic recovery and a generally weaker US currency.

There was a retreat back to the 0.75 region as risk appetite deteriorated, but retreats to this area quickly attracted buying support.

There were no major domestic influences with the building-orientated data slightly stronger than expected with markets waiting for fresh Reserve Bank guidance.

The Australian dollar should maintain a relatively firm tone in the short-term although it will remain vulnerable to a further correction weaker following recent gains.

Canadian dollar:

The Canadian dollar continued to gain ground over the first half of the week and strengthened to 7-month highs near 1.15 against the US currency. There was a sharp  retreat back to near 1.18 as risk appetite dipped with consolidation near 1.17.

The Canadian trade account remained in surplus for March as import values declined and the overall impact was limited as trends in global risk appetite remained the dominant influence. The currency drew underlying support from hopes that the global economy was stabilising and commodity prices were also generally higher.

The Canadian dollar should be able to resist heavy selling pressure in the short-term. It will be difficult to gain strong gains from current levels given the amount of global economic improvement priced in.

Indian rupee:

The rupee was generally weaker during the past few days and dipped to test two-week lows near the 50 level against the US dollar before a recovery. There was evidence of exporter dollar selling near the 50 level which capped US currency gains

The rupee was unsettled to some extent by political uncertainty ahead of the election results with fears that there could be a relatively weak coalition.

Risk appetite fluctuated during the week, but there was a slightly weaker net tone for much of the time which curbed rupee support. There was no evidence of substantial capital outflows and the currency edged stronger on Friday.

The rupee will gain support if there is a credible government following the election results. Near-term rupee trends will still tend to influenced strongly by trends in risk appetite and it will be difficult for the currency to make strong headway.  

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The HKMA was again forced to intervene heavily to keep the Hong Kong dollar within the permitted trading band as it remained pinned near to the 7.75 stronger limit. The persistent intervention has resulted in total intervention of over HKD100bn since the beginning of April.

There were further capital inflows on hopes that the Chinese economy was improving, especially with optimism that the Asian economy could lead a global recovery.

Given the improvement confidence surrounding the regional economy, the Hong Kong dollar should be able to maintain a firm tone. Further intervention is likely to be required, at least in the near term.  

Chinese yuan:

The yuan edged slightly weaker, although moves were limited and it settled close to 6.8250 against the US currency. There was a small increase in global risk aversion which dampened demand for the currency to some extent, although confidence was still generally resilient.

There was mixed economic data as the export figures were weaker than expected while the domestic capital spending data was stronger than expected.

The yuan will continue to be influenced strongly by trends in the domestic and global economy. The Chinese authorities will be reluctant to allow currency appreciation if there are renewed doubts over the Chinese and international economy.