Weekly Forex Currency Review 17-01-2014

The US growth and monetary outlook will continue to be a very important short-term market influence. Despite the weaker US employment data, markets are expecting a further tapering of bond purchases at the late-January meeting. There will be a sustained increase in volatility if these expectations are not met. The ECB will also be under pressure for a more aggressive monetary policy and political stresses within the Euro-zone will be a potentially very important focus over the next few weeks.

Key events for the forthcoming week

Market analysis

Dollar:

The much weaker than expected US payrolls data has damaged immediate confidence surrounding the outlook and has also increased uncertainty surrounding the outlook which will increase the threat of volatile trading conditions. The most likely outcome is still that the Federal Reserve will continue to sanction a further gradual tapering of bond purchases over the next few meetings. Net bond yields should still provide some degree of support for the US currency, especially in contrast to other main economies. Further structural improvements will also be an underlying supportive factor for the dollar.

The dollar came under sharp selling pressure following the weaker than expected employment report, but managed to regain some ground this week with slow gains in relatively cautious conditions as the Euro retreated back towards 1.36.
 
The headline US payrolls data was much weaker than expected with an increase of 74,000 for December from a revised 241,000 gain the previous month. The data was overall was very mixed as the unemployment rate fell sharply to 6.7% from 7.0%, the first time is has been below 7.0% since 2008. The decline appeared to be triggered more by a renewed decline in the participation rate and an increase in people leaving the labour force rather than a stronger jobs market.

The headline US retail sales data was slightly weaker than expected as 0.2% with a downward revision to November, but there was a higher than expected core reading of 0.7% which provided some degree of relief. The latest US consumer prices data was in line with expectations at 0.3% and the core data also matched expectations with a 0.1% monthly gain which will not add to fears over inflation being too low.  

There was a much stronger than expected reading for the New York Empire PMI index with a gain to 12.5 for January from 1.0 previously. The jobless claims data was slightly stronger than expected with a decline to 326,000 in the latest week from a revised 328,000 previously. Subsequent US data releases were solid with the NAHB housing index at 56 for December from 57 previously while the Philadelphia Fed index edged higher to 9.4 from a revised 6.4.

The Fed’s Beige book latest economic survey reported moderate growth in most districts with solid retail expansion while there was also strong demand for labour with wages creeping higher. The report as a whole should not discourage the Fed from a further measured tapering of bond purchases.

Chicago Fed President Evans stated he would back the existing pace of bond tapering and maybe for a faster pace of withdrawal. Given his generally dovish tone the remarks tended to underpin expectations of further tapering at the January FOMC meeting which helped support the dollar. San Francisco Fed President Williams stated that the Fed would adjust the rate of bond tapering based on the rate of improvement in the economy and this comment again suggested that quantitative easing could be phased out at a faster pace which would tend to underpin the dollar.

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Confidence in the Euro-zone outlook will remain slightly stronger in the short-term with hopes that declines in peripheral bond yields will help signal a sustained improvement in confidence and allow further economic recovery. There are still very important risks surrounding the outlook and there will be fears that deflationary pressures will build which will maintain pressure for the ECB to take a more aggressive policy. The Euro overall will find it difficult to make significant headway from current levels and is eventually likely to retreat sharply given cyclical and structural vulnerability.

The Euro was unable to capitalise on strong gains following the US payroll report and tended to drift weaker during the week, although ranges were relatively narrow with no break of major technical levels.

There were no major economic releases during the week with the Euro-zone trade account remaining in solid surplus according to the latest data while peripheral bond yields continued to decline.
 
ECB member Mersch stated that there were more downside risks than upside risks to inflation and there will be further speculation over a more aggressive ECB tone to combat potential deflation. Bundesbank President Weidmann stated that there were medium-term inflation risks, but he was broadly supportive of the current ECB stance.

The latest consumer inflation data confirmed the flash reading of 0.8% which maintained unease surrounding the risk of inflation being too low and maintained underlying pressure on the ECB for a more aggressive policy.

Yen:   

There will be further underlying concerns surrounding a deterioration in the trade outlook as imports remain at elevated levels ahead of an increase in the sales tax.  There will also be expectations that the Bank of Japan will consider a further monetary loosening later in the second quarter.  With little confidence in the fundamentals, yen sentiment will remain generally weak. There will still be scope for sharp yen gains at times, especially when speculative short positions become over-extended.

Markets were unable to push the yen substantially weaker with caution over further selling and the Japanese currency was also more resilient on the crosses. There was also caution surrounding the underlying positioning given the high number of short yen positions and the dollar was unable to move above the 105 level.

The Nikkei index retreated to a 1-month low which initially underpinned the yen on Tuesday. The latest current account data remained weak with a record deficit for November and unadjusted shortfall of JPY593bn. Demand increased ahead of the sales tax increase and energy imports remained high. The sharp underlying deterioration will be an important underlying negative yen fundamental influence.

Subsequent industrial economic data was stronger than expected with a monthly increase in machinery orders of 9.3% from 0.6% previously which should boost optimism surrounding the industrial outlook and there was a recovery in the services sector, although this fell short of expectations.

The US currency pushed to highs just below the 105 level on expectations of underlying capital outflows from Japan in search of higher yields. The latest capital-account data recorded a second successive week of overseas bond selling by Japanese institutions. One of the bearish factors in expecting a weaker yen is capital outflows from Japan on yield grounds and the latest data will cast some doubt on these flows which will also make it more difficult to push the yen weaker.

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Confidence in the economy will remain solid in the short-term, especially with evidence of further gains in the housing sector. There has been some evidence that the rate of growth is peaking and there will also be concerns surrounding exports if the Euro-zone deteriorates again. Sterling will tend to be more vulnerable if there is a revision to expectations that the Bank of England will be forced to tighten monetary policy during 2014. From a longer-term perspective, there will also be important balance of payments vulnerability.

Sterling had a slightly more defensive tone during the week as it tended to underperform major rivals. There was support on dips towards the 1.63 area against the dollar while the Euro regained the 0.83 level.
 
The latest UK headline consumer inflation rate was slightly below expectations at 2.0% for December from 2.1% in November which was the lowest rate since late 2009 and the first time the Bank of England target has been met for over four years.  

The data should make the Bank of England slightly more comfortable in holding interest rates at record-low levels and this would tend to have a negative Sterling impact on yield grounds, especially with recent growth data slightly weaker.

The latest housing data maintained expectations that the pace of economic growth could be moderating, although it also sustained confidence that there would still be a solid expansion in the housing sector which would underpin the wider economy.

Swiss franc:

The Swiss economy should continue to perform strongly in the short-term. The National Bank will be uneasy over the risk of further inflationary pressures within the housing sector and will also be extremely wary of allowing fresh franc appreciation. For now, the Euro minimum level is likely to be maintain with the bank resorting to direct controls if it needs to combat and over-heating housing sector. The franc will tend to lose ground if confidence in the global outlook strengthens further with volatility liable to increase.

The dollar pushed higher during the week, but hit resistance close to 0.91 while the Euro lost ground after failure to break above the 1.24 level.
 
The domestic economic data was stronger than expected with an annual increase in retail sales of 4.2% in the year to November which will maintain underlying confidence in the growth outlook. The franc will tend to lose support if there is a sustained improvement in risk conditions, although uncertainty is liable to prevail, especially with uncertainty surrounding the Euro-zone outlook.

National Bank Chairman Jordan maintained his commitment to the 1.20 Euro minimum level and reiterated that the franc was at a very strong level in historic terms. He also stated that policy minutes would not be released.

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The Australian dollar initially pushed above the 0.90 level against the US dollar, but volatility increased later in the week and there were heavy losses for the currency as it weakened to four-year lows below 0.88 against the US currency.

There were concerns surrounding the underlying outlook for commodity prices and regional growth trends which had a negative impact on the currency. There was a much weaker than expected domestic labour-market report with a decline in employment of over 22,000 for the month which undermined confidence in the economy and reinforced bearish market sentiment.

The overall Australian dollar trend is liable to remain weak, especially if Chinese unease increases and the currency will struggle to extend any corrective recoveries.
 
Canadian dollar:

The Canadian dollar was subjected to further sustained selling pressure during the week and dipped to lows close to the 1.10 area which was a fresh four-year low.

There was selling pressure from a generally weaker trend in commodity prices and there was also further speculation that the Bank of Canada and government were happy to see a weaker currency to help underpin the export sector. There was some correction later in the week as short-term technical indicators were over-sold.

The Canadian dollar is over-sold on a short-term view. Markets will still be expecting a weaker medium-term trend, especially with no domestic opposition to depreciation.

Indian rupee:

The rupee was again confined to relatively narrow ranges during the week with support weaker on any retreats towards 62 against the US dollar. The US currency was undermined following the weaker than expected employment data, but overall sentiment towards emerging currencies remained very fragile.

There was a decline in wholesale inflation to a five-month low which boosted confidence that the  Reserve Bank would be able to loosen policy which would also help underpin the growth outlook.

Domestic sentiment can remain slightly stronger with hopes for a more constructive monetary policy, but emerging-market fundamentals overall will limit support.

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The Hong Kong dollar continued to find support on any approach to the 7.7550 area against the US dollar with the main feature being very narrow ranges. Markets will continue to monitor trends in US monetary policies and emerging-market currency rends for evidence on potential stresses surrounding the local currency peg.

Chinese economic and yuan trends will continue to be watched closely both in the short and medium term to assess underlying stresses on Hong Kong’s currency peg.
 
Chinese yuan:

The yuan initially moved to a fresh record high against the US currency with a move just beyond the 6.05 level against the US currency. There was a partial reversal over the second half with the local currency being undermined by a firmer US dollar tone while the PBOC also looked to resist further gains through weaker fixes.

There was a weaker than expected reading for credit lending in the latest data and markets remained very uneasy surrounding underlying credit trends with fears that the wider economy would increasingly be affected. The latest GDP data will be watched closely early next week.

Lending developments will be watched very closely given the risk of a credit crunch. Underlying capital trends are also likely to be less favourable, undermining the yuan.

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