Weekly Forex Currency Review 17-06-2011

The Euro-zone debt crisis and sovereign-debt default risk will continue to have a very important short-term market impact with the Euro still under pressure and any default would invite a serious implosion in risk appetite. Conditions within the US and global economy will also continue to be watched very closely in the short-term and the Federal Reserve faces a key policy meeting next week. The underlying theme is liable to be one of caution which will maintain some defensive dollar demand despite the lack of fundamental support.  

 Key events for the forthcoming week 

Market analysis

Dollar: 

There will be further concerns over the US economic outlook, especially with  downturn in key manufacturing indices. Federal Reserve policy will be watched very closely in the near term as quantitative easing comes to a close. The Fed is unlikely to instigate a new round of easing at this stage, but rates will be held at very low levels and there will be a reluctance to tighten policy over the next few months. The dollar will not be in a strong position to gain support on yield grounds and an early deal on the debt ceiling will be needed to boost sentiment. There is still scope for support from on defensive grounds, especially as capital flows into emerging markets are liable to subside.  

The dollar secured net gains for the second successive week as a deterioration in risk appetite triggered defensive support for US Treasuries and the dollar.

The US growth-related data was mixed, but with a weaker bias as the New York manufacturing PMI index weakened to below zero for the first time since November 2010 with a drop to -7.8 from 11.9 previously while the NAHB housing-sector index fell to 13 from 16 previously.  There was also a sharp decline in the Philadelphia Fed index to a two-year low which maintained fears over the economic outlook.

There was a stronger than expected reading for US housing starts and building permits also rose to a five-month high which provided some relief. There was also a decline in jobless claims to 414,000 in the latest week from 430,000,  while the retail sales decline was held to 0.2% for May compared with expectations of a 0.3% fall with a 0.3% core increase.

Fed Chairman Bernanke warned that the US AAA credit rating could be at risk if there was no improvement in the fiscal position and underlying confidence in the US fundamentals remained weak. There were no substantive comments on interest rates.

But for too long people have been missing out on the easy profits on the foreign exchange (or forex) market.
Until Now...  Click Here.

The Euro-zone structural difficulties will remain an extremely important short-term focus as leaders continue to battle with the intractable Greek debt crisis. There are still crucial differences of opinion over an appropriate solution, but without a resolution market pressures will continue to increase and the threat of contagion will also intensify. These fears will leave the Euro vulnerable and widening spreads within core countries would leave the currency extremely vulnerable. There will be some support from an expected interest rate increase and there will also be an important temporary recovery if a credible Greek rescue package can be put together.

The Euro remained under pressure for the week as a whole, but did find some support on approaches to the 1.40 area against the dollar. There were further market concerns over the Greek outlook and severe default risk, especially after the reports that differences of opinion may prevent any support agreement until July. The severity of the situation was illustrated by a further sharp ratings downgrade. Standard & Poor’s cut the Greek rating to CCC from B.

Reports continue to suggest that the German government is insisting that private bond-holders accept losses as part of any fresh support package while the ECB remains heavily opposed to any measures which would constitute a default. Although other European governments appeared to be moving closer to the ECB position, there will be no deal without German agreement. Market fears over instability and default continued to increase which put the Euro under pressure.

Additionally, the Irish government stated that it had asked for IMF support to impose haircuts on senior bondholders of Irish banking-sector debt. Such a move would increase wider fears over imposed losses and there were further fears over the European banking sector. ECB President Trichet stated that markets must avoid compulsion in any bond restructuring and avoid triggering a credit event and there were further concerns over further damage to the European banking sector.

The indications were that the IMF would agree to pay the next instalment by early July, but this would be dependent on fresh austerity measures.  Protests continued in Greece and there were further resignations from the government. The Prime Minister will, therefore, find it extremely difficult to find approval for tightening measures and this will also jeopardise any agreement that can be secured.

German Chancellor Merkel and French President Sarkozy will meet on Friday to discuss developments and EU Finance Ministers are due to meet on Sunday and Monday as market pressures increase.  

JNFX are a city-based FSA Regulated provider of corporate foreign exchange services. Offering competitive foreign exchange pricing and same day cost-free international payments we are a direct alternative to the banks. For further information click here

Although there is some tentative evidence of an improvement in demand conditions, overall confidence in the economy and fundamentals will remain very fragile. There will also be persistent fears that the weak government will not be able to address the extremely serious government-debt situation. The yen will gain defensive support when risk appetite deteriorates and there will also be the potential for long-term capital repatriation which would underpin the yen, especially if European bond holdings are scaled back.  

The dollar found support close to 80.0 against the yen early in the week. It failed to break above 81 and retreated to lows near 80.50, although selling pressure was contained. Although US yields stabilised to some extent following the US housing data, interest-rate support was still lacking which curbed dollar support.

The Japanese currency continued to gain some support on defensive grounds as risk appetite remained weaker with Sterling testing support below 130. A further decline in regional bourses on Friday also triggered defensive yen demand.

Domestically, there was a reported improvement in manufacturing confidence according to the latest tankan survey and the government retained a slightly more optimistic tone surrounding the outlook.  The Bank of Japan held interest rates at 0.1% following the latest council meeting and there were no additional measures by the central bank.  The latest Bank of Japan minutes reported that two members saw the need for a further relaxation of monetary policy.

Sterling:

Confidence in the economy will remain weak with further concerns over the outlook for consumer spending as real incomes remain under pressure. Although inflation is continuing to run substantially above target, the Bank of England will not be in a position to raise interest rates significantly and real yields will remain very unattractive which will limit Sterling support. There will also be further unease over the banking sector, especially if there is the threat of losses from Europe. In this context, the UK currency will find it difficult to gain strong defensive support from difficulties within the Euro-zone and the net trend is liable to be for depreciation against the dollar.

There was a weaker than expected 1.4% decline in sales for May. Although recent data has been distorted by holidays, the ONS warned that there had been a deterioration in trends.  The headline consumer inflation rate was in line with expectations at 4.5% and unchanged from the previous month while the core rate dipped to 3.3% from 3.7%. The headline UK claimant count data was weaker than expected with an increase of  19,600 for May from a revised 16,900 previously. The data as a whole maintained unease over growth trends.

In his Mansion House speech on Wednesday, Bank of England Governor King maintained a generally downbeat assessment of the economic outlook and also referenced to very weak growth in money supply. There will be continuing expectations that the central bank will resist pressure to increase interest rates as it believes that domestically-induced inflationary pressure remains very limited.

There was a decline to test support levels close to 1.61 against the dollar and Sterling failed to gain much respite as the technical outlook also deteriorated.

Risk conditions will inevitably remain important in the short-term and Sterling will tend to be vulnerable if there is a further deterioration in confidence. There will be particular doubts surrounding the UK banking sector given the underlying stresses.

Receive this 10 page property report when you sign up to the free version of The Mountain Investor Report monthly newsletter.
Click here 

The Swiss currency will remain the ultimate safe-haven currency, especially with all major alternatives suffering from a serious lack of confidence. Euro-zone stresses will be watched very closely in the short-term given the potential for further capital flows out of the Euro area. There will be pressure for the National Bank to take action, but the central bank appears to have ruled out any intervention. The currency should retain a strong net tone, but there will be sharp retreats at times, especially as it is substantially over-valued.  

The franc retreated sharply at times, but the underlying theme was still one of strength as defensive demand for the currency continued.  The National Bank left interest rates on hold at 0.25% at the quarterly monetary policy meeting and also slightly lowered its inflation forecast for 2012 and 2013. There was little immediate franc reaction with the dollar blocked near 0.8550 against the franc.

In the press conference following the meeting, bank officials expressed unease over the franc’s level, but also stated that there would be no intervention at this stage to weaken the currency.

The franc continued to gain support on defensive grounds as fears surrounding the Euro-zone sovereign-debt situation intensified as the Euro dipped to record lows below 1.20. The currency remains substantially over-valued and there were further volatile moves given a reluctance to hold aggressive positions. 

Australian dollar:

There was further choppy trading conditions in the Australian dollar as the currency was again buffeted by domestic and international factors. There was selling pressure just above 1.07 and the currency retreated sharply to test support below 1.05

Reserve Bank Governor Stevens stated that monetary policy would need to be tightened further at some point in the future, but markets were less convinced that there would be scope for further rises in interest rates.

Global market conditions continued to have an important impact with weaker risk appetite undermining support for the Australian currency. Stock markets were generally on the defensive and weakness within Asia was particularly important.

Short-term yield factors will support the Australian dollar, but he underlying domestic and international risk profile leaves it vulnerable to further selling pressure.

Canadian dollar:

The Canadian dollar strengthened following better than expected domestic data over the first half of the week, but it was unable to sustain the gains and was subjected to considerable selling pressure later in the week.

Global risk conditions continued to have an important impact and the Canadian currency was undermined by a deterioration in confidence, especially after oil prices retreated sharply as it retreated to test support beyond 0.9850 against the US currency.

The Canadian dollar is liable to drift weaker given unease over the global growth and risk environment, especially as commodity prices will be vulnerable to further losses.

17% a year returns & only £10K down. For your FREE investment guide, Click here.

The rupee edged lower over the week as a whole and tested support near 48 against the US dollar. There was a negative impact from a deterioration in global risk appetite and weaker regional bourses, although the currency held firm given the underlying deterioration in conditions which suggested that capital flows held broadly firm.

The Reserve Bank increased the repo rate by a further 0.25% to 7.50%, the 10^th increase in the current tightening cycle and suggested that rates would rise further.

Although the rupee should be able to remain resilient in the short-term it will be difficult for the currency to make strong gains given the weaker risk environment.

Hong Kong dollar:

The Hong Kong dollar held minor losses against the US dollar over the first half of the week, but there was more substantial pressure during Thursday and the local currency retreated to lows around 7.795 against the US dollar.

There was a further decline in the Hang Seng Index to a nine-month low which undermined the Hong Kong dollar, especially as wider risk appetite also deteriorated. There was also unease over the Chinese economy which dampened currency support.

The Hong Kong dollar will be vulnerable if risk appetite deteriorates further and there will be increased speculation over the  peg’s outlook with potentially higher volatility.

Chinese yuan:

The yuan maintained a solid tone and, although movements were limited, there were gains to a fresh record high just beyond 6.472 against the US dollar which was a significant move given that the dollar advanced further against the Euro.

The headline inflation rate was in line with expectations at 5.5% for may, but there was a further policy tightening by the central bank as reserve ration requirements were increased by a further 0.5% to 21.5%.  There was a pledge to increase yuan flexibility and also to curb speculative capital inflows.

Gradual short-term yuan appreciation remains likely for now, although there will be a growing threat of instability as capital flows intensify and economic doubts increase.