Weekly Forex Currency Review 17-09-2010

DO YOU OWN THE RIGHT STOCKS?

Analyze Your Stocks FREE! – Click Here

Official currency policies will inevitably be an important focus following the Bank of Japan intervention to weaken the Japanese currency. There will be increased political pressure for currency appreciation to be resisted and there will be the threat of increased policy tensions over the next few weeks which would contribute to increased currency-market volatility.               

Key events for the forthcoming week

Dollar:

Fears over a renewed slide towards recession may ease very slightly in the short-term, but doubts surrounding consumer spending and the labour market will continue. Overall yield support for the dollar will, therefore, remain weak amid speculation that the Federal Reserve could sanction further quantitative easing. Global considerations will remain important and the US currency will be much more vulnerable to selling pressure when confidence in the global economy improves. Nevertheless, confidence in the international risk profile is liable to deteriorate again which should provide some dollar protection.

The dollar was generally on the defensive against the Euro and Sterling during the week as the currency was unable to gain fundamental support while defensive demand for the dollar was generally weaker.

AS far as the economic data is concerned, the Philadelphia Fed survey improved from the August reading, but there was still a second successive figure below zero at -0.7 and the orders component was at the weakest for over 12 months.

The New York Empire manufacturing index was weaker than expected with a decline to 4.1 in September from 7.1 the previous month, but the underlying components were generally firmer. The industrial production data was in line with expectations with a 0.2% increase for August.

Retail sales recorded a 0.4% increase for August following a revised 0.3% gain the previous month while underlying sale rose 0.6% for the month. There was a larger than expected increase in business inventories for the latest month which boosted optimism over third-quarter GDP growth. The jobless claims data again recorded a slightly stronger than expected figure with claims declining to 450,000 in the latest week from a revised 453,000 previously.

The data overall helped ease fears over a slide into recession for the US economy, but there was still a lack of buying support for the dollar. There was still some speculation that the Federal Reserve would decide on further quantitative easing within the next few months given underlying credit pressures.

The US capital account position will also continue to be watched closely and net long-term inflows increased to US$61.2bn from US$44.4bn the previous month. Solid net flows will help offset the potential impact of a wider current account deficit for the second quarter and should curb dollar selling to some extent.

Open an account with CMS Forex with at least $500 and you will receive a 100% deposit bonus.  Every time you trade 10 lots you will get $50 until you have received all 100% of your deposit.  There is no maximum - deposit $100,000 and you can earn up to $100,000. Already have a CMS account?  You can still get the 100% bonus on your next deposit. Click here

There will be persistent unease over the structural vulnerabilities within the Euro-zone and recession conditions in the weaker countries. Although sentiment could remain firmer in the very short-term, it is still the case that only a limited deterioration in sentiment or evidence of more serious stresses within the banking sector could trigger heavy Euro selling. The currency will more vulnerable to selling pressure if there is an underlying deterioration in global risk conditions and the Euro will find it difficult to sustain gains.

The Euro pushed higher on Monday as risk appetite remained firmer and there were no surprises from the new Basel bank-capital regulations. There was longer than expected for the new capital levels to be reached while there were concessions for the German savings banks which helped underpin Euro sentiment. The currency was able to maintain a firm tone during the week with firm institutional demand.

Risk appetite remained generally firmer during the week which helped underpin the Euro. The underlying Euro-zone vulnerabilities were also less of a focus as markets concentrated on the yen and this also helped curb selling pressure on the currency.

The German ZEW business survey index was weaker than expected with a decline to -4.3 for September from 14 the previous month even though the current situation component remained firm while industrial production was unchanged for July.

The Euro drew support from a firm demand at the latest Spanish debt auction which helped lessen immediate fears surrounding deficit financing stresses and also encouraged a modest narrowing of yield spreads. From a longer-term perspective, there was no agreement on financial penalties for missing EU budget targets and there are still important Euro vulnerabilities.

Yen:   

The Bank of Japan and Finance Ministry will inevitably remain an important focus after intervention this week. The Japanese authorities will not want to surrender the initiative and will, therefore, be ready to intervene again in the near term. The yen will still gain important protection from a lack of confidence in the global economy and especially from a fundamental lack of confidence in the other major economies with capital flows to the US and Europe weak. The Bank will, therefore, still face a tough battle to avoid fresh yen gains.

Prime Minister Kan narrowly won the Democratic Party leadership vote on Tuesday as he defeated rival candidate Ozawa. There were market expectations that Kan would be less likely to back intervention to weaken the yen and dollar weakened to fresh 15-year lows below 83 against the yen.

The Bank of Japan and Finance Ministry took advantage of increased speculative yen buying and intervened in the market during Asian trading on Wednesday with Finance Minister Noda justifying the move by stating that demand for Japanese goods had fallen. This was the first time the bank had intervened openly since 2004 and there were reports of several rounds of yen sales, totalling more than US$20bn.

The yen weakened sharply following the move with a dollar high above 85.70 against the Japanese currency. Markets will now look to see whether the intervention is sustained before deciding where to start selling the US dollar. The Finance Ministry stated that it would be prepared to act again to sell yen if necessary.

Trading ranges then remained narrower as markets considered the next potential move. The US data provided some net support to the dollar and it nudged to a high around 85.80 with some further paring of long yen positions.

There was further US criticism of China’s economic policies and this also reinforced expectations that the US will not support Japanese intervention on the yen which will tend to lessen the effectiveness of Bank of Japan action.

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

Underlying unease over growth trends is likely to increase after a batch of generally weaker than expected economic data. There will be expectations of further weakness in the housing sector and an increase in strike action which will also pose a risk to consumer spending. Any evidence of a renewed deterioration in bank-credit availability would also have an important negative impact on sentiment. Sterling will continue to gain some degree of protection from a lack of confidence in the US and Euro-zone. Overall, Sterling is unlikely to make strong headway given the underlying domestic economic risks.  

Sterling was prone to economic fears during the week, but proved resilient against the dollar and secured net gains over the week. The UK currency pushed to a high above 1.57 against the dollar while Sterling tested 7-week lows near 0.84 against the Euro.

The latest UK housing data was weak with the RICS index declining to a 15-month low of -32 for August from -8 which reinforced fears over a sharp slowdown.

The latest inflation data was stronger than expected with the headline rate steady at 3.1% for August compared with expectations of a decline to 2.9%. There was also an increase in the core rate to 2.8% from 2.6%. The data triggered some speculation that the Bank of England would need to take a tougher line on monetary policy.

There was a surprise 0.5% decline in retail sales for September compared with expectations of a further monthly increase. This was the first decline since January and, although the series is volatile, there will be some renewed doubts over consumer spending trends which will also unsettle Sterling. The latest CBI industrial trends survey was also weaker than expected with a decline to -17 from -14.

The net impression will be that the underlying economy has slowed slightly which will tend to curb Sterling sentiment. Bank of England governor King stated that the banking sector was still fragile and not in good shape.

Swiss franc:

The more cautious than expected National Bank outlook will undermine the franc in the short-term, especially following the warnings over growth. The Swiss currency will continue to gain important support from a lack of confidence in the Euro-zone financial sector. Volatility is likely to remain an important near-term feature as markets will also be uncertain over the central bank’s policies.

Franc volatility remained higher during the week and, after securing renewed gains, the franc was subjected to considerable selling pressure later in the week.

The National Bank held interest rates at 0.25% following the quarterly meeting which was broadly in line with expectations even though there had been some speculation over a rate increase. The bank stated that growth had slowed markedly and the underlying tone was significantly more pessimistic than expected.

The bank also lowered its inflation forecasts which dampened any expectations of a near-term monetary tightening. There was a decline in the Swiss ZEW business confidence index which may raise some doubts over the economy.

The bank tone triggered sharp selling pressure on the Swiss currency as the Euro rallied to  a high near 1.34. The dollar also gained ground with an advance to the 1.0160 area with a reduction in defensive demand for the franc.

DO YOU OWN THE RIGHT STOCKS?

Analyze Your Stocks FREE! – Click Here

The Australian dollar proved resilient during the week and advanced to a high above 0.94 against the US dollar.

There was further optimism surrounding regional growth prospects following the regional economic data and this continued to provide some underlying support to the Australian currency as commodity prices remained firm. Risk appetite was also generally firmer which helped underpin the currency.

The domestic data was weaker than expected with a decline in consumer confidence, although the impact was limited, especially as. there was an improvement in the NAB business confidence index

Although it can maintain a firm tone initially, the underlying global and domestic risk profile, will make it difficult for the Australian dollar to extend gains.

Canadian dollar:

The Canadian dollar maintained a firmer tone during the week and strengthened to a high just beyond 1.0250 against the US dollar.

The US currency was generally vulnerable during the week while there was also notable demand for commodity currencies as investors looked to take a more optimistic tone towards the international economy. The domestic influences remained of secondary importance for currency direction.

The net risks suggest that selling pressure on the Canadian dollar should be contained, but it will be difficult to extend gains given the underlying international risk profile.

Indian rupee:

The rupee maintained a firmer tone during the week and strengthened to a three-month high near 46.0 against the dollar. The Reserve Bank of India increased interest rates slightly more aggressively than expected which helped provide currency support.

Risk appetite was generally firm and there was further optimism over capital-account trends. There were, however, some concerns following another weaker than expected trade deficit figure.

The rupee should be able to prove broadly resilient given longer-term capital inflows even if it proves difficult to extend gains. 

Our "Value Packed" online trading seminar will show you how you can.

Click Here To Find Out More

The Hong Kong dollar found support close to 7.77 against the US dollar during the week and had a slightly firmer net tone, but it did hit resistance close to 7.7650.

A firmer Chinese yuan and generally firm risk appetite provided support for the Hong Kong dollar.

The Hong Kong dollar should be able to resist substantial losses even if risk appetite deteriorates, especially with the US Fed maintaining a highly-expansionary policy.

Chinese yuan:

The yuan had a significantly firmer week against the US dollar, maintaining the change of tone seen during September and it strengthened to highs near 6.73. The US currency remained generally fragile while the central bank was slightly more tolerant of yuan gains even when there were sharp yen losses.

The sharp rise in imports did not appear to have a significant impact on yuan policies. The authorities also denied that increased US pressure for a stronger yuan would have any policy impact. US Treasury Secretary Geithner was more forceful in calling for yuan gains to be accelerated.

The central bank may remain more tolerant of a measured advance for the Chinese yuan, especially if the US currency remains more fragile within global markets.

Open an account with CMS Forex with at least $500 and you will receive a 100% deposit bonus.  Every time you trade 10 lots you will get $50 until you have received all 100% of your deposit.  There is no maximum - deposit $100,000 and you can earn up to $100,000. Already have a CMS account?  You can still get the 100% bonus on your next deposit. Click here