Weekly Forex Currency Review 24-05-2010

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 and unease over the threat of renewed financial-sector turbulence will continue be a very important near-term market focus. The main attention will tend to be on Europe, but there will also be unease over US and Japanese outlook given their debt profiles. Risk appetite is likely to remain generally weaker in the short-term which will provide a significant degree of protection to the dollar and yen.                 

Key events for the forthcoming week

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

Download the free demo - Click Here

Underlying confidence in the Euro-zone economy and Euro will remain very weak in the short-term. There will be fears of medium-term debt defaults even with the latest support package. There will also be expectations that aggressive fiscal tightening will undermine the growth outlook and keep interest rates at lower levels. It is also the case that confidence in the key Euro institutions has been damaged. There is the potential for G7 action to stabilise markets and there is also the potential for a short squeeze given the high number of speculative short positions, but a sustained improvement in confidence will be difficult.

The Euro remained under pressure for much of the week as there were persistent fears surrounding the Euro-zone structural outlook and the risks of a break-up to the Euro area in the medium term. There was evidence of substantial capital outflows as confidence deteriorated.

There was a generally downbeat assessment of the outlook by ECB President Trichet who stated that the economic situation was the worst faced since at least 1945. In this environment, there were continuing fears over an environment of weak growth and medium-term Euro stresses.

The German ZEW index fell to 45.8 for May from 53.0 which was slightly weaker than expected as European debt fears undermined business confidence.

There was also an exodus from the Euro as the German government implemented a ban on short selling in the major German financial companies.

Speculative short Euro positions remained at record levels according to the latest data and this provided some degree of protection from further selling, especially as there were bouts of short covering and this trend intensified later in the week.

There were rumours of central bank intervention to support the Euro during the US session on Thursday and there were also rumours of an extraordinary ECB policy meeting which pushed the Euro stronger to a high above 1.26 against the dollar.

Yen:  

Trends in risk appetite will remain important and the Japanese currency will continue to gain some support if there is a sustained deterioration in confidence surrounding the global economy. In particular, increased strains in the banking sector would trigger important yen support with the potential for capital repatriation. 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 further near-term gains.

The yen continued to gain underlying support from weakening equity markets and a lack of confidence in the global economy. Risk appetite deteriorated particularly sharply in US trading on Thursday and there was also evidence of carry-trade liquidation, especially in commodity currencies.

There was renewed safe-haven demand for the yen and it strengthened rapidly to a high near the 89 level against the US dollar before a correction back to around 90 while the yen reversed some of the very strong gains on the crosses.

Japanese Finance Minister Kan was generally downbeat over the economic situation and stated that further government spending may be required to support the economy. In this environment, there will be pressure for yen gains to be resisted.

The Japanese GDP data recorded growth of 1.2% for the first quarter, but this was weaker than expected and underlying confidence is remained fragile with fears that any Japanese momentum would stall very quickly.

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 government efforts to curb government borrowing levels will tend to lessen fears over a near-term credit-rating downgrade. There will be uncertainty over interest rate trends with Bank of England unease over near-term inflation trends offset by concerns over the growth outlook and the need to support the banking sector. Overall confidence is liable to remain very fragile given the debt profile and the currency will be more vulnerable to selling pressure when there is a deterioration in global risk appetite. Overall, Sterling is liable to weaken further, although losses may be measured against the Euro given European fears. 

Sterling maintained a weaker tone during the week and dipped to a 14-month low against the US currency below 1.4250 while the UK currency was also unable to hold an advance against the Euro. The UK currency was certainly unsettled by sovereign-debt fears during the week increased risk aversion also damaging. The UK currency rallied against the dollar, but dipped to lows beyond 0.87 against the Euro.

The consumer inflation rate rose to 3.7% for April from 3.4% while the RPI rate rose sharply to 5.3%. as the inflation rate was pushed up by higher taxes and energy costs.

The Bank of England Governor was forced to write a letter to the Chancellor explaining why the inflation rate was more than 1.0% above the 2.0% target rate. In the letter, King stated that the inflation rise should be short-lived and that the bank could act to tighten or loosen policy as required, while the overall impression was that the bank would err on the dovish side over the next few months.  

The MPC minutes from the May meeting recorded a 9-0 vote for unchanged policy. There were mixed views on the economy by members with some uneasy over the inflation developments while others were focussed more on the growth risks.

The divergence of views tended to reinforce policy uncertainty and contributed to Sterling volatility. The net expectations were still that the bank would have a bias towards maintaining low interest rates.
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 the recent action suggests that the bank has taken a determined stance to act against speculative action. It remains unlikely that there will be substantial franc losses within Europe while Euro confidence remains so weak.

There was very high Swiss franc volatility during the week as the National Bank played a very important part in the markets. The dollar strengthened to fresh 12-month highs above 1.1550 during the week.

There was evidence of sustained Euro selling early in the European session on Wednesday, but the flows reversed sharply in New York with evidence of very heavy and sustained National Bank intervention. The Euro strengthened rapidly to a high close to the 1.45 level against the Swiss currency on Thursday from 1.40.

National Bank President Hildebrand stated that the Swiss currency strength jeopardised the economic recovery and that the bank would react flexibly and decisively. There were mixed comments from Bank members with Jordan stating that the franc rise was not excessive, but also that the bank was acting aggressively to counter deflationary forces.

DO YOU OWN THE RIGHT STOCKS?

Analyze Your Stocks FREE! – Click Here

The Australian dollar weakened steadily during the first half of the week. The currency was held back by weaker risk appetite and lower commodity prices.

There was further aggressive Australian dollar selling in Asia on Thursday which pushed the Australian dollar to lows near 0.8250, the weakest level since September 2009. After a brief rally, there was renewed selling pressure during the New York session with a low at 0.8100 before buying support emerged with very high volatility.

The domestic data recorded a decline in consumer confidence to the lowest level for 12 months which unsettled sentiment towards the Australian economy.

The Australian dollar moves will be influenced strongly by trends in risk appetite. Volatility is liable to be higher and the currency may look to stage at least a limited corrective recovery after very heavy losses.

Canadian dollar:

The Canadian dollar was unable to make progress during the week and weakened sharply in the middle of the week. As risk appetite deteriorated and commodity prices came under heavy selling, the Canadian dollar weakened to lows beyond the 1.07 level against the US currency.

Underlying confidence in the fundamentals and expectations of higher interest rates in June did provide some degree of protection.

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 again a key feature during the week as there were substantial moves in many global asset markets. There were substantial rupee losses to 15-week lows beyond 46.80 against the US dollar.

Risk appetite deteriorated sharply during the week as equity markets declined and confidence in emerging markets declined. There were fears over capital flows away from emerging markets with estimates that close to US$1bn in funds had been withdrawn from India during 2010.  

The rupee should be able to avoid heavy losses from current levels, but will find it difficult to make much of a near-term recovery 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 has remained under pressure during the week and weakened to beyond the 7.80 central rate within the HKMA-managed band.

The currency was unsettled by a further deterioration in risk appetite, rising US money-market rates and fears over an exodus of funds from emerging markets.

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 yuan rate remained broadly steady against the dollar, although there was a decline in the NDF market. There were further net yuan gains against the Euro.

There was increased policy uncertainty as risk appetite deteriorated and there were also expectations that the Chinese authorities would reject any change to the yuan exchange rate regime while global stresses intensified.

The US maintained pressure for the Chinese yuan to be allowed to strengthen, stating that it would strengthen Chinese control of economic policy and inflation.

A stronger US currency and global market instability will continue to lessen the potential for a near-term move to adjust the yuan exchange rate system by the Chinese authorities.