Weekly Forex Currency Review 01-03-2013

Euro-zone vulnerability will be an important short-term focus amid expectations that the Italian election outcome will trigger fresh political and economic instability. The ECB will be under pressure to ease monetary policy, especially after a series of generally disappointing releases and reduced inflation threat. The US economy is also still set to out-perform in the short-term which will underpin the dollar.

Key events for the forthcoming week

Dollar:

There will be expectations of solid US growth in the short-term with particular optimism surrounding the manufacturing sector. There will still be some concerns over consumer spending, especially if the sequester does take effect, but the US economy is still set to out-perform over the next few months.  The Federal Reserve will maintain its short-term commitment to bond purchases, but there will be some pressure for the bank to signal an eventual tightening. In international terms, the US dollar should still be able to out-perform, especially given vulnerability in the Euro-zone.

The dollar was able to maintain a robust tone during the week with further net gains on a trade-weighted basis, but it was unable to break 1.30 against the Euro.
 
The US data was generally solid with an increase in consumer confidence to 69.6 for February from 58.4 previously. There was also an increase in new home sales while the Richmond Fed index returned to positive territory. The data reinforced expectations that the US economy would out-perform over the next few months.

The headline US durable goods data was weaker than expected with a 5.2% decline, but there was a significant core increase which provided some underlying reassurance.

The headline US GDP data was revised to 0.1% from -0.1% previously. As expected, there was an improved trade performance with the deficit at a three-year low, but there was also a lower build-up of inventories which could underpin future growth.

The other data was stronger than expected with jobless claims falling to 344,000 in the latest week from a revised 366,000 previously. There was also a stronger than expected Chicago PMI reading at 56.8 from 55.6.

Fed Chairman Bernanke stated that the benefits of quantitative easing out-weighed the costs at least for now. He remained concerned surrounding the labour-market, but was generally more optimistic surrounding the economic outlook which curbed any immediate dollar selling. There were still expectations that bond purchases would continue in the short-term, but could be tapered later in 2013.

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

There will be expectations that the German economy will continue to register firm growth. There will still be concerns surrounding the peripheral outlook as a whole with increasing pressure for austerity measures to be reversed. The Italian election has triggered fresh unease surrounding the prospects for structural reform and also increased pressure for a reversal in austerity measures. There will also be additional pressure on the ECB to relax monetary policy further to help underpin demand conditions and there will be political pressure for a weaker Euro, especially from France.

The Euro lost ground during the week as a whole and for February as enthusiasm for the currency faded on renewed political and economic concerns.

Initial exit polls from the Italian election suggested a centre-left majority was likely in the Lower House and Senate which provided immediate Euro support, but the currency was quickly subjected to fresh selling pressure on later projections which suggested that Berlusconi’s centre-right coalition could win the Senate.

The provisional results confirmed a Lower House victory for Bersani’s centre-left collation, although the margin of victory was extremely narrow at less than 0.5%. Similarly, the Senate vote was very close with Berlusconi’s centre-right party the largest party. With Grilli’s five-star movement poling over 25%, no bloc will have a Senate majority. This outcome increased fears over political deadlock and a lack of support for economic reform policies. In turn, there were fears that wider Euro-zone stresses would intensify once again as support for austerity policies continues to erode rapidly. There were market concerns that support for austerity programmes would erode rapidly and create serious friction with Germany and the EU Commission.

There were also important concerns that Italy would now be much more vulnerable in the event of a market attack against the bond market, especially as it would be extremely difficult for the country to meet conditions attached to the ECB’s OMT programme. On a wider perspective, there were concerns surrounding the wider political acceptance of austerity measures and demands for policy changes.

Compared with January, there was a significant increase in yields at the latest Italian Treasury bond auction. There was relief that yields did not increase further and there was also some reassurance over the bid/cover ratios. Initial relief was tempered by a strong suspicion that Italian banks had been the main buyers, especially after data from January confirmed that local banks had been strong buyers in domestic auctions.

The Euro-zone inflation rate was confirmed at 2.0% for January while there was a lower than expected reading of core inflation at 1.3%. The decline in inflation will maintain expectations that the ECB could shift to a more accommodative policy at next week’s council meeting.
    
Yen:

The appointment of Kuroda as the next Bank of Japan Governor will be extremely important for the medium-term yen prospects, especially given his reputation for favouring more aggressive monetary policies. There will certainly be pressure for additional monetary stimulus to combat deflation. The central bank is still likely to cautious over more controversial policies such as foreign bond buying. The yen could also gain some degree of support if confidence in the global economy deteriorates in the short-term.

Buying pressure on the yen intensified dramatically late in the US session on Monday with the dollar briefly declining to below 91 as the Euro retreated to lows below 119 from a peak above 125 just a few hours earlier and registering the sharpest one-day decline since May 2010. The yen was unable to sustain the gains as underlying yen sentiment remained weak.

As expected, the government confirmed its appointment of Asian Development Bank head Kuroda as the next Bank of Japan Governor. Iwata and Hiroshi were nominated as deputy Governors.  There will be expectations of an aggressive monetary policy to combat deflation, although there will be reduced speculation that the Bank of Japan will buy overseas bonds and the appointments were in line with expectations.

The economic data was generally yen negative with a sharp decline in capital spending for the fourth quarter. The inflation readings were in line with expectations with a national core rate of -0.2% for January, illustrating the difficulties in combating deflationary pressure.

Earn a tax free income trading, from just 20 minutes a day – no experience needed
Our powerful trading software will help you decide when to enter trades and how to maximise profits.

Register for a FREE brochure and trading guide, Click Here.

Underlying confidence in the economy will remain extremely fragile in the short-term with fears that growth will remain weak.  The loss of AAA credit rating will complicate government policies and markets will be expecting a generally defensive budget. Bank of England policies will also remain an extremely important focus and there will be strong expectations that the bank will pursue more aggressive policies to help underpin the economy. Sterling could gain some support from a fresh deterioration in Euro-zone sentiment and volatility is likely to remain high, especially if Euro-zone stresses increase.

Sterling was subjected to renewed selling pressure early in the week, butt here was amore stable tone which helped the currency resist further losses later in the week.

Just ahead of the US close on Friday, Moody’s announced that it was cutting the UK credit rating from AAA to Aa1 due to the persistently weak growth outlook and unease surrounding debt levels. There were widespread expectations that the AAA rating would be lost within the next few weeks, but Sterling was still subjected to significant selling pressure. There will also be important political stresses as it puts the Chancellor under intense pressure ahead of next month’s budget

Bank of England members remained generally cautious over the economic outlook and insisted that there was room for further quantitative easing if required to support demand.  Deputy Governor Tucker commented that it was worth considering negative interest rates as a radical measure to help support the economy. Bean stated that he did not want negative interest rates and that the idea had only been floated as an idea rather than being a serious policy proposal. There were also further comments that Sterling’s real exchange rate needed to weaken, maintaining expectations that the central bank was actively engaged in an attempt to push the currency weaker. There were expectations that monetary policy would remain extremely loose.

There was a slightly weaker than expected CBI retail survey, although the underlying impact was limited. The revised GDP estimate was unchanged from the original estimate at -0.3%, but here was a small upward revision to the annual total. The data breakdown was generally discouraging with a decline in business investment and exports, both of which will be essential for a longer-term improvement in growth.

Swiss franc:

There will be concerns surrounding the growth outlook even though there was a slightly stronger than expected reading for the latest GDP data. The National Bank will remain strongly committed to the 1.20 minimum Euro level especially as renewed Euro-zone stresses following the Italian election could quickly trigger a resumption of upward pressure on the Swiss franc. The central bank will still be prepared to engage in further measures to stem capital inflows if required.  

The franc gained support following the Italian election result, but failed to sustain the gains amid expectations that Swiss currency gains would be resisted. The Euro found support on dips towards 1.21 while there was a dollar move to highs above 0.9350.
 
The Swiss KOF index was weaker than expected with a decline to 1.03 from 1.12 the previous month which will maintain some concerns surrounding the growth outlook. National Bank Head Jordan stated that the central bank was far from exiting the minimum Euro level.

InterTrader.com provides an award-winning suite of products and tools to help you back your judgement Spread betting in the financial markets. Our aims are simple: to make the markets accessible to all, to make CFD trading and Spread betting affordable and to provide a service that you can trust. Click here

The Australian dollar was unable to regain the 1.04 level against the US currency during the week and retreated to re-test support levels below 1.02.

There was a decline in construction work and capital spending for the fourth quarter which maintained some degree of concerns surrounding the economy, although there were reduced expectations that the Reserve Bank would consider a March interest rate cut. The central bank commented that the currency was overvalued by 5-14%.

Despite a scaling back of interest-rate cut expectations may provide some support, the Australian dollar overall is likely to remain generally vulnerable to further losses.

Canadian dollar:

The US dollar secured a solid tone and pushed to 2013 highs just above the 1.03 level during the week. The Canadian dollar was hampered by a decline in oil prices.

There were also further underlying doubts surrounding the Canadian fundamentals amid fears over over-heating and a sharp correction within the housing sector.

Lower energy prices will undermine the currency. There are likely to be further concerns surrounding the fundamentals which will curb Canadian dollar support.

Indian rupee:

The rupee initially held a firm tone during the week at stronger than the 54 level against the US currency with an initial 3-week high. Markets were generally optimistic surrounding the budget.

In the event, the government remained committed to a 4.8% of GDP deficit for 2013/14 which was in line with expectations. There was disappointment that spending levels would not be reduced with the government relying on increased tax revenues. There were fears that investment flows would weaken and there were longer-term concerns surrounding the trade outlook.

With a generally testing global economic environment, the rupee is likely to be unsettled by underlying structural budget and current account deficits.

..From expert analysts at CML Markets.  Background analysis and how you can profit in these market conditions.  Download your free report now.  Click Here.

The Hong Kong dollar was again confined to narrow ranges around the 7.7550 area against the US currency. There were still longer-term concerns surrounding the potential inflation threat until there is any underlying policy shift by the US Fed.

In this context, there were important concerns surrounding the housing sector with the administration taking additional measures to cool the sector including a doubling of stamp duty.

Medium-term speculation over a peg break will continue, especially given inflation concerns with a short-term focus on measures to cool the property sector.

Chinese yuan:

The Chinese yuan was generally firm during the week with gains to the 6.22 level even though the US currency was generally firm on the crosses. There were important uncertainties surrounding monetary policy with the volatile open-market operations.

There was a weaker than expected flash PMI reading for February with the official index only marginally above the 50 level which revived some concerns surrounding the economic outlook, although seasonal factors are likely to have played an important part.

There will be uncertainties surrounding monetary policy. Overall, given persistent economic and risk of capital outflows, the yuan is unlikely to make much headway.

New ADVFN Service - FREE Reports

Get your free report on Isa's, Investment Trusts, Funds,
Sipps Travel and Cars - FREE and Easy service CLICK HERE