Weekly Forex Currency Review 15-04-2011

Underlying confidence in the dollar is likely to remain very fragile with further expectations of medium-term reserve diversification away from the US currency, although the rate of diversification should ease. On valuation terms, the dollar is also significantly under-valued against European currencies and this factor should help to offer protection, especially given the risk of complacency over the global growth outlook.

 Key events for the forthcoming week

 Market analysis

Dollar: 

The US economy will maintain a solid tone in the near term, but there will be unease that high energy prices will trigger a fresh slowdown. Monetary policy will remain a key short-term focus, especially with continuing divisions within the Federal Reserve.  The overall evidence suggests that the Fed will resist pressure for any tightening over the next few months and interest rates will remain extremely low which will curb yield support. Confidence in the medium-term fundamentals will also remain weak even if there is a serious attempt at curbing the budget deficit.  The dollar will gain support from a more cautious attitude towards the global economy, especially if there is a reduction in capital flows into emerging markets.

The Euro retreated to lows below 1.4380 against the dollar as the currency was unsettled by a deterioration in risk appetite and an unwinding of carry trades. The dollar was unable to sustain the advance and the Euro then staged a powerful rebound and pushed to a fresh 15-month high above 1.4520 during the US session. The dollar was again unsettled by expectations of central bank reserve diversification.

The US economic data did not provide support for the dollar with jobless claims rising to 412,000 in the latest reporting week from a revised 385,000 previously. The headline increase in producer prices was also lower than expected at 0.3% for March.

The headline US retail sales data was slightly weaker than expected at 0.4% for the latest month, but there was still a solid 0.8% increase in core sales which will offer some reassurance over spending trends. The Beige Book reported that the economy was expanding moderately and the general tone was broadly optimistic, although there was some uncertainty over the global outlook.

Comments from Federal Reserve regional president Bullard suggested that he was not optimistic over convincing the FOMC that quantitative easing should be ended early and most other FOMC members were broadly dovish in their tone.

Regional Federal Reserve President Plosser stated that the US would need to reverse monetary policy in the not too distant future, but markets are still expecting that core FOMC members will maintain the commitment to very low interest rates. The 2-year yield advantage on German bunds over US Treasuries widened to a 28-month high above 115 basis points which severely limited the scope for a dollar advance.

We allow ECN/STP and Fixed Spread/STP accounts with several trading platforms:

MetaTrader 4, Web Trader (Web browser based platform), and  Mobile Trader (for Smartphones) including an iPhone application.
Click here for more information

The ECB remains determined to curb inflation and will look to raise interest rates further if necessary. The German economy should continue to perform strongly in the near term, but there will be important weaknesses elsewhere as the peripheral economies remain in recession. There will be further speculation over contagion risk and the fact that debt restructuring is likely to be unavoidable in the medium term which will also undermine the banking sector. In this context, Euro confidence is still liable to be extremely fragile and vulnerable to a sharp reversal.

The Euro was able to recover ground quickly when it came under selling pressure, helped by expectations that the ECB is still looking to tighten monetary policy further over the next few months. The contagion threat was contained for much of the time, especially with speculation over Chinese buying of Spanish bonds.

There was a renewed increase in fear surrounding the Euro-zone peripheral economies during Thursday, triggered in part by fresh speculation over a Greek debt rescheduling following comments from the German Finance Ministry. Markets remain very sensitive to the debt issue, especially as any restructuring would increase the bad-debt burden within European banks. There will also be further unease over the risk of a Greek default which would seriously compromise Euro stability.

There will also be further unease over the banking sector with a report that non-performing loans could be at least EUR1.3trn. The pressure to raise capital and cut loans will certainly have a negative impact on Euro-zone lending potential.

Penny shares aren’t for the faint-hearted. But the potential gains can be massive...

In this essential report, Tom Bulford reveals his 10-step guide to successful penny share investing.

Claim your FREE copy here

From a medium-term perspective, there will be a continuing lack of confidence in the Japanese fundamentals as the debt burden continues to increase and the government is forced to maintain a highly-expansionary fiscal policy. The Bank of Japan will also maintain a very aggressive monetary policy to help support the economy. The yen will gain support when risk appetite deteriorates and exporter selling will also increase when the dollar rallies. G7 will look to prevent any fresh surge in the Japanese currency.

The yen strengthened sharply in Asian trading on Tuesday as risk conditions deteriorated sharply. The Japanese central bank warned over the economic outlook and the nuclear crisis at the Fukushima complex was upgraded to level 7 from level 5, the same as the Chernobyl disaster in 1986. Japanese equity markets fell sharply and there was also a reversal in commodity prices which triggered profit taking on short yen positions and also discouraged carry trade activity.

The dollar did find support close to the 83.00 area and attempted to rally, but the yen proved more resilient as underlying risk appetite remained fragile. There was also a decline in energy and commodity prices which maintained pressure for a reversal in recent carry trades.

The Japanese Cabinet office downgraded the economic outlook for the first time in six months, maintaining the increase in fears surrounding the economy. The budget outlook will remain an important focus with further market expectations that funding pressures will intensify.

Finance Minister Noda stated that he had asked G7 members to act in the currency markets when needed. There will be further speculation of action to prevent a renewed yen surge and comments from international officials will be watched closely

Sterling:

Confidence in the growth outlook will remain weak in the short-term with continuing fears that downward pressure on consumer spending will undermine the economy as a whole.  The lower than expected inflation rate will also ease immediate pressure on the Bank of England to raise interest rates, although inflation will still be a very important market focus. Overall, interest rates are likely to remain negative in real terms which will undermine support for Sterling. The UK currency will be more vulnerable when risk appetite deteriorates, but continuing vulnerability in other major currencies will remain the best form of protection.

The latest UK inflation data was significantly weaker than expected with a decline in the headline consumer inflation rate to 4.0% for March from 4.4% previously, in contrast to expectations for an unchanged rate. There was also a decline in the RPI inflation rate to 5.3% from 5.5%.

The decline in inflation triggered a further re-assessment of Bank of England policy with reduced expectations that the central bank would increase interest rates at the May MPC meeting, especially given the bank’s continued unease over the growth outlook. There was a test of support near 1.62 against the dollar an the UK currency also weakened to near 12-month lows beyond 0.89 against the Euro.

The latest UK labour-market data was mixed as a decline in the unemployment rate to 7.8% from 8.0% was offset by an unexpected increase in the claimant count. This increase was probably related to technical factors and the report over all did not provide much in the way of fresh evidence.

There was a small recovery in consumer confidence according to the latest Nationwide data. the latest RICS house-price index improved slightly to -23% for March from -26% previously. There was a sharp decline in the BRC retail sales index with a like-for-like sales decline of 3.5% for March, the weakest reading since 2005.

The UK currency will continue to gain important protection from a lack of confidence in the other major currencies, especially while the dollar remains on the defensive and the Euro will also find it difficult to advance further.

DO YOU OWN THE RIGHT STOCKS?

Analyze Your Stocks FREE! – Click Here

Domestically, there will be pressure on the National Bank to tighten monetary policy to curb inflation. The bank will be extremely sensitive to competitiveness concerns as well and will find it very difficult to respond when the currency is so strong. The Swiss currency will remain the ultimate safe-haven, especially with all major alternatives tarnished and this will trigger underlying flows into the Swiss currency.  The franc’s movements will tend to remain correlated strongly with trends in risk appetite and sustained weakness looks unlikely for now.

The Euro was unable to advance further against the franc and was subjected to renewed selling pressure during the week. The dollar remained under pressure and after failing to break back above 0.90, it dipped sharply to test fresh record lows just below 0.89 as volatility spiked higher again.

Risk considerations still tended to dominate and there was further support from a generally cautious tone and from renewed fears over Euro-zone structural debt. An underlying lack of confidence in all fiat currencies also maintained global demand for the Swiss currency.

Domestically, the latest ZEW business confidence index improved to an 8-month high which improved sentiment towards the economy.

Australian dollar:

The Australian dollar retreated sharply at times during the week, but continued to encounter strong-buying support on dips and there was a further attack on resistance above the 1.05 level against the US currency. The currency came under pressure when global stock-markets retreated and fears surrounding Japan increased as international market conditions remained under close scrutiny.

The domestic data recording a small deterioration in business confidence did not have a major impact as trends in risk appetite and commodity prices tended to dominate.

Even though the currency will stay strong initially, reservations over domestic and global conditions will leave the Australian dollar vulnerable to a sharp correction.

Canadian dollar:

The Canadian dollar hit resistance beyond 0.9550 against the US dollar and had a generally softer tone, but losses were still limited as confidence in the US currency remained fragile with support beyond 0.9650.

The Bank of Canada left interest rates on hold at 1.00% following the latest council meeting. The bank expressed some unease over the inflation outlook, but was also concerned over the headwinds posed by a strong currency and it suggested that there would be caution over raising interest rates

Trends in risk appetite remained important and the Canadian currency came under pressure when there was a decline in oil and wider commodity prices.

The Canadian dollar will continue to draw support from the high level of commodity prices, but valuation issues will make it vulnerable to a more significant correction.

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

Click Here To Find Out More

The rupee was unable to strengthen through the 44 level against the US dollar and had a generally weaker tone with a retreat to the 7.7750 area. There was some covering of short dollar positions as the pace of importer buying increased.

Underlying risk appetite was fragile and there was also unease over the inflation outlook with fears that the central bank would have to respond with a further increase in interest rates. The stock market did decline, but the evidence suggested that overseas holdings were resilient which curbed rupee selling.

The domestic and international risk profile will make it difficult for the currency to advance strongly, but net capital flows should limit selling pressure.

Hong Kong dollar:

The Hong Kong dollar maintained a firm tone during the week, but it did hit resistance stronger than 7.7750 against the US dollar and settled close to this level.

There was some covering of short US dollar positions during the week and the local currency was also held back by a generally cautious attitude towards risk as global stock-markets remained fragile and there was further unease over the impact of the Japanese earthquake. There was underlying support from IPO-related capital inflows.

The Hong Kong dollar moves will remain correlated initially with risk appetite. Longer-term revaluation speculation should curb selling pressure.

Chinese yuan:

The yuan has maintained a strong tone during the past week and the central bank has continued to guide the currency stronger with a succession of higher fixes and it advanced to 6.53 against the dollar on Friday.

The central bank stated that there were benefits from a small and steady rise in the yuan, reinforcing market expectations that further gradual appreciation is realistic.

The GDP and inflation data were stronger than expected with a CPI reading of 5.4% for March which will maintain pressure for a further gradual tightening of monetary policy.

The evidence continues to suggest that the central bank will favour gradual yuan appreciation to curb inflation with a faster pace of reform still ressited.

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