Weekly Forex Currency Review 16-09-2011

The Euro-zone will inevitably be extremely important in the short-term. There will be additional liquidity support for the European banks which will lessen the risk of European contagion, although there will also be continuing speculation that there will be an imminent Greek default with European leaders looking to contain the contagion impact through increased support for the banking sector.  

Key events for the forthcoming week

Dollar:

The US economic trends have tended to be overshadowed by the Euro-zone stresses, but there will be a greater focus over the following week with the latest Federal Reserve meeting. There will be expectations that the Fed will look for more technical support for the economy in the form of a shifting bond maturities rather than increasing outright bond purchases. There will be further doubts surrounding the economy, especially with a continuation of weak manufacturing surveys and budget fears will increase again. The central bank operations will alleviate dollar shortages which will ease technical buying support for the currency, although there will still be defensive support on global economic fears.

The dollar was unable to hold its best levels during the week as measures to tackle European banking-sector stresses undermined defensive support with the Fed supplying increased dollar liquidity. US Treasury market continued to gain defensive support during the week. At one stage, benchmark 10-year yields fell to a record below the 1.90% level. From a longer-term perspective, there was further speculation over US reform of corporate taxes which could encourage a medium-term flow of funds back to the US and support the dollar.

The US retail sales data was slightly weaker than expected with no change for August while there was an underlying 0.1% increase for the month. The immediate data impact was limited with markets still focussed firmly on the Euro area.  There were further expectations surrounding a relaxation of ECB monetary policy and yield spreads over the dollar narrowed to eight-month lows.

Subsequent US economic data offered no support to the immediate growth prospects. The New York manufacturing PMI index fell again to -8.8 for September from -7.7 previously while the Philadelphia Fed index also remained well below zero at -17.5 for the month. In addition, there was an increase in jobless claims to 428,000 in the latest week from 417,000 previously.  There will be additional pressure on the Federal Reserve to take additional steps at the FOMC policy meeting next week.

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 outlook remains extremely precarious as sovereign-debt issues continue to intensify. The Greek economy remains in freefall and there remains an extremely high risk of debt default and Euro exit, potentially very quickly. With growth conditions deteriorating, there will be fears that debt profiles in Italy and Spain will also continue to deteriorate, exposing them to a further contagion risk. There will be further fears over the banking sector and political divisions surrounding key issues such as Eurobonds will continue.  The Euro will gain relief at times, but will find it very difficult to gain sustained support, especially as sovereign buying from Asia is liable to be lower.   

The Euro recovered from its worst levels near 1.35 against the dollar as European officials looked to ease strains within the region. The Greek announcement that it would introduce fresh austerity measures also lessened immediate fears that the government would abandon the austerity programme and look to default instead. The Italian auction, however, was weaker than expected with 5-year yields rising to the highest level since the Euro’s inception in 1999 at above 5.6%, reinforcing fears the Italian debt profile would quickly move out of control.

The German and French governments pledged their support for Greece in a conference call, although there were no fresh measures announced. There were also setbacks surrounding the EFSF vote as the Austrian parliament blocked any fast-track vote to expand the European support fund and there were further political fissures within Germany.  

There were further fears surrounding the Euro-zone financial sector as there were credit-rating downgrades for two French banks while two banks also accessed the emergency ECB dollar funding facility.  There was a further increase in dollar Libor rates as tensions remained high.

The ECB and Federal Reserve, along with other major central banks, announced a new three-month dollar repo facility.  The ECB will, therefore, be in a position to provide unlimited dollar liquidity to European banks with funds secured from the Federal Reserve. The moved eased fears over a dollar liquidity crisis within the European banking sector. There was an improvement in risk appetite as Euro-zone fears eased to some extent. The facility will also curb dollar demand in the open market which will tend to lessen US currency buying.

There was also speculation that the ECOFIN meetings on Friday would look to leverage the EFSF and give the ECB more buying power to purchase Euro-zone bonds. There was still a high degree of unease over the Euro-zone outlook with strong speculation that Greece would still default. German Chancellor Merkel also opposed the use of Eurobonds in very strong terms.

Yen:   

A lack of confidence in the global economy will continue to provide support for the yen with a reluctance to engage in aggressive carry trades.  The yen’s global position has also been shifted very importantly by the Swiss national Bank decision to block currency gains and there will be the potential for important defensive inflows into the yen. There will also be the potential for a repatriation on Euro-zone bonds. The dollar will also find it very difficult to secure increased yield support, but there will be backing on valuation grounds. Fears over renewed Japanese intervention will also tend to deter aggressive yen buying.  

The decline in US Treasury yields had an important impact in curbing support for the dollar.  The US currency initially found support in the 76.60 area against the yen on and briefly spiked to a high around 77.20 as there was speculation over the Bank of Japan checking rates. There was also a surge in risk appetite following the announcement of extra dollar liquidity which curbed defensive yen demand.

The US currency was unable to sustain the advance and weakened back to the 76.70 area in Asia on Friday as underlying yen selling pressure was still limited.

There was still a fundamental lack of confidence in the Euro-zone situation which maintained some defensive yen demand. The Swiss National Bank’s reiteration of its determination to prevent fresh franc appreciation also reinforced the market perception as the yen being the only viable safe-haven currency.  

Do you know the two most-overlooked property shares? If you did, you’d want to keep them a secret. 2 companies survived the crash, leaving them grossly under-valued, in spite of their track record and skilled management! Find out how these two shares will supercharge your portfolio today.  Click Here.

Confidence in the economic outlook will remain extremely fragile in the short-term with growth liable to deteriorate further, especially with Euro-zone vulnerability dampening exports.  There will be further speculation over additional quantitative easing and there will also be speculation that there will be a shift in government policies to slow the pace of fiscal adjustment.  Sterling should still be able to gain some degree of protection from its position outside the Euro-zone with some flow of funds into bonds, although this trend could reverse very quickly.  Sterling is unlikely to gain strong support given the fundamentals.

Sterling was weaker against the dollar during the week, although it did recover from eight-month lows near 1.57 while the Euro recovered to above 0.87.
 
The latest consumer inflation data was in line with market expectations as the headline rate edged higher to 4.5% from 4.4% as utility prices continued to increase. Sterling failed to gain any significant support from the data as there is no prospect of the Bank of England tightening monetary policy. The trade data remained disappointing with the deficit unchanged at GBP8.9bn for July.

MPC member Posen called for additional policy action in the form of quantitative easing, although he called for international action and not just measures in the UK.

The headline UK unemployment claimant count was slightly better than expected with an increase of 20,300 for August after a revised 33,700 increase the previous month. In contrast, the 3-month unemployment figures were weaker than expected as government employment fell sharply. There was a 0.2% decline in retail sales for August compared with a 0.2% gain previously with the underlying trend flat.

Bank of England MPC member Weale stated that the risks of another recession had increased while fellow member Bean commented that inflation was set to decline in 2012.  There was further speculation that the Bank of England would eventually move to sanction additional quantitative easing.   

Swiss franc:

The National Bank decision to set a floor for the Euro against the franc will continue to be an extremely important factor in the short-term. The central bank will have to defend the currency floor in the short-term as any short-term reversal would result in a huge loss of credibility and losses.  There will also be a reluctance to take on the fixed level in the very short-term. There will still be the potential for a flow of funds into Swiss banks given fears over Euro-zone instability and the currency policy could still come under heavy medium-term attack. For now, the franc is likely to maintain a weaker tone.  

The Euro continued to find support above 1.20 against the franc while the dollar was blocked above the 0.89 level. In its quarterly policy statement, the Swiss National Bank stated that it would maintain the repo rate below 0.25% and effectively target the a level close to zero. It also reaffirmed the minimum Euro level of 1.20 against the Swiss currency.

All necessary measures would be taken to defend this level. The strong comments deterred any potential attack on the bank’s policies, especially with the possibility that further action would be taken if required. There was also some easing of risk aversion following the move to expand dollar liquidity which curbed defensive franc demand. The Euro strengthened to the 1.2080.

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

The Australian dollar was subjected to heavy selling pressure and dipped to test support below 1.02 against the dollar before staging a recovery back towards 1.04. There was a sharp deterioration in risk appetite and the currency was also undermined by a weakening trend for Asian currencies as a whole as growth fears increased.

Domestically, there was a weaker than expected reading for housing starts which reinforced fears that the economy was heading for a sharp slowdown and there was renewed speculation that the Reserve Bank would have to loosen policy within the next few months.

Australian dollar volatility is likely to remain higher in the short-term and it will be difficult o secure much of a recovery given the international and domestic risk profile.

Canadian dollar:

The Canadian dollar found support weaker than parity against the US dollar and strengthened back to the 0.9830 area as the US currency lost momentum and there was a recovery in risk appetite.

There was little in the way of fresh domestic incentives, although there were concerns that persistent weakness within the US manufacturing sector would create additional stresses within the Canadian manufacturing sector.

The Canadian dollar is unlikely to advance significantly given the international risk profile, especially as growth fears will tend to undermine commodity prices.

Indian rupee:

The rupee was subjected to renewed selling pressure during the week and dipped to a two-year low close to 48 against the dollar before finding some degree of support.
Underlying risk appetite remained extremely fragile which undermine demand for the currency and the local stock market was generally on the defensive.

The repo rate was increased to 8.25% at the latest policy meeting and the Reserve Bank was reluctant to signal that the tightening process had come to an end.

The rupee will continue to be hampered by caution over risk. Heavy losses from current levels should be avoided unless credit conditions deteriorate severely.

Click here for you FREE Report.

The Hong Kong dollar tested support levels beyond 7.80 against the dollar in the first half of the week as underlying risk aversion increased again in global markets and there were fears surrounding the local economy.

The currency did, however, recover strongly and strengthened through the 7.79 area. There was renewed speculation that the currency peg could be broken in the medium term, especially after a prominent hedge fund stated that it was buying Hong Kong dollar calls in anticipation of a revaluation.

The Hong Kong dollar should gain further near-term protection from speculation over a medium-term peg shift to revalue the currency.

Chinese yuan:

The Chinese yuan was confined to relatively narrow ranges during the week, although there was support on dips towards 6.40 against the US currency. The central bank also resisted any significant depreciation even when the Euro was subjected to selling pressure and the bank was still looking for gradual underlying appreciation

There was some speculation that China would buy Euro-zone debt, although the underlying impact was limited as markets waited for further evidence on the domestic economic trends.

The PBOC is likely to maintain its policy of gradual yuan appreciation in the short-term, especially as it will be increasingly reluctant to increase interest rates further.