Weekly Forex Currency Review 17-05-2013

The Federal Reserve stance will be extremely important in the short-term. The dollar has gained support from expectations that the Fed could scale back bond purchases and any confirmation from the Fed would trigger further substantial dollar inflows. Markets will also be monitoring Euro-zone stresses very closely with a particular focus on France, Spain and Italy where political and economic stresses are building.

Key events for the forthcoming week

Dollar:

The latest US retail sales data offered some relief, but there will still be significant uncertainties surrounding the US outlook. Markets have swung towards expecting a stronger economy and a move by the Federal Reserve to taper bond purchases within the next few months. In this context, there is the risk of a reassessment if forthcoming data disappoints and Fed Chairman Bernanke maintains a dovish tone. There is still likely to be US out-performance which will provide underlying dollar support, especially with growing concerns surrounding the global outlook. Improving fundamentals will support the dollar, but with the threat of a correction after strong gains.

The dollar continued to make net gains during the week with the trade-weighted index testing 2012 highs as underlying demand for the currency remained robust and it hit 6-week highs against the Euro.
 
There was a headline 0.1% increase in retail sales for April compared with expectations of a second successive decline. Although there was an underlying 0.1% decline, this was also more robust than expected.

The US other data was mixed, but had a generally negative slant. The New York Empire PMI index unexpectedly weakened to -1.4 for May from 3.1% previously, although the employment component did remain in positive territory. There was also a 0.5% decline in industrial output, but the NAHB housing index rose to 44 from 41.

There were net long-term capital outflows from the US for the second successive month in March as US investors took a more optimistic tone towards overseas securities while there was confidence that the budget and trade deficits would continue to improve.

Housing starts fell by over 16% in the month to an annual rate of 853,000, although there was an increase in permits. There was a sharper than expected increase in jobless claims to 360,000 in the latest week from a revised 328,000 previously while the Philadelphia Fed index also returned to negative territory at -5.2 from 1.3 previously. The data undermined market confidence in the US growth outlook.

The latest inflation reading was also weaker than expected with a 0.4% headline decline while core prices rose 0.1%. The benign inflation reading, coupled with weak growth-related data initially dampened expectations that the Federal Reserve could move towards a tapering of bond purchases in the short-term.

There were, however, potentially significant comments from regional Fed President Williams who suggested that there cold be a reduction in bond purchases as early as the Summer. Williams is generally a dovish member with views close to Chairman Bernanke and this increased speculation that core Fed members are looking at the possibility of a short-term move.

Download your FREE 'Gold Volatility' Trading Report, courtesy of Tradenext. 
Click Here.

The principal feature is likely to be continuing stresses and tensions within the Euro-zone.  The underlying economic performance remains very weak with peripheral economies in severe distress. There will be pressure for policy changes which will inevitably create major tensions with Germany. The ECB will remain under pressure to provide additional support, but there is a limit to potential policy actions, especially with Bundesbank opposition to more aggressive monetary stimulus. In this environment, there is a high risk that the Euro will face another crisis of confidence during the Summer.

The Euro dipped to six-week lows below 1.2850 against the dollar, although the currency was broadly resilient on the main crosses.
 
At the Eurogroup meeting, ECB member Visco floated the possibility that negative deposit rates could be introduced which unsettled the Euro. There were further stresses surrounding European banking union with German ECB member Asmussen warning against the current proposals. Further delays and friction surrounding banking union would undermine the case for wider structural reform and make it even more difficult to secure longer-term Euro stability.

The German ZEW index was marginally higher at 36.4 for April from 36.3 previously which was weaker than expected and reinforced a sense of unease surrounding Euro-zone prospects. The Euro-zone GDP data was weaker than expected with Germany managing a first-quarter expansion of only 0.1% while there was a contraction in France. For the Euro-zone as a whole, there was a 0.2% decline, the sixth successive quarter without growth, the longest period since the Euro’s introduction.

The weak data reinforced pressure for a more aggressive monetary policy from the ECB and will inevitably trigger fresh talk surrounding negative interest rates. There will also be the threat of increased social tensions as popular discontent increases which will unsettle the Euro. In particular, there were fears surrounding the Spanish outlook as social infrastructure continued to show signs of deterioration.

Yen: 

The Bank of Japan will continue to sanction an extremely aggressive monetary policy in the short-term in pursuit of rising inflation expectations. Domestically, there is liable to be an increase in scepticism and opposition to the policies, especially if bond markets become unstable. Regional and global  trade tensions are also liable to increase given the impact of much stronger Japanese competitiveness. The yen will remain on the defensive for now, but the pace of selling is likely to moderate.  

The dollar reached a four-year high against the yen with a move above 102.50 and the Japanese currency was also vulnerable on the crosses. The US currency was able to gain support from expectations of rising US Treasury yields as benchmark yields rose to near 2.0% together with a structural shift out of defensive assets.

The latest capital account data recorded another week of net capital flows into overseas bonds which will tend to undermine the yen. The first-quarter GDP data was slightly stronger than expected with a 0.9% increase which will underpin expectations that the aggressive monetary stimulus will have a positive effect.

Fitch maintained Japan’s credit rating at A+ and it also maintained a negative outlook, although there were comments that an improved growth outlook could trigger an upgrade in the medium term.

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. 

There will be some further improvement in confidence surrounding the UK outlook with improved readings for business confidence. There will still be important reservations surrounding the spending outlook, especially with weak growth in incomes. In this environment, there will continue to be pressure for a highly-expansionary monetary policy as Carney takes office in July. The underlying fiscal and balance of payments position is also precarious.  Sterling will find it hard to make much headway given the fundamental outlook.

Sterling was generally confined to relatively narrow ranges during the week with solid support on dips to below 1.52 against the US currency.

The RICS housing index recorded a figure of +1% from -2% previously while housing demand was at the highest level since 2009.  The latest claimant count data was again stronger than expected  with a 7,300 decline in the latest month from a revised 9,900 drop the previous month. There was also a drop in the unemployment rate, but there were concerns surrounding the earnings data. The annual increased slowed to 0.4% in the three months to April from a revised 1.0% previously which will maintain concerns over a lack of consumer spending power.

The latest Bank of England inflation report upgraded GDP growth forecasts slightly for the first time in four years, although the change was limited and the growth trajectory was still very subdued with Governor King warning over the difficulties in securing a sustainable recovery while Euro-zone demand remains depressed. King was generally cautious over the possibility of negative interest rates, although he did state that it was a policy option which was open to the committee to use in the future.

Attention was also focussed on the potential impact of incoming Bank of England Governor Carney with pressure for an even more aggressive monetary stimulus.

Swiss franc:

There will be unease surrounding Swiss growth prospects as it struggled to offset the impact of weak Euro-zone demand. There will be uncertainties surrounding capital inflows into the Swiss franc.  There has been marked weakness in former safe-havens such as the yen and gold which could have a negative impact on the franc, but his could be reversed quickly if Euro-zone tensions increase again with Swiss currency volatility liable to remain higher.
 
The franc weakened sharply to lows beyond 1.25 against the Euro before finding some respite. There was a correction from 2013 highs above 0.97 against the dollar.

There was evidence of a structural shift away from defensive assets and this had a significant impact in undermining demand for the Swiss franc. There was also underlying structural demand for the US dollar. Higher volatility is liable to remain a key short-term feature with some speculation that the National Bank would take advantage of a weaker Swiss currency to raise the minimum level.  

The Swiss ZEW index deteriorated to 2.2 from 20 previously which maintained concerns surrounding the Swiss outlook.

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 subjected to heavy selling pressure during the week and dipped to below parity against the US currency for the first time since June 2012 with lows below 0.9750. There was further speculation over hedge-fund selling of the currency and markets remained very uneasy surrounding the outlook for commodity prices, especially with uncertainties surrounding the Chinese economy.  

There were no major data releases during the week with the latest budget release not having a major market impact. There were expectations that the Reserve Bank would cut interest rates further.

The Australian dollar will remain vulnerable on domestic and international growth concerns, but there will be scope for a short-term recovery from over-sold conditions.

Canadian dollar:

The US dollar was able to find support just above parity against the Canadian dollar and rallied to the 1.02 area. The Canadian currency was broadly resilient against other major currencies despite the impact of lower oil prices.

There were persistent doubts surrounding the housing-sector outlook and the manufacturing sales data was weaker than expected.

The Canadian currency will be vulnerable on falling commodity prices and domestic doubts. Positioning should limit the scope for near-term losses.

Indian rupee:

The rupee was unable to make any impression on the dollar during the week and dipped to test two-month lows beyond 55, primarily reflecting a stronger global dollar trend. There was a lower than expected reading for wholesale prices which increased speculation that there could be another interest rate cut in June.

Domestic equity markets were stronger which maintained optimism over investment flows, but this optimism was countered by concerns surrounding the trade account as the deficit hit an 18-month high.

Although the rupee will continue to gain some underlying support on expectations of capital inflows, gains are likely to be limited, especially with competitive pressures.

..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 trapped within narrow ranges during the week with a slightly weak tone and drift towards 7.7635 with a firmer US dollar tone providing some degree of relief.

The slightly weaker yuan trend helped ease strengthening pressure on the Hong Kong dollar slightly. There were still very important concerns surrounding the very tight property sector and underlying inflation risks.

Given concerns surrounding the threat of imported inflation and an over-heated property sector, there will be speculation over an eventual peg break.

Chinese yuan:

The Chinese yuan initially maintained a solid tone with support beyond 6.14 against the US currency.  The PBOC appeared content to let the currency gain ground with a slightly firmer fix on Friday despite a firmer US dollar.

There were further concerns surrounding competitiveness during the week as the yen remained under pressure. There will certainly be grater resistance to currency gains given the export outlook. There were also concerns surrounding the underlying inflation threat which is serving to complicate monetary policy and there will be further attempts to curb speculative capital inflows.

Competitiveness issues will be increasingly important and the PBOC will be reluctant to let the yuan strengthen strongly, especially with growth fears liable to increase

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