Weekly Forex Currency Review 23-08-2013

Federal Reserve policies will continue to have a very important impact in the short-term with the crucial meeting due in Mid September and with continuing expectations that there will be a tapering of bond purchases. There will be a direct influence and also important implications for emerging markets. Volatility is liable to increase sharply and there should be a solid underlying tone for the US currency.  

Key events for the forthcoming week

Market analysis

Dollar:

Markets overall are continuing to expect a Federal Reserve tapering of bond purchases in September, but a lacklustre set of releases over the next two weeks would increase speculation of over a limited cut in purchases which would undermine yield support and the dollar. For now, yield support will continue to provide support and the dollar will also gain support from underlying stresses in emerging markets. In this context, any relief for emerging currencies would tend to sap dollar strengthen but the overall tone is likely to be firm.

The dollar was able to make headway on a trade-weighted index during the week, but struggled to make any significant impression on major European currencies as the Euro maintained a solid underlying tone.
 
Emerging-market currencies remained under pressure with the Indian and rupee dipping sharply to fresh record lows while the Turkish lira and Indonesian rupiah both falling sharply again as markets fretted over the impact of higher US bond yields with capital outflows from a wide range of emerging markets.

The US economic data was stronger than expected with existing home sales rising to an annual rate of 5.39mn for July from a revised 5.06mn the previous month and this was the highest reading since November 2009 which reinforced a more optimistic tone surrounding the housing sector. Overall action was limited as caution prevailed ahead of the Federal Reserve minutes.

The minutes showed that a majority of members backed Bernanke’s plans for bond tapering. There were some concerns that inflation could stay at levels which would be considered too low and there was a slightly less confident tone surrounding the growth outlook given disappointment over the first-half performance.

There was also still an underlying caution over the merits of tapering bond purchases with some members calling for caution, although others suggested it would soon be time to slow the rate of purchases. The dollar firmed immediately after the minutes, but markets found it difficult to justify strong buying despite underlying expectations that there would be at least a limited September tapering.

Jobless claims increased to 336,000 in the latest reporting week from 323,000 previously and holding close to lows seen at the end of 2007. There was also a further small improvement in the PMI manufacturing index to 53.9 from 53.7 previously.

Fed tapering expectations continued to have an important impact on markets with markets watching both data releases and comments from Fed officials. The net impact was still that the Fed would move to taper bond purchases in September. Yield trends remained important and there was a fresh push higher in US benchmark yields.

TorFX is one of the country’s leading foreign exchange companies, offering competitive currency exchange rates and providing unbeatable customer service. TorFX ensures you get the best possible exchange rate, at the right time; offering unbeatable rates which are often 3% better than banks. TorFX saves you both time and money.
Click here

Confidence in the overall Euro-zone growth outlook will remain stronger in the short-term, especially with a further net improvement in the PMI indices. They will be concerns surrounding the French outlook and there will also be wider concerns surrounding the sustainability of growth. Political tensions will continue in Italy and there will also be growing tensions surrounding Germany’s September Federal election. The ECB is unlikely to cut interest rates in the current environment, but will resist a tightening of conditions and verbal intervention is a growing possibility.

The Euro pushed to six-month highs against the dollar and maintained a firm tone, although it did retreat from its best levels
 
There was a spike higher during European trading following the Bundesbank monthly report. The German central bank stated that forward guidance is not unconditional and does not mark a fundamental change in the ECB’s monetary policy strategy. The bank also stated that the guidance did not rule out the possibility of higher interest rates if greater inflation pressure emerges. The Euro pushed higher following the reference to higher interest rates, although the overall comments were more moderate as the bank recognised that rates would need to stay low for now.

The Euro-zone PMI data was generally stronger than expected with flash manufacturing index rising to a two-year high of 51.3 from 50.3 previously.  The services-sector index also moved above the 50 level for the first time in 19 months. Although there was evidence of recovery in peripheral economies, the improvement was again led by Germany and there was some disappointment surrounding the French data which recorded renewed deterioration.

There was further speculation that another Greek bailout package would be required and there were also further concerns surrounding the Italian political situation with potential threats and risk that the government will collapse within the next few weeks.

Yen:   

The government remains determined to promote growth through aggressive macro policies and the Bank of Japan has also suggested that it will be quick to relax policy again if there is evidence of downside pressures. These factors will undermine the yen on yield grounds, but there will be pressure for the bank to take a more cautious stance, especially given vulnerability within emerging markets.  The yen will also gain some degree of support if global risk conditions deteriorate further.

The dollar continued to gain support on yield grounds during the week and there were reports of importer dollar buying, although exporter selling is also likely to increase at current levels. The US currency peaked just above 99 while the Euro moved above 132 late in the week.

There was further speculation that plans to raise the sales tax would have a damaging impact on the economy and also weaken the yen, at least in the medium term. The complications for the government and yen were illustrated by Moody’s warning that a delay in introducing the sales tax would be damaging and risk further medium-term ratings downgrades. The latest trade data was weaker than expected with an increase in the deficit to a seasonally adjusted JPY0.94trn from JPY0.66trn previously.

Bank of Japan Governor Kuroda stated that the bank would not hesitate to act if there was evidence of downside economic risks increasing. The comments maintained expectations that there would be a further expansion of monetary policy on any sign of a downturn in demand.

US 10-year yields moved higher following the FOMC minutes with a peak around 2.93% which pushed the US currency higher. There was a stronger than expected HSBC Chinese PMI index as it moved back above the 50 level which helped improve risk appetite and curbed yen demand.

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 greater economic confidence in UK growth given the favourable run of data. The Bank of England will be uneasy over the rise in bond yields and there will be further efforts to talk yields down. There is also the possibility of further quantitative easing, especially if credit conditions tighten. The UK will continue to run a current account deficit which will leave the currency more vulnerable to selling pressure if emerging-market tensions intensify. Overall, it will be difficult to make significant Sterling headway from current levels.

Sterling challenged eight-week highs around 1.57 against the dollar during the week, but was unable to break higher and was subjected to a correction as the UK currency also hit resistance close to 0.85 against the Euro.
 
The UK growth-orientated data was again stronger than expected as the CBI industrial trends survey registered a reading of zero for August from -12 the previous month, the best reading for two years, which maintained positive sentiment.  

The government borrowing data was less favourable with a smaller than expected surplus of GBP1.3bn for the latest month, the weakest July reading for three years as spending rose sharply. Spending will help support the immediate growth outlook, although there will also be unease surrounding the underlying budget outlook.

There were comments from MPC member Weale that he could imagine the circumstances where further quantitative easing could be introduced, primarily focussing on external risks. The comments had a significant impact given that Weale had dissented against forward guidance and comments from Governor Carney will be watched very closely with a speech due next week.

Swiss franc:

The franc will gain some support from tensions within emerging markets, especially as it runs a very substantial current account surplus.  The improvement in risk appetite surrounding the Euro-zone will, however, act as a drag on the currency and overall demand is liable to be lower. The National Bank will also continue to resist any pressures for franc gains.

The franc was little changed against the Euro for the week as a whole with Euro resistance above the 1.24 area while there was support blow 1.23. The dollar did find support below the 0.92 level, but struggled to make much headway.

Further evidence of improvement in the Euro-zone economic outlook curbed immediate demand for the Swiss currency. There were still important reservations surrounding emerging market currencies which helped curb further selling pressure on the currency with a reluctance to extend short positions.

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 mixed influences during the week with choppy trading as the currency managed to avoid substantial losses. There were important reservations surrounding emerging markets which undermined the currency.

There was, however, some relief surrounding the Chinese economy which helped curb selling pressure and there was   support on dips towards the 0.89 level against the US dollar. The Reserve Bank minutes were broadly in line with expectations as the bank maintained that there was potential for further rate cuts if required.

The Australian dollar will gain support if confidence in China’s growth improves, but there will be little scope for gains given wider emerging-market stresses.
 
Canadian dollar:

The Canadian dollar was unable to make any progress during the week and dipped to lows beyond 1.05 against the US dollar which was six-week low for the currency.

The Canadian data was weaker than expected with a headline 0.6% decline in retail sales while core sales declined by 0.8%. There was also a sharp decline in whole sales which maintained some unease surrounding the economic outlook.

Overall confidence in the Canadian dollar is likely to be weaker on commodity-price doubts, especially with further doubts surrounding domestic economic fundamentals.

Indian rupee:

The rupee remained under substantial pressure for much of the week as currency weakness entered a new and much more prominent phase. There was a succession of record lows which culminated in lows beyond 64.50 against the US dollar.

The currency was undermined by persistent vulnerability in emerging markets as a whole with further expectations of Fed tapering. The Reserve Bank attempted to stabilise the rupee at times, but overall sentiment remained extremely weak with a lack of confidence in the direct measures which had been introduced.

There was serious unease over the current account deficit and fears that foreign investment inflows would be weaker which would have a negative impact on growth.

Overall confidence in the Indian economy and currency is liable to remain weak with fears over structural vulnerabilities, but with some corrective recoveries at times.

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

The Hong Kong dollar hit resistance stronger than 7.7550 during the week and edged slightly weaker, although overall currency moves were limited.

There was further uncertainty surrounding emerging markets as sentiment remained very fragile, although there were no major moves in the currency.

Given wider stresses in emerging markets and uncertainties over US Federal Reserve policies, the HKMA will continue to concentrate on short-term currency stability.
.
Chinese yuan:

The Chinese yuan moved slightly lower over the week, although moves were relatively limited with a move to just beyond the 6.12 level against the US dollar.

There were further important concerns surrounding wider emerging-market trends, but the overall currency impact was relatively limited. There were further concerns surrounding the capital account with some evidence of net outflows.

The latest Chinese HSBC PMI index was stronger than expected with a move back above the 50 level which provided some degree of reassurance, although there were still underlying unease surrounding economic trends.

The yuan will gain net support on yield grounds. There will be pressure to keep the currency competitive and there will also be concerns surrounding net capital outflows.

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