Weekly Forex Currency Review 23-09-2011

Fears over the Euro-zone and global economy is likely to remain dominant in the short-term with a particular focus on the banking sector as underlying sentiment remains extremely fragile. There will also be fears that Europe in particular will be unable to find the necessary policy responses. While risk appetite remains weak, there will be further defensive dollar support.

Key events for the forthcoming week

Dollar:

The US economy is likely to remain weak in the short-term as manufacturing stresses continue with consumer spending unlikely to secure strong gains. In this environment, the Federal Reserve will keep interest rates at extremely low levels and will consider further quantitative action. The underlying budget position also remains precarious. International trends will tend to dominate in the very short-term at least and there will be further important defensive support from a lack of confidence in global markets. There will be reduced reserve diversification away from the dollar and there will also be a flow of funds into the US currency if emerging markets continue to weaken.

The dollar secured important support during the week as confidence in the global economy deteriorated. This triggered a fresh flow of defensive flows into US Treasuries and flows into the US currency tended to accelerate as emerging markets came under heavy selling pressure. The dollar index pushed to an 8-month high as fear dominated during the middle of the week
 
Attention returned to the Federal Reserve later in the US session on Wednesday with the latest FOMC statement. In broad terms, the Fed met market expectations with the announcement of ‘operation twist’. The Fed will buy US$400bn in longer-dated securities in the period until mid 2012 through the selling of shorter-term securities.
There was no introduction of further quantitative easing at this stage with the Fed keeping all policy options open as it remained generally downbeat on the economic situation. Three FOMC members dissented from the decision.

Equity markets fell sharply following the FOMC meeting and this also triggered a sharp deterioration in risk appetite which pushed the dollar sharply higher.
The US existing home sales data was stronger than expected at 5.03mn for August. It will still be difficult for the dollar to gain any significant support on yield grounds, especially with the Fed acting to keep long-term interest rates down.

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 will remain extremely precarious in the short-term. Greece may be able to secure additional aid which would keep the economy afloat for a few weeks, but this is far from assured given that domestic opposition to austerity will increase. A default also remains inevitable in the medium term. There will be further concerns surrounding the Italian economy and the banking sector will also remain a critical focus. Measures to recapitalise the banks would provide important support for the Euro. There will, however also be strong pressure for the ECB to cut interest rates which would undermine Euro support. In this environment, the currency is unlikely to secure a significant recovery.   

The Euro was subjected to further selling pressure as fears surrounding the sovereign-debt crisis and banking sector increased. The Euro dipped to 8-month lows near 1.34 before some stabilisation.
 
There were increased political divisions within the Euro area with notable tensions in Germany and Greece. There was evidence of divisions within the Greek cabinet over economic policies while the government also floated the possibility of a referendum on Euro-zone membership in order to strengthen the government’s mandate and there were very strong expectations of an eventual default.

There was some relief as the government pledged to strengthen austerity measures through spending cuts with reductions in public-sector wage costs a key focus. There were still concerns whether the government would be able to deliver the austerity measures given internal divisions and popular discontent.

There were also further fears surrounding the European banking sector following reports that Chinese banks had withdrawn credit lines while dollar Libor rates continued to increase slowly and fears then escalated from mid week.

There were also continuing fears surrounding the banking sector as underlying stresses persisted. The IMF estimated that at least EUR200bn in fresh capital needed to be raised and there were persistent doubts surrounding the French banks in particular.  There were also rumours that Austria could face a credit-rating downgrade due to the heavy burden of credit derivatives within the banking sector.

The German ZEW business confidence index weakened to -43.3 for September from -37.6 previously, although this was slightly better than expected and there was also some cautious optimism from the ZEW institute that conditions might be stabilising.

There was a further deterioration in the Euro-zone PMI indices with the flash manufacturing index weakening to 48.4 for September from 49.0 previously while the services sector also weakened to below the 50 level for the first time in two years. There was increased speculation that the ECB would need to take emergency action to cut interest rates in an attempt to boost confidence.

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 as a safe-haven has also been boosted and this will be important in providing defensive support. There will also be the potential for further capital repatriation from Europe. There will be additional measures designed to prevent further yen gains and intervention will remain a possibility. In the short-term, the yen is likely to resist significant losses given the deterioration in risk appetite.  

There was also further defensive demand for the yen during the week, especially as Asian equity markets remained firmly on the defensive. The US currency consolidated below the 77 level with exporter selling also increasing on any move towards this level. There was no evidence of intervention during the week.

The latest Japanese trade report was weaker than expected with a larger than expected deficit as imports increased. Although this will increase optimism that the economy may be able to recover more quickly than expected, there will also be fears surrounding the export outlook and additional pressure to support competitiveness.

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.

There will be further concerns over the UK economy in the short-term with weak consumer spending compounded by a much less favourable global outlook. There will be strong pressure on the Bank of England to sanction further quantitative easing in an attempt to boost demand and real interest rates will remain very negative.  Any dip back into recession would also fuel additional debt and budget fears which would undermine the currency. Sterling will be much more vulnerable to selling pressure if there are renewed fears over the banking sector. There could still be some protection from the UK position outside the Euro-zone, but Sterling is unlikely to make much headway.

Sterling weakened to 12-month lows against the dollar during the week as the US secured wider support while Sterling was unsettled by domestic fears and renewed fears over the banking sector.
 
The IMF lowered its growth forecasts which had a negative impact on sentiment.  The 2011 estimate was cut to 1.1% and, more damagingly, the 20012, forecast was cut to 1.6% from 2.3% previously. There was also further market discussion surrounding the FT assessment that the structural budget position was weaker than expected.

The Bank of England minutes recorded a 9-0 vote for unchanged interest rates at the September MPC meeting and there was an 8-1 vote for quantitative easing to be held at GBP200bn as Posen again voted for an expansion. The bank was generally pessimistic over the economic outlook and several members did move towards voting in favour of additional quantitative easing. There were, however, important reservations over fresh action when inflation was so far above the 2.0% target.

Markets concluded that further quantitative easing was likely over the next few meetings and this pushed Sterling sharply weaker. The latest government borrowing data was weaker than expected at GBP13.2bn for August, although there were downward revisions to previous data. There was further pressure for the government to slow fiscal tightening given the deteriorating economic outlook.

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 remain determined to protect the minimum level and there will also be additional speculation that there could be a move to increase the base level. The is still the potential for an underlying shift of assets into Swiss institutions if confidence in the Euro-zone banking sector continues to intensify. Nevertheless, the franc is unlikely to advance far in the near term.
 
The Euro rallied strongly against the franc on Tuesday with a peak above the 1.2250 level. Some recovery in Euro sentiment curbed franc demand, although renewed speculation surrounding franc policies was the dominant market focus.

There were market rumours that the National Bank would announce an adjustment in its minimum level against the Euro to 1.25 from 1.20 at present. Predictably, the central bank refused to make any comment on the rumours. The franc regained some ground late in the European session, but was subjected to renewed selling pressure in Asian trading on Wednesday as rumours returned.

The domestic ZEW data recorded a further deterioration to -75.7 for September from -71.4 previously, maintaining fears over the economic outlook and there was further pressure on the National Bank to maintain its aggressive policies and prevent renewed franc appreciation. The dollar peaked at around 0.9180, the highest level since April.

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 blocked in the 1.04 area against the US currency early in the week and was then subjected to heavy selling pressure with lows below 0.97 which equalled the weakest reading seen during 2011.  International risk conditions dominated and an increase in fear, together with further sustained pressure in global equity markets, pushed the Australian currency sharply lower.

The Reserve Bank maintained both optimism over the longer-term economic outlook and concerns over inflation in the monetary policy minutes, but there was still additional speculation that there would be a cut in interest rates.

Australian dollar volatility is likely to remain higher in the short-term. The international and domestic risk profile suggests further net losses are likely.

Canadian dollar:

The Canadian dollar briefly strengthened towards 0.98 against the US dollar during the week before hitting aggressive selling pressure and weakening to lows beyond 1.0350, which was the lowest level for close to 12 months.

The Canadian dollar was undermined by a further deterioration in risk appetite and a sharp decline in equity markets with losses compounded by falling commodity prices as fears surrounding the global economy increased.  International considerations dominated with a higher than expected inflation reading not having a major impact.

The Canadian dollar is liable to remain on the defensive in the short-term, although there is scope for some initial stabilisation after recent sharp losses.

Indian rupee:

The rupee was subjected to further selling pressure during the week with particularly heavy selling on Thursday and the Indian currency dipped to 28-month lows beyond 49.50 before stabilising. The currency was undermined by a serious deterioration in risk appetite and a flow of funds back to the dollar as global confidence deteriorated.

There were reports that the central bank was checking rates, butt here was no evidence of heavy intervention to support for the rupee.

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

Click here for you FREE Report.

The Hong Kong dollar again tested support levels beyond 7.80 against the dollar during the week as international risk appetite continued to deteriorate. In a regional and global context, the currency held relatively firm, especially as there was further speculation that there would be a medium-term revaluation of the currency

The currency also gained some limited support from a sell-off in the offshore yuan market, but he risk conditions prevented any significant advance for the currency.

Even with weak risk appetite, 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 unable to make significant gains in the domestic market as global risk appetite deteriorated. There was also significant evidence of offshore selling pressure with the yuan weaker in the spot market while the option positioning was biased towards selling by the largest extent since the first quarter of 2009.

There were further concerns over the domestic economy, especially as the flash PMI manufacturing reading was below the pivotal 50 level for the third successive month.
There was a flurry of comments surrounding the merits of investment in European bonds, although domestic concerns gradually increased in importance.

There will be increased speculation that the yuan could face depreciation pressures, especially if there is evidence of further domestic deterioration.