Weekly Forex Currency Review 25-01-2013

There has continued to be an important easing of immediate fears surrounding the Euro-zone as financial risks have eased, at least for now.  This has triggered an exodus of defensive capital flows from currencies such as Sterling and the Swiss franc. Confidence may remain stronger in the very short term, but there are still very important policy risks surrounding the Euro-zone.

Key events for the forthcoming week

Dollar:

The US labour-market data has remained generally encouraging and there should be solid growth in the short term, although sharp downward revisions to some regional indices will cause concern.  The Federal Reserve will maintain a very loose monetary policy in the short term with bond purchases continuing. The Fed will, however, be under pressure to moderate quantitative easing slightly or take a firmer verbal stance if growth conditions improve further. There are still important battles surrounding automatic spending cuts with congressional tensions liable to increase again.  The dollar will gain some defensive support if fears surrounding the Asian growth outlook increase again.

The dollar was generally firm on a trade-weighted basis, but the US currency was weaker against the Euro which tended to over-shadow the impact to some extent.

There was further discussion of the debt ceiling with House Republicans holding a vote on whether to suspend the debt ceiling issue until the end of May. Approval lessened the immediate default threat which had some impact on underpinning risk appetite. There was a downward revision to the Chicago PMI index, matching a sharp downward revision to the Philadelphia Fed index which caused some unease surrounding the US outlook.

The latest US jobless claims registered another decline to 330,000 in the latest week from 335,000 the previous week. The decline to a fresh 5-year low may have been influenced to some extent by seasonal considerations, but here will still be optimism over growth trends. The Markit PMI manufacturing index also increased to 56.1 from 54.0. The BIS stated that quantitative easing would risk being increasingly ineffective and any comments from Fed officials will be watched closely.

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

Structural fears surrounding the Euro-zone will remain lower in the short term. There has been a continuing decline in peripheral bond yields with a series of strong bond auctions.  There will be some uncertainties over the impact of an early repayment of LTRO funds. The growth outlook in Germany has certainly improved, but conditions within the Euro-zone as a whole are still very difficult with peripheral recession continuing while the French economy is continuing to deteriorate. Overall confidence in the Euro could still falter quickly given the underlying growth vulnerability.

The Euro pushed higher during the week with further support from gains on the crosses and it broke above the 1.34 level in early Europe on Friday.
 
The Euro-zone data release offered important support with the German ZEW index rising sharply to 31.5 from 6.9 previously and this was the highest reading since May 2010. There was also a decline in yields for the latest Spanish bill auction and the government secured demand in excess of EUR20bn for the latest syndicated bond sale. There was, however, a further decline in Spanish house prices for the fourth quarter, maintaining fears over further losses in the banking sector.

The Euro-zone data as a whole recorded an improvement in manufacturing and service-sector conditions according to the flash PMI data. There was a significant improvement in the German economy notably for services and there is likely to have been an improvement in peripheral economies, although still below the expansion threshold. In contrast, there was a further deterioration in the French readings, increasing fears surrounding the French outlook and competitiveness.

There was also a rise in Spanish unemployment to 26% for the fourth quarter from 25% which will maintain unease over the Spanish outlook and potential social consequences. The Bank of Spain stated that there was a fourth-quarter GDP decline on 0.6%, confirming an annual decline of around 1.2%.

There are likely to be some LTRO repayments over the next few weeks as banks look to repay funds that can now be accessed more cheaply in markets. There could be some positive impact on the Euro, although there will also be concerns that banks in peripheral economies will not be able to repay funds.  

Yen:   

The Bank of Japan has introduced a 2% inflation target and will maintain an aggressive monetary easing. The open-ended commitment to bond purchases is not due to come into effect until 2014 and there will be further concerns whether the central bank will actually deliver on the more aggressive policies. The appointment of new Bank of Japan governor will be watched very closely over the next few weeks.  The underlying economic fundamentals remain weak with a substantial trade deficit undermining the yen directly and triggering demands for a more competitive currency as political pressures continue.

The Bank of Japan confirmed another raft of measures to combat deflation. The bank will switch to an open-ended commitment to buying assets next year and will also increase the inflation target to 2% with a commitment to reaching the inflation goal at the earliest possible time. The dollar found support just above the 88 level and rallied steadily as there was solid yen selling on rallies with vulnerability on the crosses.

There were further expectations that there would be aggressive capital flows out of Japan, especially into emerging markets through Toshin funds. The overall evidence, however, was still mixed with no evidence of substantial capital outflows at this stage.

There was a further Japanese trade deficit for December which took the 2012 deficit to a record JPY6.9trn as exports remained under pressure.  The data tended to maintain negative underlying yen sentiment and Deputy Economy Minister Nishimura sated that the yen correction was not yet over.

There were some cautious comments from German Chancellor Merkel who was uneasy over the Bank of Japan becoming so engaged in currency issues and there was some criticism of the government stance to promote a weaker currency.

Japan’s core consumer inflation reading was in line with expectations at -0.2% which will reinforce pressure for more aggressive policy action to meet the 2% inflation target and the dollar held above 90.

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 further concerns surrounding the UK growth outlook which will reinforce fears surrounding the government finances.  There have been calls from the IMF for a change in policy and overall confidence in economic policies is liable to deteriorate sharply, especially after the GDP contraction for Q4. There will be expectations of much-reduced defensive Sterling support in the short term, especially with Euro-zone fears easing and this could have an important impact in undermining Sterling.

Sterling was on the defensive during the week with further losses against the dollar and Euro with four-month lows near 1.5750 against the US dollar.
 
The headline UK government borrowing data was broadly in line with expectations. There was an underlying increase of over GBP7bn for the first eight months of the year with generally weak tax receipts. The substantial structural deficit will maintain fears over the UK AAA credit rating. There was also a weak reading for the CBI industrial survey with orders at -20.

Bank of England Governor King stated that the Monetary Policy Committee could consider further quantitative easing. There were comments surrounding the bank’s remit with King stating that it was time to review the situation. He was particularly concerned as to how the MPC should balance short-term inflation and growth risks.   

The latest labour-market data was stronger than expected as the headline claimant count fell by 12,100 for December to an 18-month low following a revised drop of 8,900 the previous month while the unemployment rate declined to 7.7% from 7.8%.

The Bank of England MPC minutes were broadly in line with expectations with a 9-0 vote for unchanged rates and an 8-1 vote not to adopt further quantitative easing.  Some members expressed doubts whether any further quantitative easing would be justified. In contrast, there were further concerns surrounding Sterling’s level.

Prime Minister Cameron’s European speech did not have a major impact, although there were some underlying concerns over potential negative implications for the economy if there is a prolonged period of uncertainty.

There were further underlying concerns surrounding economy as the IMF called for a shift in fiscal policies and there was also unease surrounding the fourth-quarter GDP release with expectations of a further contraction. Chancellor Osborne was generally very cautious over the outlook, but pledged no change in policies. GDP fell a provisional 0.3% for the fourth quarter.

Swiss franc:

Given that the Swiss franc was a key beneficiary of defensive inflows during the Euro-zone crisis, there will be further speculation of a reversal in flows now that Euro-zone tensions have eased. There will be further debate over the merit of lifting the Euro minimum level, although the National Bank is certainly very reluctant to engage in a policy of fine tuning.

The Euro was able to secure net gains against the Swiss franc despite seeing a sharp corrective decline from highs above 1.25 and the US currency was broadly resilient.

National Bank member Danthine stated that there was no scope to fine-tune the Euro minimum level which continued to dampen speculation over a short-term move to a 1.25 minimum level. There was still expectations that there would be a decline in defensive inflows, especially after the Danish central bank increased interest rates.

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 unable to make any impression on resistance levels towards the 1.06 area and dipped significantly weaker later in the week. There was further evidence of position adjustment and an unwinding of long Australian dollar positions

Domestically, the consumer inflation data was weaker than expected with a headline 0.2%  increase and a core reading of 0.6% which fuelled expectations of further Reserve Bank interest rates.

The Australian dollar is unlikely to make much headway, especially with further rate-cut expectations and the risk of fresh concerns surrounding the Chinese outlook.

Canadian dollar:

The US dollar was able to find support at lower levels and rallied strongly during the week.  There was some further unwinding of long positions and the core retail sales data was weaker than expected.

As expected, the Bank of Canada held interest rates on hold at 1.00%. In the statement, there was a more dovish tone with Governor Carney stating that, although there was still a case for an eventual policy tightening, the bank was not expecting to reach full capacity until the middle of 2014 which triggered a scaling back of rate expectations which undermined the Canadian dollar.  

With a more dovish Bank of Canada stance, the US currency broadly resilient on valuation grounds despite optimism surrounding Canadian fundamentals.

Indian rupee:

The rupee maintained a solid tone during the week and pushed to beyond the 54 level against the US currency despite the impact of strong dollar demand by importers.

The government announced that it was increasing foreign investment limited which bolstered confidence in the capital account. There were no suggestions that the central bank was looking to intervene to weaken the currency which helped bolster confidence in the rupee.

The rupee will gain near-term support from wider Euro resilience and hopes for capital inflows.  It will still be difficult to secure strong local currency gains.

..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 continued to stay away from the 7.75 band limit during the week, although there was no move beyond the 7.7530 area.

HKMA officials continued to warn that there would be no move away from the currency peg and continued to pledge that high-profile bets by prominent hedge funds would fail.  There was still underlying speculation that there would need to be a medium-term policy shift given persistent domestic inflation stresses.
 
Given that inflation fears will continue, especially with aggressive monetary policies in the US and Japan, medium-term speculation surrounding the Hong Kong peg.

Chinese yuan:

The yuan maintained a generally firm tone over the week and the spot rate traded beyond the 6.22 level against the US dollar.  The PBOC continued to resist gains even with the US currency unable to make headway against the Euro. There was further evidence of corporate dollar selling which provided underlying yuan support.

There was some optimism surrounding the Chinese economic outlook following a solid reading for the HSBC flash PMI index, but here was still a high degree of caution surrounding the lending outlook as banks remained extremely cautious over extending fresh loans.
 
Even with continuing corporate dollar selling interest, the yuan will still find it difficult to make much headway, especially with the PBOC likely to resist gains.

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