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Forex Weekly Currency Review
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Forex Weekly Currency Review – Forex Weekly Currency Review
A weekly round-up of the week's activities in the Foreign Exchange market, including a forecast of the week ahead and a table of key events. Find out the latest news on the US Dollar, Euro, Japanese Yen, British Pound, Swiss Franc, Australian Dollar, Canadian Dollar, Indian Rupee and the Hong Kong Dollar. Click here to receive or weekly bulletins.

Weekly Forex Currency Review 29-11-2013

11/29/2013
Weekly Forex Currency Review
 ADVFN III Weekly FOREX Currency REVIEW 
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Weekly Market analysis

Global central banks will continue to run a very loose monetary policy over the next few months with all maintaining a commitment to extremely low interest rates. This should, in theory, limit the potential for sustained and sharp currency moves.  There will still be a significant impact from any Fed tapering, especially in emerging markets, and underlying volatility is liable to increase on any Fed move while the ECB will remain under pressure to take more aggressive action.

Key events for the forthcoming week

Date

Time (GMT)

Data release/event

Tuesday December 3rd

03.30

Reserve Bank of Australia interest rate decision

Wednesday December 4th

15.00

Bank of Canada interest rate decision

Thursday December 5th

12.00

Bank of England interest rate decision

Thursday December 5th

12.45

ECB interest rate decision

Friday December 6th

13.30

US employment report

Market analysis

Dollar:

The US economic releases have remained mixed, but with enough solid evidence to maintain the possibility that bond purchases will be reduced at the December FOMC meeting. The Federal Reserve rhetoric has been designed to reinforce the message that monetary policy will stay very loose even when quantitative easing has been completed. This will continue to have the effect of curbing increases in bond yields and also limit dollar support.  The US economy is still gaining an important competitive advantage with growth also boosted by lower energy prices and this should provide important dollar support.

The dollar held firm against the yen, emerging and commodity currencies during the week while remaining under pressure against the main European currencies as the Euro moved to the 1.36 area. Commodity currencies remained under significant pressure despite firm risk conditions which helped provide some wider protection to the US currency and the dollar held firm on a trade-weighted index.

The latest US housing data was stronger than expected with permits rising in October to an annualised rate above the 1.00mn level for the first time in six months from 0.97mn previously while the Case-Shiller house-price index recorded a 13.3% annual increase, maintaining optimism surrounding the housing sector. There was also a stronger than expected reading for the Richmond Fed index.

In contrast, there was a weaker than expected reading for US consumer confidence with a November decline to 70.4 from 72.4 previously. The survey also suggested greater concerns over the longer-term outlook for jobs. This will also make it more difficult for the Federal Reserve to justify a tapering of bond purchases given that the labour market remains a prime focus and area of concern.

The headline US durable goods data was marginally weaker than expected with a 2.0% monthly decline, but other data points were better than expected. Jobless claims fell to 316,000 in the latest week from a revised 326,000 previously, offering some reassurance over labour-market trends, while there was an upward revision to the University of Michigan consumer confidence index. The Chicago PMI index also held comfortably above 60.0 for November at 63.0.


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Euro

Although the German economy is growing significantly, there will be further concerns surrounding growth conditions in the Euro-zone as a whole. The latest data registered weaker money supply growth and a further contraction in lending which will make it very difficult to sustain any recovery. There will be further pressure on the ECB to take a more aggressive policy stance. The evidence continues to suggest capital repatriation associated with the banking sector which will provide underlying Euro support.  In contrast, capital inflows are liable to fade which will make the currency increasingly brittle.

The Euro held a firm tone during the week and challenges resistance levels above the 1.36 level against the dollar with strong gains against the yen.
 
ECB member Hansson stated that the central bank was prepared to cut interest rates further if required. There was a further stream of rhetoric from other ECB officials with Coeure, for example, stating that negative rates were a possibility while other members were keen to reiterate that there was limited room for manoeuvre on policy. There were also some media reports of increased pressure on the ECB to buy peripheral bonds while background political stresses were also significant.

A stronger than expected inflation reading from Saxony, the first of the German regional states to report, triggered some speculation over a higher national release. In turn, there was some expectations that the ECB would find it more difficult to justify further monetary easing which pushed the Euro higher.

In contrast, there was a 10,000 increase in German unemployment for November, the fourth consecutive monthly rise. The latest Euro-zone money supply data was weak with M3 growth slowing to 1.4% from 2.0% previously. The private lending data was particularly important with another annual contraction for the series which has shown annual declines since early 2011. This data is particularly important for potential growth and will certainly increase pressure for a more aggressive ECB policy.

The data did push the Euro lower briefly, but it quickly recovered ground later in the session. There was a Standard & Poor’s downgrading of the Dutch credit rating, but there was a revision to Spain’s outlook from negative to stable.

Yen:

There will be further expectations of an aggressive Bank of Japan monetary policy, especially as there will be pressure to offset the negative spending impact of the 2014 planned sales tax increase.  Overall confidence in the fundamentals will remain weak, especially with a very weak debt profile. With the potential for capital outflows, there will be strong interest in yen selling. In this environment, there will also be scope for sharp yen corrections at times as speculative positions become substantially over-extended.

The yen remained under heavy selling pressure during the week as the dollar pushed to six-month highs above 102 while the Euro hit five-year highs.
 
There were also potential flows into European bonds from Japanese funds which maintained downward pressure on the currency. Underlying yield considerations were again negative for the Japanese currency with most funds expecting further yen weakness in the longer term.

Core consumer prices rose 0.9% in the year to November, the highest rate since November 2008 which suggested the Bank of Japan was making headway against deflation. The industrial production data was weaker than expected with a 0.5% increase while the household spending and labour-market data were also weaker than expected. There will be fears that measures to boost inflation are undermining consumer purchasing power and undermining growth potential.

The yen initially remained under heavy selling in Asia on Friday with the dollar moving above 102.50. There was some pressure for consolidation given extreme positioning and caution running into the month-end


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Sterling

Overall confidence in the economy will remain firm in the short-term, especially with robust employment data. Sterling will also gain support from expectations that the Bank of England will be one of the more hawkish central banks. Governor Carney has, however, reinforced forward guidance and will look to keep policy extremely loose which will curb yield support. There will also be further underlying concerns surrounding the balance of payments situation which will expose Sterling to selling pressure if confidence deteriorates.
 
Sterling advanced to near-2013 highs against the dollar with a move above 1.6350. Technical considerations were important, especially with Sterling challenging crucial longer-term resistance levels. A move above 1.6250 triggered stop-loss buying. There was also notable strength against the Euro with a move to the 0.8325 area.
 
In Bank of England testimony to the parliamentary Select Committee on the latest inflation report, there was a re-iteration of forward guidance with the commitment not to raise interest rates even with firm growth. Carney again stated that the 7% unemployment level is a threshold and not a trigger for policy action. There were also hints that this 7% level could be lowered. The testimony overall was not hawkish with the determination to maintain low interest rates and there was a decline in bond yields.

The UK GDP data was broadly in line with expectations as third-quarter growth was confirmed at 0.8%. There was a slight upward revision to capital spending estimates, but exports were disappointing. The latest CBI retail sales survey was also significantly weaker than expected with a reading of 1 for November.

The Bank of England released its latest Financial Stability Report and did not express major concerns over the housing sector despite some concerns over elevated prices. The central bank and Treasury, however, announced that the Funding for Lending Scheme would be scaled back for residential lending from January.

Any measures to cool the housing sector would make and early tightening by the Bank of England less likely which should also have some impact in curtailing Sterling support. There was a weaker than expected reading for consumer confidence which may raise some doubts over spending, but Sterling held firm.

Swiss franc:

Evidence of firm growth will tend to support the franc. The National Bank will remain wary over export conditions and will also be uneasy over the implications of any more aggressive policy tone by the ECB which could lead to fresh capital inflows. There will, however, still be speculation that the bank will be more tolerant of franc gains next year as deflation fears subside. For now, there will be a strong commitment to retain the Euro minimum level.

The franc was confined to relatively narrow ranges against the Euro during the week while the US currency was on the defensive against the Swiss currency as it dipped below the 0.91 level. National Bank Jordan continued to insist that the Euro minimum level was an essential tool and that the franc was still highly valued.

There was a continuing debate surrounding European monetary policies during the day and further speculation that pressure for more aggressive ECB policies could trigger renewed appreciation pressure on the Swiss currency, especially with the Japanese currency being subjected to strong selling.


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Australian dollar

The Australian dollar was again subjected to sharp selling pressure and weakened to three-month lows below 0.91 against the US dollar. The currency was undermined by a general decline in commodity prices as gold prices continued to move lower. A government block on a key mining-sector takeover also undermined confidence

There was a weaker than expected release for home sales, but the other data was stronger than expected with rising capital spending for the third quarter.
 
The possibility of intervention will continue to unsettle the Australian dollar and commodity-price weakness in tandem with Fed tapering would also be unsettling.
 
Canadian dollar:

The Canadian dollar was unable to make any significant headway during the week and came under pressure with USD/CAD rising to the 1.06 area. The currency was undermined by a decline in oil prices and wider selling pressure on commodity prices.

There were a series of research reports calling for the Canadian currency to weaken in 2014 which had some negative impact. Next week’s Bank of Canada monetary policy decision will be watched very closely following the dovish tone last time.

The Canadian dollar will tend to be hampered by expectations of medium-term losses, especially if there is a further decline in oil prices and dovish Bank of Canada policy.

Indian rupee:

The rupee was able to secure limited overall gains despite losing ground late in the week and consolidated just stronger than 62.50 against the US dollar. There was an increase in month-end demand for dollars from oil importers which put downward pressure on the local currency and there was also a more uncertain tone surrounding Asian currencies as a whole.

There were gains for the local equity market which helped underpin the rupee and the dollar was on the defensive against the Euro which cushioned selling pressure.

The rupee will tend to be vulnerable if the Federal Reserve tapers bond purchases with the potential for vulnerability in emerging markets and domestic stresses.


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Hong Kong dollar

The Hong Kong dollar was trapped in very narrow ranges during the week with no pressure on the 7.75 upper limit. There was further underlying speculation over a shift in regime with further talk of a link to the Chinese yuan or a basket of currencies.

There will be a continuing debate surrounding the longer-term peg outlook, especially if there is a liberalisation of the Chinese capital account and a wider trading band.
 
Chinese yuan:

The yuan was confined to narrow ranges and settled just weaker than 6.09 against the US currency. The PBOC appeared happy with a generally stable currency. There were no significant data releases with markets waiting for the official PMI release.

There was further speculation and debate over the reform plans with the likelihood of a wider trading band next year. There was speculation that more freedom on the capital account would increase outflows and potentially weaken the yuan. Any lowering of risk limits on currency positions could also result in a weaker currency

There will be expectations of a more flexible currency within the next few months. Net capital-account trends are likely to be less favourable, limiting any yuan gains.

 

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Forex Weekly Currency Review