Weekly Forex Currency Review 30-08-2013

Liquidity conditions will remain weak in the very short-term with a US holiday on Monday, but the pace of action will intensify very quickly later in the week ahead of key US employment data. September overall is likely to prove to be a very important month with the Federal Reserve meeting and German election while emerging-market volatility will remain high. Overall, the dollar has scope for a firm tone, but with the strong probability that volatility will intensify.  

Key events for the forthcoming week

Market analysis

Dollar

Markets overall are continuing to expect at least a limited Federal Reserve tapering of bond purchases in September, especially as labour-market data has remained solid. A weak payroll report would be important in undermining confidence and the emerging-market stresses will also increase pressure for the Fed to maintain a very expansionary policy. The net policy actions should provide dollar support and the US currency will also secure support from wider stresses within emerging markets with modest gains the most likely outcome.

The dollar was subdued early in the week before gaining ground with the trade-weighted index moving significantly higher as EUR/USD dipped to near 1.32.
 
The latest US durable goods orders data was sharply weaker than expected with a headline decline of 7.3% for July. Although the bulk of the decline was accounted for by a slide in aircraft orders, there was still an ex-transport decline of 0.6% for the month which was a setback for the economy. A stronger than expected US Richmond Fed reading and a solid reading for consumer confidence at 81.5 for August from 81.0 the previous month helped offset the impact to some extent.

Yield considerations were significant as the gap on US Treasuries over German bunds moved wider during the week to the highest level for August.  There was also an increase in demand for dollar call options which suggested solid underlying demand for the currency in global terms.

The later US GDP data was stronger than expected with the second-quarter estimate revised up to 2.5% from 1.7% previously and compared with expectations of a 2.2% rate.  As expected, exports were revised higher and there was also a positive impact from rising inventories. Initial jobless claims were close to expectations with a decline to 331,000 in the latest week from 337,000 previously.

The net impact was to boost confidence in the US economy overall and also maintained expectations that the Federal Reserve would push ahead with bond-purchase tapering at the September meeting. In this context, the easing of emerging-market stresses also had a potential positive dollar impact as it lessened pressure for tapering to be resisted, but volatility was high.

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

The Euro-zone economy will remain on slightly sounder footing in the very short-term. The situation is, however, extremely fragile and there will be fresh concerns surrounding monetary developments, especially with lending still extremely weak.  The ECB will also remain under pressure to prevent any tightening of conditions and resist Euro appreciation through a dovish policy. There will be tensions surrounding the German September Federal election and the Euro will find it hard to make significant gains.

The Euro moved weaker during the week with some deterioration in yield support relative to Sterling and the dollar with the Euro dipping towards the 1.32 level.
 
The latest German IFO report was stronger than expected as it pushed to a 16-month high of 107.5 from 106.2 previously, maintaining the run of favourable German data. There were, however, persistent  tensions surrounding the Italian government which had a negative impact and Spanish housing data was very weak with a further very sharp decline in mortgage approvals. There were further concerns surrounding the underlying situation in Greece with expectations that a further loan package would be required next year as underlying peripheral stresses continued.

The increase in money supply growth remained at subdued levels and there was a bigger than expected contraction in private loans which will reinforce concerns over a lack of sustainable growth. This will also maintain pressure for a more aggressive ECB monetary policy to help avoid a tightening of credit conditions.

There was a surprise 7,000 increase in German unemployment for August, offsetting the decline seen for the previous month, but the overall impact was limited with attention generally focussed elsewhere while there was a weak retail sales reading. Underlying stresses within peripheral Euro-zone economies remained lower which helped protect the Euro as Italy held a broadly successful bond auction.

Yen

The government remains determined to promote growth through aggressive macro policies and the Bank of Japan will be under strong pressure to relax monetary policy if there is any sign of fresh vulnerability. The yen could still gain some degree of defensive support if there is a sustained deterioration in emerging-market sentiment. Competitiveness issues will also remain important with demands for a weak yen despite rising imports. Overall yen sentiment is also likely to remain weak given concerns surrounding the debt fundamentals.

The yen weakened during the week, primarily on yield grounds, with the US currency moving to test resistance levels above the 98 level.
 
Deputy Bank of Japan Governor Iwata stated that the central bank will maintain its quantitative easing programme until inflation stabilises around 2% which undermined the yen. The capital account data recorded a flow of funds back to Japan, although the impact was limited. The US currency gained significant support from an increase in US yields, especially as Japanese benchmark yields remained at three-month lows.

The Japanese growth-orientated data was generally stronger than expected with a 3.2% gain for industrial production and a higher reading for the PMI index. The latest inflation readings were also marginally higher than expected which suggested that underlying deflationary pressures were easing. The yen impact was mixed as the yen’s correlation with the Nikkei index remained high.

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. 

Underlying confidence in the economy will remain stronger in the short-term following the stream of more favourable surveys. Sterling will gain support on yield grounds, but the Bank of England will still be looking to protest against any significant tightening in monetary conditions, especially as it will be extremely anxious to promote investment. The current account deficit will also be an important source of vulnerability, especially given underlying vulnerability within the banking sector. Overall, Sterling is unlikely to make much headway.

Sterling was able to recover from weakness seen during the first half of the week as yield support improved with support on dips towards 1.54 against the dollar and beyond 0.8650 against the Euro with significant gains.

The UK data maintained a firm tone with the CBI sales survey rising to 27 from 17 previously. Consumer confidence increased to -13 from -16 previously and the Chambers of Commerce also upgraded its latest economic forecasts.

Bank of England Governor Carney’s speech was watched very closely. The speech and press conference were broadly in line with recent bank commentary as he reiterated that unemployment was unlikely to fall to the 7% region for some time which would keep interest rates at very low levels.  He also stated that the bank may provide additional stimulus if higher market rates threaten to undermine the recovery. Carney also announced a new scheme, aiming to bolster bank lending by a further GBP90bn by reducing cash holdings if institutions meet capital requirements.

The comments dampened immediate expectations that there would be any further move to bolster quantitative easing and Carney was also slightly more optimistic surrounding the UK growth outlook. There was pressure to cover existing short positions as the Euro hit strong selling pressure close to 0.8650 against the Euro.

Underlying confidence in the UK economy remained firmer and there was further speculation that the Bank of England would not be able to combat higher bond yields. In this context, there was a renewed increase in benchmark UK yields with 10-year rates moving to a two-year high around 2.83% while the yield gap over German bonds rose to the highest level for three years.

Swiss franc

The franc will gain some support from tensions within emerging markets, especially as it runs a very substantial current account surplus. A further increase in tensions surrounding Syria would also be important in underpinning the currency. The corollary of this is that the franc will lose ground if global tensions ease. The National Bank will also block any significant franc gains against the Euro with little scope for net gains, especially if the Fed does act to taper bond purchases in September.

The Swiss currency initially gained support both from fears surrounding emerging markets and increased tensions surrounding Syria with a move to beyond 0.92 against the dollar. Confidence in the yen remains significantly weaker which will tend to reinforce the potential for defensive flows into the franc with gold also likely to be seen as an attractive destination.

The franc lost ground against the Euro later in the week with a move to the 1.2325 area and there was also significant losses against the dollar with a peak near 0.9320.

There was a decline in emerging-market stresses which lessened immediate support for the Swiss currency on defensive grounds. With attractive rates, there was also some evidence of increased franc borrowing which will tend to undermine the franc.

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 hold above the 0.90 level against the US dollar during the week and dipped to lows below the 0.89 level in choppy trading conditions.

The currency was undermined by important stresses within emerging markets, especially with fears that there would be a further deterioration in regional growth conditions which would undermine the Australian currency.

There were no major developments surrounding the domestic economy with a stronger than expected reading for capital spending.

There will be little scope for Australian dollar gains given overall yield considerations even if there are expectations of a slightly firmer Chinese economic trend.
 
Canadian dollar

The Canadian dollar found support on dips towards the 1.06 level against the US dollar and temporarily recovered the 1.05 level. There were sharp gains for oil prices which had some beneficial impact on the Canadian currency as domestic developments did not have a major impact with attention focussed on global trends.

Despite high oil prices, overall confidence in the Canadian dollar is likely to be weaker with further doubts surrounding domestic economic fundamentals.

Indian rupee

The rupee remained under substantial pressure for much of the week as developments were a major global discussion point with fears over a wider emerging-market crisis. The rupee weakened extremely sharply on Wednesday with the biggest one-day loss for 20 years and lows beyond 68 against the US currency.

There were important fears surrounding the current account deficit and risks to growth with expectations of investment outflows. There were also concerns surrounding risks to the credit rating. Later in the week, there were government measures to boost confidence with the Reserve Bank moving to supply dollars directly to oil importers which would lessen dollar demand in the open market. The rupee recovered strongly before dipping back through 67 on Friday as overall confidence remained very weak.

There will be further very high rupee volatility. It will gain support at times on RBI direct measures, but structural vulnerabilities will maintain a weak overall tone.

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

The Hong Kong dollar was trapped in narrow ranges during the week as the HKMA concentrated on stability given the important stresses within emerging markets. There was longer-term speculation surrounding the implications of the next Federal Reserve Chairman and the potential for medium-term stresses on the currency peg.

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 was trapped within narrow ranges during the week with the spot rate confined to narrow ranges around the 6.12 area as the PBOC maintained tight control of the market.

There were concerns surrounding wider emerging-market volatility and this will encourage the PBOC to maintain near-term stability and dampen fears surrounding potential capital account outflows.

There were no major developments surrounding the Chinese economy during the week with some expectations that underlying growth conditions were stabilising.

The yuan will gain net yield support while overall emerging-market stresses will be negative. The PBOC is likely to concentrate on maintaining stability for now.

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