Weekly Forex Currency Review 04-04-2008

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Overall strategy: Financial market conditions and global growth considerations will remain very important market factors in the short-term. Although confidence will be brittle, risk tolerances are likely to remain slightly stronger for now which will lessen demand for defensive currencies. The dollar will take some comfort from recent data release, but a strong advance is unlikely unless there is a big increase in fears that US weakness will cause substantial damage to the European economies.                  

Key events for the forthcoming week

Dollar:

The most recent data releases will increase optimism that a further serious deterioration can be avoided in the short-term and there will be some hopes for a recovery later this year. Expectations of further Fed interest rate cuts are also likely to be scaled back slightly. The dollar will look to gain some support from this shift in expectations, but confidence will be brittle at best and will reverse rapidly if there are further major financial stresses or signs of further deterioration in the economy. The G7 members are likely to protest against excessive dollar weakness at the meetings next week which should also stem near-term speculative selling on the US currency.  
      
The dollar was subjected to choppy trading over the week. Following a retreat to near record lows close to the 1.59 late last week, the US currency rallied to highs near the 1.55 level before weakening back to 1.57 ahead of the US payroll report.

The US PMI index for the manufacturing sector edged higher to 48.6 in March from 48.3 the previous month while there was a strong increases in prices in the survey. The services-sector data followed a similar pattern with an increase to 49.6 in March from 49.3 previously. Market expectations were for a further drop in both indices.

The labour-market data was mixed with the ADP report recording an increase in private-sector employment of 8,000 for March, but there was a sharp increase in jobless claims to a 30-month high of  407,000.

In testimony to Congress, Fed Chairman Bernanke stated that there was the possibility of recession during the first half of 2008. The Fed chief, however, was also optimistic that the combination of interest rate cuts and tax rebates would secure a recovery over the second half of the year. Bernanke expressed some concern over the weak dollar an the potential impact on inflation.

Markets were less confident that the Federal Reserve would sanction a further 0.50% cut at the next FOMC meeting with futures markets shifting to expecting a 0.25% cut.

The dollar was still unsettled by speculation that Middle East countries would revalue their currencies or abandon the dollar pegs with fears over reserve diversification.

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Despite some positive trends within the German industrial sector, there are likely to be increased fears over the Euro-zone economy with a particular focus on the Spanish economy. The ECB will continue to take a tough stance on inflation, but it will be increasingly difficult to maintain the aggressive stance if there is a serious deterioration in growth. There will also be a growing risk of policy divisions which will tend to limit Euro buying support, especially if official opposition to Euro strength increases.        
       
The Euro put in a mixed performance over the week with net losses against the dollar and Sterling while there were gains against the Japanese yen and Swiss franc.

There was a further erosion of business confidence in the Euro-zone survey. Consumer confidence held steady in the latest monthly survey, but there was another series of disappointing retail sales report with a monthly decline for February in both Germany and the Euro-zone as a whole.

The provisional consumer inflation rate increased to 3.5% in March from a revised 3.3% previously while there was no estimate of the core rate in this data releases.

The ECB continued to take a tough stance on inflation and interest rates over the week with further warnings over the need to avoid secondary inflation threats. The ECB concerns were fuelled by the high wage settlement in the German public sector as well as the elevated inflation reading.

European officials suggested that the issue of a weak dollar would be discussed at the G7 meetings which are due to be held at the end of next week.

Yen:  

Confidence in the Japanese economy will remain weak in the short-term which will tend to undermine the yen to some extent, especially with some speculation that the Bank of Japan could consider a cut in interest rates. International market trends will tend to dominate in the short-term and the yen will tend to weaken if there is a sustained recovery in risk appetite. Although caution will persist, there is scope for a further short-term yen retreat on capital outflows. 
                    
The dollar found support below the 99 level against the yen during the week and pushed to a high near 103.0 as risk appetite recovered. The yen weakened to beyond the 160.0 level against the Euro. Yen trends were again influenced to a high degree by levels of risk aversion while there were increased capital outflows from Japan.

The headline Tankan index of business confidence fell to +11 in April from +19 the previous quarter. This was the weakest reading for over four years and reinforced fears over the corporate sector prospects, especially as capital spending estimates were revised down.

Bank of Japan and government officials were generally downbeat on the economic prospects and there was some renewed speculation that the authorities could consider the option of an interest rate cut over the next few months.

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Recent data releases have been mixed, although there will be substantial concerns over an economic slowdown, especially with evidence that credit conditions are continuing to deteriorate. In this environment, there will be additional pressure on the Bank of England to sanction a further cut in interest rates next week. Sterling will gain some relief if there is a sustained recovery in risk appetite and improvement in confidence within the financial sector. Nevertheless, rallies will soon attract selling pressure given economic fears. 
 
Sterling weakened to record lows near the 0.80 level against the Euro at the end of last week before strengthening back to 0.7850 during the current week. There was choppy trading against the dollar with support below the 1.98 level.

The PMI index for the manufacturing sector was unchanged in March at 51.3. In contrast, the index for the services sector weakened to 52.1 from 54.0 the previous month which reinforced fears over a downturn in the consumer-related sector.

Mortgage approvals weakened sharply over the year while consumer credit growth was robust. There was further evidence of significant stresses within the mortgage market and there were also continuing strains within the money markets.

The latest Bank of England survey also reported a further tightening of credit conditions and expectations of a further deterioration during the second quarter while corporate failures had also increased.

Markets were more confident that the Bank of England would cut interest rates at the April meeting to help ease pressures in the economy.
 
Swiss franc:

There are likely to be greater doubts over the Swiss economy in the short-term following a significant deterioration in recent indicators and there will be some continuing unease over the banking sector. Franc trends are still likely to be determined mainly by international risk conditions and a sustained improvement in risk appetite would lessen near-term demand for the currency. Global caution will still be a significant element and any escalation in difficulties would quickly propel the franc stronger again. Nevertheless, a corrective and weaker tone is liable to persist for now.     
 
The Swiss franc had a weakening bias over the week, although dollar advances quickly attracted selling pressure. The dollar struggled to sustain a move above 1.01 while the Euro advanced to highs above 1.5850.

The Swiss PMI index weakened to a figure of 55.3 in March from 60.5 the previous month which reinforced expectations of a sharp slowdown in the economy. The SECO economic institute also lowered its growth forecasts for the next two years.

Consumer prices rose 0.3% in March with the annual rate increasing to 2.6% which will maintain National Bank unease over inflation trends.

The Banking Commission also warned that the financial sector faced increased difficulties while UBS announced further substantial debt write-downs.

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The Australian dollar dipped to lows near 0.90 against the US currency during the week before consolidating around the 0.9150 level.

The domestic influences were limited for much of the week, although was increased speculation that interest rates had peaked. This speculation was fuelled by generally cautious remarks from Reserve Bank Governor Stevens.

The retail sales report was weaker than expected with a 0.1% decline for February after a revised 0.1% decline the previous month.

The Australian dollar was again influenced to a considerable extent by degrees of risk aversion with some support from a net easing of credit fears.

The Australian currency will gain if risk aversion continues to eases, but the net risks suggest that gradual depreciation is the most likely outcome.

Canadian dollar:

The Canadian dollar found support weaker than the 1.03 level against the US currency and strengthened back to near parity over the second half of the week.

The latest Canadian GDP report recorded a 0.4% rebound for February after a 0.7% contraction the previous month, but this failed to have a significant impact.

The currency drew support from high commodity prices while oil prices also secured net gains over the week even though volatility levels remained high.

Economic vulnerabilities will tend to persist and the Canadian dollar will struggle to secure further significant gains from current levels.

Indian rupee:

Volatility levels eased during the week and the rupee was able to hold around the 40.0 level against the US currency with very light activity on Friday.

There was greater balance in capital flows with an easing of risk aversion supporting inflows into the local market after weeks of net losses. There was evidence of central bank dollar buying below the 40.0 level which restrained the rupee.

There was further interest rate speculation over the week with greater local pressure for a cut in rates while the central bank pledged to maintain a tough stance to curb inflation pressures.

There is the potential for a further tentative rupee recovery given the easing of global market fears and improved yield support. Strong rupee gains remain unlikely in current circumstances as caution will prevail.

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The Hong Kong dollar had a generally weaker tone over the week and dipped to five-week lows beyond the 7.79 level against the US currency.

There was an adjustment of US interest rate expectations which helped trigger a reduction in short US dollar positions over the week

HKMA chief Yam stated that US dollar weakness was not the prime cause of inflationary pressure within the economy. There was still some market speculation that the HKMA could consider a breaking of the currency peg within the next few months, especially if the yuan continues to appreciate.

The Hong Kong currency should avoid further significant selling pressure in the short-term. There will be further speculation over a revaluation or a abandonment of the currency peg within the next few months which will provide some support.

Chinese yuan:

The Chinese yuan retained a firm tone over the week, but was unable to secure further significant gains and consolidated just weaker than the 7.00 level against the dollar. The yuan was stifled to some extent by a generally firmer US currency.

During a visit to China, US Treasury Secretary Paulson praised the efforts of the Chinese authorities in letting the yuan appreciate at a faster pace over the past few weeks. There was still pressure for further action to tackle inflationary pressure within the economy with a stronger yuan seen as more attractive than higher interest rates.

The local stock markets remained very volatile with losses fuelling some international and domestic concerns over economic trends.

The yuan is likely to secure further net gains in the short-term. Concerns over the economy will tend to stem investment support and the rate of appreciation should slow unless there is a one-off revaluation.

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New York, February 26, 2008  dbFX, the leading retail online  currency trading platform from Deutsche Bank, experienced the highest  volumes of trading during January 2008 since its launch in June 2006.

Nearly half of all retail trades executed during January over dbFX  were Euro / USD transactions, compared to an average of 15% in the three months prior to the market turmoil that began in August 2007. The surge in Euro / USD trading peaked on January 16th when 70% of  daily trading was between this currency pair.

Immediately after the FED's first interest rate cut of 75 base points on January 22nd , the U.S. dollar lost ground against the Euro as the Euro / USD currency pair accounted for 40% of trading on the following day, and nearly 50% on January 24th. As a result of the FED's cut, the next day's trading of the Japanese  yen was down against the world's other major currencies, most notably against the Euro where volumes were slashed by half to just 8% of daily trading volumes.

Trading of the Japanese yen against the U.S. dollar continued to decline and accounted for less than 10% of  January's total volume on dbFX, down nearly half against the previous  month's figures. dbFX has 34 currency pairs available to investors on  its platform.

Commenting on January's volumes, Betsy Waters, Director and head of dbFX Americas said, "Tumbling equity prices prompted investors to look  for asset classes where they could make money, and FX presented such  an opportunity. In January, we saw a 'flight to quality' in currency  trading."

Launched in 2006, dbFX is available in multiple languages and accessible in over 70 countries around the world. Deutsche Bank was  ranked the No.1 Foreign Exchange Bank in 2007 by Euromoney magazine  for the third year running. The platform can be accessed here