Weekly Forex Currency Review 05-04-2013

The Bank of Japan decision to expand monetary policy extremely aggressively will have an important global currency impact. The yen will remain generally vulnerable and there will be pressure for additional capital outflows from Japan. There will be the threat of additional currency-related tensions, especially in Asia.  The Euro-zone situation will also remain a very important short-term focus amid fears that there will be a fresh deterioration in economic conditions. Political and economic tensions within the peripheral economies will also be watched very closely.

Key events for the forthcoming week

Dollar:

The latest US economic data has had a slightly softer tone with a particular focus on the labour-market data. There will, therefore, be less confidence in the growth outlook which would also tend to raise further doubts surrounding any near-term adjustment in the Federal Reserve policies with demands for bond purchases to continue. There will still be expectations that the US economy will out-perform compared with the Euro-zone. The relative outlook will, therefore, continue to provide underlying support for the currency with a lack of viable alternatives.  The dollar will also gain some support if there is any fresh deterioration in international risk appetite.

The dollar hit an eight-month high on a trade-weighted basis, but it was unable to hold the best levels against the European currencies.
 
The latest US economic data releases were weaker than expected with an ADP employment gain of 158,000 for March compared with expectations of a 200,000 increase. There was an upward revision to February’s figure, but there was still some disappointment over the data.

The ISM index for March dipped to 54.4 for March from 56.0 previously. There was still a solid reading for the components, although the employment index retreated to 53.3. The data overall triggered a greater mood of caution surrounding Friday’s payroll report.

Jobless claims increased to 385,000 in the latest week from 357,000 and this was the highest reading since November. Following the disappointing ADP report, there was renewed speculation over a disappointing payroll release on Friday and this was significant in hampering the US currency. Given the shift in expectations, the dollar will gain additional support if the payroll data is stronger than expected.

There were no substantive comments from Fed officials during the week despite some shifting of rhetoric among individual members. Fed Vice-Chairman Yellen continued to insist that monetary policy should be very accommodative.

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

There will be further concerns surrounding the Euro-zone outlook after the stream of negative data releases and fresh deterioration in confidence indicators. There will be additional pressure on the ECB to maintain a very accommodative policy and cut interest rates further to help underpin the peripheral economies. There will also be longer-term unease surrounding important structural issues such as banking union. Given the growth outlook and risk of capital outflows, allied with political stresses, the Euro is likely to remain on the defensive.

The Euro found support at lower levels during the week as markets were unable to trigger a break down through key support levels.
 
The final Euro-zone PMI manufacturing index edged marginally higher from the flash reading, but there were further concerns surrounding the underlying outlook, especially with further deterioration in Spain and Italy. The Euro-zone unemployment rate at 12.0% was another record high since the Euro’s inception which maintained pressure for more proactive measures to boost the economy.

ECB council member Coeure stated that currency rates could be a trigger for action, but that the exchange rate would not be a policy target. There was further speculation that the ECB could move closer to an interest rate cut or at least take a more dovish policy stance at this week’s policy meeting, especially as a weaker Euro would provide some economic support at the margin.

There were further concerns surrounding the political outlook in Italy with no agreement on a new government by the freshly-form panel of advisors.  Following the Cyprus agreement, there were further concerns surrounding the risk of capital outflows from peripheral economies and the Euro-zone as a whole.

There were solid Euro-zone bond auctions with French 10-year yields falling to record lows below 2.0% while Spain also achieved its target amount.

The ECB left interest rates on hold at the latest meeting with the benchmark repo rate at 0.75%. In the press conference following the decision, President Draghi remained generally downbeat over the economic outlook. He expressed expectations that that there would be a limited recovery over the second half of 2013, but also stated that the bank would stand ready to act if necessary.

The latest rate decision was by consensus with discussion described as extensive, increasing speculation that there was increased pressure for a cut in rates from certain quarters within the bank. The Euro fell sharply following Draghi’s comments on expectations that rates would be cut over the next few months before reversing sharply as support  levels at lower levels held intact.
    
Yen: 

The Bank of Japan has embarked on a further and substantial increase in quantitative easing as it looks to double the monetary base and increase the amount of bond purchases.  The aggressive central bank policy will be an important negative factor for the Japanese currency in the short and medium term.  The yen may gain some respites if there is a deterioration in risk appetite and global growth stresses intensify.

The yen consolidated stronger than 93 against the dollar ahead of the critical Bank of Japan policy decision before weakening as volatility exploded higher.
 
There was a continuing mood of caution ahead of the Bank of Japan policy meeting. In the event, the central bank was more aggressive than expected at Kuroda’s first meeting as Governor. The central bank will combine bond-buying into one programme and will aim for monthly purchases of JPY7trn to push the yield curve down across all maturities.

There was also an announcement that the main focus of bank policy would switch to the monetary base from the overnight call rate at present. There was a commitment to double the size of the monetary base in order to erase deflationary pressure within the economy.

The yen fell very sharply following the more aggressive policy announcement Bank of Japan Governor Kuroda defended the aggressive monetary expansion in parliament as benchmark Japanese 10-year yields dropped to record lows.  There were expectations of additional capital outflows from Japan in search of additional yield with speculation that Euro-zone bonds could benefit. The dollar continued to gain ground in Asia on Friday with a peak above 97.10 before correcting lower.

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.

Overall confidence in the UK economy will remain very fragile. The latest survey data will provide some relief over the likelihood of avoided a triple-dip recession, but the overall growth dynamics remains very poor. In this environment, there will still be pressure for the Bank of England to sanction additional quantitative easing. There will also be further concerns surrounding the underlying balance of payments situation.  Overall, Sterling is likely to remain vulnerable to further selling even with the relative weakness elsewhere helping to curb losses.

Sterling found support on dips towards the 1.50 level against the dollar and pushed to highs above 1.52 with the Euro consolidating near 0.85.
 
The March PMI manufacturing index at 48.3 was slightly stronger than March’s reading of 47.9, but it fell short of market expectations and had a significant negative impact on sentiment.  There was a further contraction in orders and production which increased unease surrounding the outlook.

There was relief surrounding the latest PMI services report with an increase to 52.4 for March from 51.8 previously and this helped reverse a weak Sterling trend early in Europe.  The data suggested that marginal GDP growth was likely for the first quarter of 2013 which lessened the potential for a triple-dip recession. Nevertheless, the implications were still that growth would be extremely weak at best and not suggest any significant momentum for the economy.

The Bank of England held interest rates at 0.5% at the latest Monetary Policy Meeting and also held the quantitative easing amount at £375bn. There was no statement with the decision and the vote split within the committee will not be known until the minutes are released in two weeks time.

Even with speculation over action later in 2013, there was some relief that the central bank decided against further easing and Sterling also found support in the 0.85 region against the Euro as the dollar dipped to lows beyond 1.52.

Swiss franc:

With a renewed downturn in business confidence, there will be concerns surrounding the growth outlook, especially given evidence of further deterioration within the Euro-zone which would undermine Swiss exports. The underlying evidence still suggests that there has not been serious pressure on the minimum 1.20 Euro level. Nevertheless, the bank will remain extremely wary of the situation, especially given the potential for renewed underlying capital inflows as reserves start to edge higher again.   

The Euro found support below 1.2150 against the franc on Thursday with a modest advance during the New York session. There was relief that the ECB decided against a further interest rate cut, lessening immediate fears surrounding fresh capital flows into the Swiss currency. There were still important reservations surrounding the Euro-zone outlook which limited any selling pressure on the Swiss franc.

The Swiss PMI index weakened to 48.3 for March, dipping back below the 50 threshold which will maintain unease over the growth outlook, especially with weak export prospects within the Euro-zone and this will maintain pressure for any franc gains to be resisted.

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 initially held support close to 1.04 against the US dollar and pushed back to the 1.05 area before retreating again as conviction was lacking.

The Reserve Bank left interest rates on hold at 3.00% following the latest policy meeting. The domestic data was stronger than expected with a 1.3% gain in retail sales and a solid reading for building approvals, although there was also a sharp decline in house sales.

Despite some shift in expectations, the Australian dollar is still likely to be hampered by unease surrounding the regional growth outlook and commodity-price trends.

Canadian dollar:

The US dollar continued to generally drift weaker and dipped to lows in the 1.01 area during the second half of the week.

There were no major domestic indicators during the week and the Canadian currency was hampered to some extent by a retreat in oil prices.
 
With oil prices subdued, the global growth profile will tend to limit Canadian dollar support, especially with doubts over the housing and manufacturing outlooks.

Indian rupee:

The rupee was generally on the defensive during the week with dips towards 55 against the dollar. There was some relief as the US currency retreated against the Euro, but with only limited gains.

There were further concerns surrounding the current account deficit following the record deficit for the final three months of 2012. In this context, there were continuing fears over capital account financing.

The rupee is likely to be hampered by underlying structural budget and current account deficits with little scope for significant gains given competitiveness pressures.

..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 was unable to make any impression on levels below 7.76 against the US dollar during the week and consolidated near 7.7640.

There was a more cautious tone surrounding risk appetite which curbed demand for the Hong Kong currency, especially as the Chinese equity market retreated.

Medium-term speculation over a peg break will continue given inflation concerns. The short-term focus will continue to be on attempts to cool the property sector.

Chinese yuan:

The Chinese yuan maintained a generally solid tone and the spot rate pushed to fresh record high beyond 6.21 against the US dollar before correcting slightly weaker. Market holidays in China dampened activity to some extent.

The PBOC was willing to tolerate some appreciation, but resisted any major strengthening move as economic uncertainty prevailed with comments that the global outlook remained complicated. There were also some uncertainties surrounding the underlying capital account trends. There was some further speculation that the PBOC would move to a tighter monetary policy later this year.

The yuan is unlikely to make strong headway given the underlying growth and capital account profile with increased unease surrounding banking-sector trends.

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