Weekly Forex Currency Review 07-06-2013

Expectations surrounding the Federal Reserve stance and global growth trends will continue to be extremely important and the dollar remains vulnerable while expectations are scaled back. The wider emerging-market trends will be extremely important for the underlying US currency trends and further substantial losses should be avoided. High volatility is likely to remain an important feature.

Key events for the forthcoming week

Dollar:

There has been a cooling of expectations surrounding an imminent Federal Reserve move to taper bond purchases, especially after the weak manufacturing PMI reading. Confidence will erode further if there is a weaker than expected payroll report. The US economy is still well placed to out-perform Europe which will offer some degree of protection. The Fed may also decide it has to act soon given the risk of even more serious market distortions if aggressive bond purchases continue. There will also be underlying dollar support if there is a further outflow of capital from emerging markets.

After a robust start to the week, there was a sharp dollar decline over the second half of the week with a reversal of May gains and sharp losses against the yen.
 
The US ISM manufacturing index release which fell to 49.0 for May from 50.6  previously. This was only the third sub-50 reading in four years and the lowest since June 2009.  There was also disappointment surrounding the main components as employment was barely above the 50 level while orders contracted.

Regional Federal Reserve President George repeated her concerns surrounding quantitative easing and continued to push for a reduction in bond purchases. The hawkish tone did not have a major impact ahead of Friday’s crucial payroll data with the latest ADP employment report also due for release on Wednesday.

The latest US ADP employment report was weaker than expected with a 135,000 increase in jobs for May from a revised 113,000 the previous month. With government payrolls consistently falling this year and a potential negative impact from sequester, there were concerns surrounding a weaker than expected payroll report on Friday. There was some relief surrounding the ISM non-manufacturing index with an improvement to 53.7 from 53.1. There was, however, disappointment surrounding the employment component.

The Fed’s Beige Book reported modest to moderate growth in most districts with Dallas reporting a strong expansion. The construction sector remained strong all round and the labour market was also improving despite major regional variations.

The US currency remained vulnerable to position adjustment and a squeeze on long positions. Volatility surged later in the New York session on Thursday with the dollar being subjected to heavy selling pressure, notably against the yen.

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

There have been some further tentative signs of improvement in the Euro-zone economies as PMI indices tick higher, especially in Spain, but any recovery comes from an extremely low base and conditions are still extremely fragile given the very high unemployment levels. There has been some scaling back of expectations surrounding further ECB policy action, but there will still be intense pressure for more aggressive action. Political tensions will also increase ahead of the German Federal election. Overall, there is little scope for sustained Euro gains from current levels.

The Euro was mixed against major currencies overall, but it did advance strongly against the dollar with a three-month high above 1.32.  

There was some disappointment surrounding the latest Euro-zone data as the final services-sector PMI index weakened slightly to 47.2 from the flash reading of 47.5, in contrast to an improvement seen in the manufacturing release. There was also a larger than expected 0.5% decline in retail sales which did little to improve confidence, although the overall reaction was limited.

As expected, the ECB left interest rates on hold at 0.50% at the latest council meeting with the main focus on Draghi’s press conference. The ECB President remained generally downbeat of growth prospects, repeating his concerns that growth risks were to the downside while inflation expectations were well-anchored. He also made reference to a lack of reform measures by national governments and the bank remains extremely anxious to keep pressure on politicians.

Most attention focussed on his comments surrounding negative interest rates, Draghi made clear that the ECB was technically ready to implement negative rates if required, but he saw no need for the bank to act at present and the underlying tone was more confident as he praised the OMT programme. The rejection of further measures at this time and no real hint of any further short-term shift in policy triggered fresh a further adjustment of yield expectations which supported the Euro.

Yen:

Monetary policy will remain highly expansionary in the short-term as the government and Bank of Japan continue to battle against deflation. There will be important unease surrounding instability within the bond market which will demand some degree of caution surrounding monetary policy. The capital-account trends will be watched very closely and the yen will gain some support if there is still no evidence of significant outflows. The Japanese currency is unlikely to make strong gains given the underlying monetary policies.  

The yen gained strongly during the week as a sharp drop in the Nikkei index triggered an unwinding of short yen positions.

Prime Minster Abe pledged that the government would push ahead with reform measures to boost growth. There was a lack of specific measures and, after moving lower ahead of the speech, there was a sharp reversal later in the Tokyo session with the yen gaining support as the Nikkei index was subjected to renewed selling.

The latest capital account data recorded another weekly net repatriation to Japan with net inflows of JPY1173bn from JPY1117bn the previous week. Previous yen selling had been based on expectations of substantial capital outflows, but the data has again not backed-up these expectations.

The dollar was subjected to further sharp selling pressure on Thursday. There was a slide to the 98.50 area with an election of stops triggering a sharp move. The rate of selling accelerated rapidly later in the US session with a temporary slide to lows below 96 on position liquidation, the sharpest daily decline for over two years.

The Nikkei index has fallen by over 20% from its peak and there were fears over potential margin calls which could trigger further stop-loss yen buying. The index remained under pressure on Friday and the dollar dipped to lows around 95.50 as Finance Minister Aso stated that currency moves would be monitored closely, but that there was no immediate prospect of intervention. The dollar recovered back towards the 97 level as volatility remained extremely 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. 

Confidence in the economic outlook has improved following a run of more favourable survey evidence, especially within the services, sector, and there is also a more confident tone surrounding the housing sector. In this environment, there will be reduced speculation that incoming Bank of England Governor Carney will look to sanction a further substantial easing of monetary policy. The underlying growth dynamics are, however, still extremely fragile with a high degree of underlying vulnerability surrounding the budget. Sterling will, therefore, find it difficult to gain sustained support.

Sterling maintained a robust tone during the week with a firm tone on a trade-weighted basis with significant gains against the US currency. The latest PMI manufacturing data was stronger than expected with an increase to 51.3 for May from a revised 50.2. This was a 14-month high for the index which boosted confidence with the UK data stronger than the US and Euro-zone equivalent releases. The construction PMI index to 50.8 from 49.4, the first reading over 50 for six months as residential construction picked up.

The PMI services-sector index was stronger than expected, rising to 54.9 for May from 52.9 previously, the highest reading since April 2012. The data reinforced a slightly more optimistic tone surrounding the UK outlook with all PMI indices stronger than expected. In response, there was reduced speculation that the Bank of England would make any move to expand quantitative easing at the latest MPC meeting due on Thursday, the final meeting chaired by Governor King.  

As expected, the Bank of England left interest rates on hold at 0.50% and the amount of quantitative easing was also unchanged at £375bn at the latest meeting. The unchanged policy did support Sterling as it held close to 0.85 against the Euro and continued to gain ground against the fragile US dollar. Sterling spiked higher to a peak above 1.56, matching April highs, as the dollar was subjected to wider selling

Swiss franc:

Speculation that the National Bank will take advantage of any franc vulnerability to raise the minimum Euro level is likely to fade slightly in the short-term, especially as the Euro failed to hold the 1.25 region. If global risk appetite deteriorates, there could still be a rapid flow of funds back into the Swiss currency, especially if there is sustained selling pressure on equity markets. Volatility is still liable to be the main focus as any fresh advance in risk assets would increase the threat of renewed capital flows into the Swiss currency.
 
The latest Swiss PMI index rose to 52.2 in the latest month from 50.2 previously which will have a small impact in boosting confidence.

The franc again performed strongly with the Euro testing support below 1.23 before securing a limited recovery. With the Euro advancing strongly against the dollar, the US currency slid rapidly to lows below 0.9250 before finding some respite.

The franc was broadly resilient even when the yen edged weaker which suggested that it was not being used aggressively as a global funding currency.

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 again subjected to high volatility. Sustained selling pressure which pushed the currency to 31-month lows below 0.9450 against the US currency. The Reserve Bank left interest rates on hold at 2.75% at the latest policy meeting while the statement was broadly dovish with the bank indicating that there is scope for a further cut in interest rates if necessary.

The GDP and trade data were slightly weaker than expected, although there was no major impact. Wider US dollar vulnerability was important in providing some relief later in the week, but selling pressure quickly returned.

The currency will continue to be prone to high volatility. Domestic and regional growth concerns will maintain underlying vulnerability despite corrective recoveries.

Canadian dollar:

The Canadian dollar found support in the 1.04 region against the US currency and there was a retreat to below 1.03 over the second half of the week.

There was a stronger than expected reading for building permits and there was also a robust reading for the PMI index which helped underpin sentiment. There were no major comments from new Bank Governor Poloz in testimony to parliament.

The Canadian dollar will find it difficult to gain strong support given the overall global growth outlook and doubts surrounding internal fundamentals.

Indian rupee:

The rupee remained under pressure for much of the week with  a slide to 11-month lows beyond 57 against the US currency before finding some relief.

There was some speculation that the Reserve Bank would intervene to prop-up the currency, but there were also comments from government ministers which suggested opposition to intervention. The currency was also unsettled by wider vulnerability within emerging markets which damaged the currency. There was uncertainty ahead of the June 17 monetary policy review with doubts over the scope for further cuts.

Continuing unease surrounding emerging-market assets as a whole will limit potential rupee support, especially given the substantial underlying current account deficit.

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

The Hong Kong dollar briefly strengthened through resistance in the 7.76 area, but was unable to sustain the gains and edged weaker.

There was reduced speculation surrounding a near-term Federal Reserve tapering of bonds which provided some net support for the Hong Kong currency. The currency was able to resist pressure from a wider downturn in emerging-market currencies.

Pressure for a longer-term Hong Kong dollar revaluation could ease slightly given concerns over emerging-market trends and Chinese economic vulnerabilities.

Chinese yuan:

The Chinese yuan edged stronger over the first half of the week before experiencing some limited weakness even as the PBOC fixed the currency at a record high. There were concerns surrounding forthcoming trade data with further speculation that exports had been artificially inflated. A firm fixing was seen as politically driven ahead of talks between Chinese President Xi and US president Obama.

There was also speculation that the rate of capital inflows had slowed sharply with an increase in dollar demand by banks and companies. There were mixed results surrounding PMI indices as the official index held above 50 while the final flash HSBC index registered a further deterioration.

A weaker capital account position and competitiveness issues will be important in restraining the Chinese yuan with little scope for any significant 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