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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 08-02-2013

02/08/2013
Weekly Forex Currency Review
 ADVFN III Weekly FOREX Currency REVIEW 
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Weekly Market analysis

Monetary and exchange rate policies will continue to be an important short-term focus.  There will be pressure on the US Federal Reserve to at least slow the rate of quantitative easing to help ease the pressure on other central banks. There will also be demands for the ECB to take a more aggressive stance and curb any Euro gains, especially with growth still very weak. There will be the risk of a sharp increase in global currency tensions with the ECB very reluctant to get involved in exchange rate management.

Key events for the forthcoming week

Date

Time (GMT)

Data release/event

Wednesday February 13th

10.30

Bank of England inflation report

Wednesday February 13th

13.30

US retail sales

Thursday February 14th

 

Bank of Japan monetary policy decision

Friday February 15th

09.30

UK retail sales


Dollar:

The US economy has slightly been out of focus with evidence of solid economic growth and Fed policy firmly on hold. Developments will, however, be watched very closely over the next few weeks, especially with some speculation that the Fed will hint towards ending quantitative easing this year.  Any shift in rhetoric by the Fed would be important in boosting underlying confidence in the dollar, although market volatility will also increase. There will still be uncertainties surrounding fiscal policy and the threat of sequesters.  The US currency will gain support if underlying confidence in the global economy deteriorates further.

The dollar was able to recover during the week as the Euro was subjected to a significant correction as it retreated to the 1.34 area from a peak around 1.37.

The headline US employment report was marginally weaker than expected with non-farm payrolls increasing by 157,000 for January while the unemployment rate edged up to 7.9% from 7.8%. There was, however, an upward revision to 196,000 for December and the data overall continued to suggest solid growth. There was also a stronger than expected manufacturing ISM reading with an increase to 53.1 from 50.2.

The latest US ISM index for the non-manufacturing sector was close to expectations at 55.2 from 55.7 the previous month. There was a robust reading for the employment component, but the orders index was less impressive. Jobless claims edging slightly lower to 366,000 in the latest week from a revised 371,000 the previous week.

Regional Fed President Evans commented that he was looking for sustained employment growth of 200,000 per month. If achieved, there would be a case for scaling down the quantitative easing programme before the unemployment rate reached 7%. Given recent payroll data, the comments will increase speculation that there could be a move to ending bond purchases before the end of 2013.


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Euro

Immediate fears surrounding the Euro-zone financial sector remain lower and there has been some improvement in the PMI indicators. Peripheral economies are still in recession however,  with the social tensions of rising unemployment continuing to increase. Political stresses have also increased again with corruption allegations in Spain and a tightening Italian election campaign.  The ECB will be extremely reluctant to engage in exchange rate targeting, but political pressure for a response will increase, especially from France. Tightening monetary conditions will also increase the possibility of an interest rate cut.

The Euro corrected weaker, especially following Thursday’s ECB meeting with a sharp correction on the main crosses, especially against Sterling and the yen.
 
The latest Spanish unemployment data recorded an increase in jobless claims of over 130,000 for January following a decline of 59,000 the previous month. There were further important concerns surrounding the Spanish political situation as opposition parties called for the resignation of Prime Minister Rajoy over alleged corruption and hidden payments to PP officials.  There was a sharp rise in Spanish benchmark bond yields to above 5.3% which had a negative Euro impact.

The Italian banking and political situation also remained an important focus with the PD party attempting to minimise damage from the Monte dei Paschi affair. There were further concerns surrounding potential deadlock following this month’s election.

There was initial relief surrounding the Euro-zone PMI data with an improvement in the final PMI services index from the flash reading. There was a significant improvement in the Spanish data, but there was a sharp deterioration in Italy and a weak reading in France, maintaining fears surrounding divergence within the Euro-zone.  French Prime Minister Hollande stated that a rising Euro may deepen the recession and made calls for the Euro to be managed.

As expected the ECB left interest rates on hold at 0.75% at the latest council meeting with attention focussed on the press conference. Draghi remained generally cautious surrounding the economic outlook and was generally dovish surrounding the inflation outlook. An important market focus was on the level of the Euro and whether there would be any comments protesting against the currency’s strength. The ECB president was extremely cautious in his response to questions. He did state that the exchange rate was important for growth and price stability. In this context, markets interpreted this to mean that the ECB was uneasy surrounding the Euro and the stronger exchange rate which could increase the chances of an interest rate cut.

In response, the Euro weakened sharply with a string of stop-loss selling pushing the currency to lows below 1.34 which was the sharpest one-day decline since June.

Yen:

The government will maintain strong pressure on the Bank of Japan to pursue a more aggressive monetary policy and combat deflation with the new 2% inflation target. The appointment of the new Bank of Japan Governor will be watched very closely and the government will be looking for a dovish appointment. There are, however, major fears within Japan over the implications of a sharp sell-off in the bond market and there will be pressure for aggressive policy changes and appointments to be resisted.  In this context, there is still the potential for sharp corrective yen gains following recent sharp losses.

The yen weakened to fresh 30-month lows around 94 against the dollar and also weakened to the 127 area against the Euro before a sharp correction stronger.

Bank of Japan Governor Shirakawa stated that he would leave office on March 19th, three weeks ahead of the official end date. Two deputy governors are also due to leave on that date which was the rationale for the change, but there was additional speculation that the government had exerted pressure for an early departure.

The Bank of Japan remained an important focus with speculation over the next Bank Governor. Prime Minister Abe will continue to push for a dovish appointment. There was, however, speculation that there was important internal opposition to such an appointment given fears of bond-market destabilisation.

There was further speculation that Japanese institutions would scale-back the proportion of Japanese bond holdings which had a negative underlying yen impact.

The December current account was in deficit for the second successive month which pushed the annual surplus to the lowest level since 1985 which will maintain underlying speculation over a longer-term yen weakening trend.


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Sterling

There will be some reduction in fears surrounding the threat of a triple-dip recession. There will, however, be fears that growth will remain extremely weak over the next few months and this will have a further extremely important negative impact on the government borrowing situation. The underlying deficit remains at unsustainable levels and there is an extremely high risk that the AAA credit rating will be lost.  There will be strong pressure on the Bank of England to maintain a highly-expansionary monetary policy with the possibility of further quantitative easing. Overall, Sterling will remain vulnerable to further selling.

Sterling initially remained under pressure before finding some relief mainly against the Euro with a recovery back towards the 0.85 area.  

The services-PMI index increased to 51.5 for January from 48.9 the previous month despite some negative impact of snow disruption. The data helped ease immediate fears surrounding the threat of a triple-dip recession. There were, however, concerns that growth would remain generally very weak with little in the way of momentum.

Bank of England Governor-designate Carney was subjected to extensive grilling in testimony to the Treasury Select Committee. The opening statement had a big impact with Carney commenting that there would need to be an exit from un-conventional measures which increased speculation over a more hawkish policy tone.  The underlying Carney comments were more dovish with expectations that monetary policy would remain extremely loose for the foreseeable future.

The Bank of England left interest rates and quantitative easing on hold at the latest policy meeting. Unusually, there was a statement released with the decision. The bank was concerned that inflation would stay above the 2% inflation target, but there were also concerns surrounding the growth outlook and that meeting the inflation target would cause unnecessary damage to the economy. This was a generally dovish stance, but Sterling was able to prove resilient and consolidated in the 1.57 region while there was a strong recovery against the Euro to the 0.8525 area.

Swiss franc:

There will be unease surrounding the growth outlook, especially with the economy struggling to find any significant traction from exports with weak Euro-zone demand and a lack of competitiveness. Immediate defensive flows into the Swiss franc are likely to remain lower, but there has been no evidence at this stage that there has been any sharp drop in reserves which does not suggest a major reversal in flows. Renewed Euro-zone stresses could quickly trigger a resumption of upward pressure on the Swiss franc.

The dollar found support below 0.91 against the franc during the week before moving back to the 0.92 area as the Swiss currency consolidated around 1.23.

National Bank member Zurbrugg stated that there would be no move to negative interest rates to help alleviate pressure on the 1.20 Euro minimum level. Although theoretically positive for the franc, the comments suggested that the central bank may now be less concerned surrounding the threat of uncontrolled inflows.  

There was an improvement in the SECO confidence index to -6 from -17 the previous quarter. The slightly more dovish ECB tone will end to provide some degree of franc support. There was little change in the latest reserves data which suggested that there had not been any significant outflow from Swiss assets.


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Australian dollar

The Australian dollar was unable to make any headway above the 1.0450 area against the US dollar during the week and retreated sharply over the second half with 3-month lows below the 1.03 level against the US currency. The Reserve Bank left interest rates on hold at 3.0% at the latest policy meeting, but the statement did offer the potential for further cuts over the next few months..

The economic data was generally weaker than expected with a drop in building approvals and a third successive monthly decline in retail sales. There was some relief surrounding the latest labour-market data, but with a drop in full-time jobs.

Given concerns surrounding the regional and domestic growth outlook and housing fears, the Australian dollar is likely to remain generally vulnerable to further losses.

Canadian dollar:

The US dollar was generally confined to narrow ranges during the week, but did find support on dips to below 0.9950 and pushed higher on Thursday as oil prices fell.

There was a stronger PMI reading, but there was a drop in building permits which increased unease surrounding the housing sector and did have a negative impact.

There are likely to be increased concerns surrounding the domestic fundamentals with a particular focus on the housing sector curbing Canadian dollar support.

Indian rupee:

The rupee maintained a firm tone for much of the week and tested 3-month highs beyond 53 against the dollar before dipping weaker again. Optimism surrounding the government’s NTPC power-company sale was offset by a decline in the local equity market for five of the last six sessions.

The government was also more cautious over the growth outlook with a forecast that GDP growth could be as low as 5% which dampened interest in the currency.

The rupee will find it difficult to secure strong currency gains given that there will be further concerns surrounding the growth outlook and structural deficits.


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Hong Kong dollar

The Hong Kong dollar found support around 7.76 against the US currency and consolidated around 7.7550 over the second half of the week.

There were still longer-term concerns surrounding the potential inflation threat until there was any underlying policy shift by the Federal Reserve.

There may be an easing of immediate speculation surrounding the Hong Kong dollar peg, but medium-term speculation will continue, especially given inflation concerns.

Chinese yuan:

The yuan was confined to relatively narrow ranges during the week with a consolidation just beyond the 6.23 area against the US currency. The PBOC continued to resist any significant yuan appreciation with caution ahead of the Lunar holiday.

There were reported net capital outflows during 2012 which maintained some underlying caution surrounding the Chinese currency. There was also speculation that the PBOC would look to maintain competitiveness given the sharp yen depreciation over the past few weeks even though the trade data was stronger than expected.  

Given pressure to maintain competitiveness, the yuan is unlikely to make significant gains with near-term activity severely limited by the Lunar New Year holiday.

 

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Forex Weekly Currency Review