Weekly Forex Currency Review 10-05-2013

The principal global central banks will remain committed to aggressive stimulus polices in the short-term with no immediate prospect of any tightening. There will be the threat of renewed currency tensions, especially with the yen continuing to weaken. The Asian outlook will also be watched very closely given speculation that Chinese conditions could deteriorate sharply over the next few months.

Key events for the forthcoming week

Dollar:

Uncertainty will continue to be a major short-term feature, but there is likely to be a slightly more optimistic tone surrounding the economy following the latest employment report and jobless claims data.  There will certainly be expectations that the US economy will out-perform Europe which will attract capital inflows.  The Federal Reserve will maintain its programme of bond purchases in the short-term which will limit the scope for US dollar support. There should still be important protection from concerns surrounding the global economy and general loss of risk appetite, especially if China’s economy falters.

The dollar was trapped with relatively narrow ranges with a slightly defensive tone over the first half of the week before securing strong gains.

Confidence in the US outlook remained slightly stronger following the payroll report. A stronger than expected April increase of 165,000 combined with upward revisions to the previous two months, put the three-month average employment gain above 200,000. There was also a decline in unemployment to 7.5% from 7.6%, although there was some disappointment over the drop in weekly hours.  

The latest jobless claims data was again better than expected with a decline to 323,000 in the latest week from a revised 327,000 previously which was the lowest figure since early 2008. The data again helped reassure markets over US economic trends. There was a significant boost to US confidence with some speculation that the Fed could move towards tapering bond purchases earlier than expected, although there were no major comments from voting Fed members. There were still expectations that the US economy would be able to out-perform European economies.

Market volatility increased sharply during the New York session on Thursday with the dollar surging across the board. As well as increased optimism surrounding the US economy, there were reports of Chinese dollar buying as part of a shift in reserve management operations, although with a high degree of uncertainty as to the reasons why there was a sudden surge in the US currency.

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There will be further concerns surrounding the growth outlook as peripheral economies remain extremely weak. Fear is also likely to spread to the core countries which would represent an even more serious situation. The ECB has indicated that it will take further action if conditions deteriorate further.  There will be speculation that the bank will look at programmes such as asset-backed securities as an alternative to rate cuts, but there will still be the possibility of a move to negative rates if conditions deteriorate further.  There will also be pressure for competitiveness to be boosted through a weaker Euro.

The Euro moved to two-week highs against the dollar before reversing course and testing the 1.30 area. The debate surrounding ECB policy was also a significant factor with a particular focus on the possibility of negative interest rates. ECB member Nowotny downplayed the possibility of negative rates. ECB President Draghi stated on Monday that the ECB was ready to act again if necessary and again hinted that negative deposit rates was a possibility.

The latest German factory orders data was stronger than expected with a monthly increase of 2.2% for March, the same increase as recorded for February. Although the data is notoriously volatile on a monthly basis there was still significant Euro buying on hopes that the German outlook was better than expected.

ECB member Asmussen was the latest central bank official to state that the ECB was ready to take additional action if necessary which unsettled the Euro to some extent, especially with persistent speculation that the bank could move to introduce negative interest rates.  The possibility of additional action unsettled the Euro, although there were still reservations over aggressive selling, especially with the ECB not engaged in quantitative easing.  ECB attempts to improve underlying financing conditions would also have a slight positive impact on the Euro.

For the second day running, there was a sharply stronger than expected German data release with a 1.2% increase in industrial production for March. This maintained a degree of optimism surrounding the German outlook, although there will be concerns that there has been a renewed deterioration since then given weak April PMI indices.

Yen:   

The Bank of Japan will continue to sanction an extremely aggressive monetary policy in the short-term in an attempt to ease deflation and boost consumer spending.  There is liable to be an increase in scepticism and opposition to the policies, especially if bond markets become unstable. A strong increase in the Nikkei index will also increase speculation that institutional capital will be allocated to domestic equities rather than international bonds which would limit any strengthening of the yen.  

A stronger than expected Chinese trade surplus helped underpin risk appetite on Wednesday which helped support risk appetite and the dollar found support in the 98.50 area against the Japanese currency.

The dollar gained support from the better than expected US employment data which had a beneficial impact on US yields. The US currency pushed sharply higher later in New York triggering momentum dollar buying and it pushed rapidly above the 100 level for the first time since April 2009.

The economic data recorded a current account surplus for the latest month. The data was over-shadowed by the capital-account data with a net flow of funds into overseas bonds for the past two weeks according to the latest data. The shift to net outflows reinforced negative market sentiment towards the Japanese currency. The dollar pushed to highs above 101 before encountering some degree of profit taking.

Markets will be wary of comments on the yen at the G7 meetings to be held on Friday and Saturday. Any signs of irritation with a weaker yen would risk a sharp correction in the Japanese currency.

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The Australian dollar was unable to push above the 1.03  area against the US currency during the week and dipped sharply to lows below 1.01. There were substantial economic events with high volatility. The Reserve Bank cut interest rates by a further 0.25% to 2.75% contrary to consensus expectations that there would be no change.

The labour-market data was stronger than expected with an employment increase of over 50,000 while there was a small decline in unemployment. There were still concerns over a slowdown in the global economy which would have a negative impact on commodity prices and undermined the Australian currency.

The Australian dollar will tend to remain vulnerable on domestic and international growth concerns, especially if there is a further deterioration within China’s economy.

Canadian dollar:

The US dollar remained under pressure for much of the week and dipped to lows close to parity before reversing course with a move back above 1.0050.

There was a stronger than expected reading for Canadian building permits, but there was a decline in the PMI level to near 50. There was a covering of short positions, but there were also background concerns surrounding the housing sector.

Positioning will support the Canadian currency, but with little scope for gains given uncertainty surrounding the domestic economy and global growth doubts.

Indian rupee:

The rupee was unable to sustain moves beyond the 54 level against the US currency during the week and retreated from two-month peaks. There was persistent US dollar demand from oil and gold importers which curbed underlying rupee support.

The domestic equity market also eased from three-week highs and there were underlying concerns surrounding the trade account, especially given the potential for regional currency devaluation policies.

The rupee will continue to gain some underlying support on expectations of capital inflows, but with little scope for gains, especially with regional competitive pressures.

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The Hong Kong dollar was trapped within very narrow ranges during the week with marginal fluctuations around the 7.76 level against the US dollar.

There were further important concerns surrounding the threat of a serious over-heating within the property market. In this context, there was further longer-term speculation that Hong Kong would need to let the currency strengthen in order to tighten monetary conditions. A stronger Chinese yuan also contributed to speculation over a stronger Hong Kong peg break.

Concerns surrounding the threat of imported inflation and an over-heated property sector will continue, especially with very low US interest rates.

Chinese yuan:

The Chinese yuan maintained a very solid tone during the week with fresh 19-year highs around 6.13  against the dollar before a limited correction. The PBOC was generally content to establish general strengthening. There was further underlying speculation over an underlying widening of the yuan trading band

There was a higher than expected reading for the latest consumer inflation rate at 2.4% from 2.1% previously which dampened speculation that monetary policy could be eased if growth conditions deteriorated. The trade account data was better than expected, but there were further doubts surrounding the data with evidence of underlying capital inflows into China.

Despite expectations of a wider trading band and capital inflows, the yuan will find it difficult to make further headway given underlying economic stresses and fears.

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