Weekly Forex Currency Review 11-01-2008

Can you identify the Next Major CURRENCY Trend? ...
with the Electronic Currency Trading System (ECTS) Help You Can! Click Here

Overall strategy: Expectations of further aggressive Federal Reserve measures to stave-off a US recession will tend to undermine the dollar in the short-term. Losses should still be measured from current levels with support on valuation grounds and increased fears over the European outlook. Hopes for a looser US monetary policy and easier liquidity conditions should also provide some renewed support to carry trades within the next few weeks.                    

Key events for the forthcoming week

Dollar:

Confidence in the US economy will remain weak with further speculation over a move into recession as the housing downturn continues. There will also be strong expectations that the Federal Reserve will cut interest rates again, potentially aggressively, which will undermine yield support. A substantial amount of easing has already been priced in which will limit the scope for further selling. The dollar will also gain some support on hopes that US Fed and government officials can revive the economy. Wider fears of a global economic downturn will also tend to support the US dollar with important defensive demand.  
      
The dollar found support close to 1.4750 against the Euro for much of the week and strengthened to 1.4650. The US currency then weakened sharply on Thursday with lows beyond the 1.48 level after the Fed comments. There were also renewed fears over the mortgage sector and rumours of bankruptcy at Countrywide Financial.

Fed Chairman Bernanke stated that further interest rate cuts may be required while the Fed would take substantive action if necessary. The comments reinforced market expectations that the Fed would cut rates aggressively by a further 0.50% at the end of January with futures markets pricing in a 90% chance.

FOMC member Plosser expressed concerns over the inflation trends in the US and suggested he would be reluctant to vote for an aggressive easing of monetary policy at this stage. There were similarly cautious remarks from Hoenig, although he will not be a voter at the January meeting.

The diversity of Fed views over the appropriate interest rate policy was illustrated by the December minutes on the discount rate decision. There were calls for rates to be cut by 0.25% and 0.50% while two banks called for the rate to be left on hold.

US pending home sales fell by 2.6% in November, but the October increase was revised up. The latest jobless claims data recorded a decline to 322,000 in the latest week from 340,000 previously.

There was further speculation as to whether there would be a US recession or, indeed, whether the economy had already entered a contraction phase. Goldman Sachs, for example, issued a report stating that a recession had probably already started.

There were increased expectations that the administration would sanction temporary tax cuts to help support consumer spending.

Discover the power of trading forex in an ECN marketplace with highly competitive interbank bids and offers. Hotspot FX offers live, executable prices, with no requotes. Hotspot FX - No Contest. Click here

The ECB statement from January's meeting illustrates that the bank will want to maintain a tough public stance on interest rates, although there is a strong probability that the rhetoric is aimed at domestic wage negotiators. There will be greater fears over a sharp slowdown in the economy, especially after weak evidence on consumer spending this week which makes a rate increase unlikely. The Euro will continue to attract short-term buying support after the ECB stance, although the currency looks to offer little immediate value.       

The Euro was subjected to profit taking at times and retreated against the Swiss franc over the week, but the currency strengthened after the ECB meeting.

The ECB again left interest rates on hold at 4.00% following the latest council meeting. In comments following the meeting, ECB president Trichet stated that inflationary pressures remained strong and would be slow to subside. Trichet also warned that wage costs needed to be contained and that the ECB would act pre-emptively. Trichet also warned over downside growth risks.

The Euro-zone data was generally weaker than expected over the week, especially on consumer spending. Euro-zone retail sales fell 0.5% in November while German sales dipped by 1.2% after a 2.1% decline the previous month. Indicators of business and consumer confidence also weakened further.

German industrial orders increased according to the latest data, but there was a drop in production for November while French production also weakened for the month.

Yen:  

The Japanese economy will remain subdued with domestic demand unable to make any significant headway. There will also be fears over the outlook for exports to the US market. With the Bank of Japan not in a position to increase interest rates, the yen will remain vulnerable on yield grounds. Hopes of lower US interest rates may support equity markets and carry trades, but underlying global risk aversion will provide some continued yen protection. Overall, the dollar will find it difficult to secure more than limited gains.   
                    
The Japanese currency weakened to 110.0 against the dollar during the week, but then again tested levels beyond the 109.0 level on Friday as risk aversion increased again.

Bank of Japan Deputy Governor Muto suggested that interest rates would be left on hold in the short-term and there was some speculation that the bank could cut rates.

The latest capital account data suggested weak net inflows, but the impact was limited as it covered the holiday period when markets were closed for much of the time.

There was evidence of Japanese retail yen selling once domestic markets returned from holiday which increased underlying yen selling pressure.

EXCLUSIVE LIMITED OFFER - Register now for your FREE
1-2-1 CONSULTATION with a Professional Trader Consultant - Click Here

There will be persistent expectations of a sharp slowdown in the UK economy as the housing sector and consumer spending come under further pressure, especially with disposable income liable to fall. There will also be strong expectations that the Bank of England will move to cut interest rates in February with a series of cuts during 2008. In this environment, Sterling will remain vulnerable on yield grounds, although the currency now looks to offer some medium-term value against the Euro at current levels.   
 
Sterling continued to weaken to fresh record lows beyond 0.75 against the Euro during the week. The UK currency also fell to 10-month lows against the dollar while the trade-weighted index was at the lowest level since 2003 as there was heavy overall selling pressure on the currency.

The Bank of England left interest rates on hold at 5.50% following the latest MPC meeting. There was no statement with the decision and the vote split was not revealed.

The British Retail Consortium (BRC) reported a like-for-like sales increase of 0.8% in the year to December while the latest survey reported a further small decline in consumer confidence.

There were mixed reports from leading UK retailers with weak results from M&S offset by a firm trading statement from Sainsburys.

The latest trade data recorded a goods deficit of GBP7.4bn for November after a revised GBP7.4bn shortfall the previous month as the oil deficit widened.
 
Swiss franc:

The domestic data should remain firm in the short-term. Swiss franc moves will still tend to be influenced strongly by levels of risk aversion and underlying caution over the global growth outlook will help underpin the currency. Risk appetite will recover at times, especially with hopes for an aggressive Fed interest rate cut in January and the franc will be vulnerable on yield grounds at times. Overall, the franc will find it difficult to extend recent gains even if credit fears limit losses from current levels.            
 
The Swiss franc resisted any selling pressure against the dollar during the week and strengthened to re-test levels around 1.10 over the second half of the week. The Swiss currency strengthened significantly against the Euro with highs beyond 1.63.

The franc gained support on defensive grounds and, significantly, the currency resisted significant selling pressure even when there were rallies on Wall Street. Renewed credit-related fears underpinned the Swiss franc during the week.

The seasonally-adjusted Swiss unemployment rate held at 2.6% in December, but domestic factors were limited over the week with international influences dominant.

..in St Lucia's UNESCO's World Heritage Site.  Superb buy to let opportunity in a breathtaking location with immediate income and dramatic capital appreciation.  For more information click here.

The Australian dollar found support below the 0.88 level against the US currency and pushed to highs above 0.8950 on Thursday as the US dollar stumbled.

The domestic retail sales data was firm with an increase of 0.7% for December following a revised 0.3% increase the previous month while the building approvals data was also solid.

Markets continued to speculate over the possibility of a further interest rate increase at the February central bank meeting. These expectations were in strong contrast to expectations of further Federal Reserve interest rate cuts and reinforced the Australian currency's yield support.

The trade deficit fell to AUD2.25bn in November from a record AUD3.0bn the previous month as exports recovered.

The Australian dollar will look to gain support on yield grounds, especially with US yields falling, but the increasingly difficult global growth environment will make it difficult to make much headway.

Canadian dollar:

The Canadian dollar was generally on the defensive during the week and weakened towards 1.0150 against the US dollar even though the US currency was generally on the defensive against major currencies.

The Canadian housing data was weaker for December with a sharp drop in housing starts and building permits, although the data was still robust for 2007 as a whole

The Canadian dollar struggled to gain support from gains in gold prices and generally robust commodity prices during the week.

Bank of Canada Deputy Governor Kennedy stated that downside inflation risks had increased over the past few weeks which increased speculation that the central bank would sanction a further cut in interest rates.

Overall, the Canadian dollar will continue to find it difficult to make much headway against the US currency as growth concerns undermine investor confidence.

Indian rupee:

Although ranges have been generally narrow, the rupee has retained a generally firm tone over the past week with gains to around the 39.30 level against the US dollar.

Potential advances on optimism over Indian trends were curbed by evidence that the central bank was intervening in the market to slow currency gains.

The rupee proved resilient when the local stock market was hit by selling pressure which suggested firm underlying currency support.

There was further evidence of rupee demand ahead of next week's public offering by Reliance Power, especially with further offerings expected over the next few weeks.

Rupee confidence should remain firm in the short-term. The currency will, however, be vulnerable to at least a limited corrective retreat given the global growth stresses.    

Click here for an A to Z of Forex-related key words and phrases.

The Hong Kong dollar edged stronger over the week, although movement was initially limited. The local currency strengthened to high around 7.8020 on Friday as the US currency came under pressure.

The local currency drew some support from an increase in local money-market rates and the drop in US rates triggered an unwinding of arbitrage trades.

The Hong Kong dollar was undermined to some extent by falls in local stock markets. Overall, the Hong Kong dollar should find further support on any dips towards 7.82 due to reduced arbitrage activity, although there will be resistance close to 7.80.

Chinese yuan:

The Chinese yuan weakened slightly over the first half of the week, primarily in a reaction to recent strong gains. The central bank wanted to encourage a two-way market and guided the yuan weaker at times, but underlying currency demand remained firm on fundamental grounds.

Renewed dollar losses allowed the yuan to strengthen to fresh post-float highs of 7.267 against the dollar on Friday.

Premier Wen stated that China was still facing inflationary pressure which reinforced expectations that interest rates could be tightened again. The yuan also gained support from a widening of the interest rate premium as expectations of aggressive US measures increased which pushed US yields down.

The underlying fundamentals will continue to promote yuan appreciation, especially give that inflation fears will persist. There will be unease over global and domestic growth trends which may slow yuan gains.