Weekly Forex Currency Review 11-04-2008

Overall strategy: Markets will continue to be driven by the relative global growth prospects and degrees of financial market stresses. Although confidence will be brittle, risk tolerances are likely to be slightly stronger for now which will lessen demand for defensive currencies, especially if G7 looks to strengthen credit markets. The dollar will look to form a base after heavy losses, but will struggle to secure more than limited gains.                   

Key events for the forthcoming week

Dollar:

There will be further unease over the US economy on fears over a deepening downturn. The near-term pessimism over economic trends will, however, be offset by some optimism that fiscal and monetary action will trigger a limited recovery over the second half of 2008. There will also be some doubts whether the Fed will be in a position to cut interest rates aggressively further in the short-term given inflation fears. The dollar will find it difficult to secure more than a limited short-term corrective recovery unless there are clear signs that the US will back efforts to curb further currency losses.   
      
The dollar was unable to strengthen through the 1.5610 level against the Euro and weakened to fresh all-time lows before a renewed correction in choppy trading.

The US currency overall remained on the defensive following the weak payroll report at the end of last week as first-quarter employment fell by over 200,000. The US currency was able to bounce off lows.

The minutes from March's FOMC meeting recorded that some members were concerned over the risks of a severe slowdown in the economy. In contrast, another camp was concerned over the inflation outlook, illustrating the difficult task faced by the Fed over the next few meetings.

Markets were split on expectations for the Federal Reserve rate decision with futures markets indicating similar probabilities of a 0.25% or 0.50% cut at the late-April policy meeting.

The US trade deficit rose to US$62.3bn in February from a revised US$59.0bn the previous month. There was a surprisingly strong increase in imports while there was a solid rise in exports for the month.

Initial jobless claims fell to 357,000 in the latest week from a revised 410,000 the previous month which eased immediate fears over the labour market to some extent, although the housing-sector data remained generally weak.

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The ECB's firm stance on inflation will provide further near-term support to the Euro. The most recent data releases have not increased fears over the Euro-zone economy, but there are still clear downside risks to growth. There is also the major threat of further divergence within individual countries as Span and Italy face major difficulties. In this context, it will become increasingly difficult for the ECB to maintain an aggressive policy stance. Protests against the Euro's level are also likely to increase if economic stresses intensify.
       
The Euro retained a generally strong tone over the week, although it was subjected to bouts of profit taking against all major currencies. The Euro was boosted by reports of sovereign buying of Euros during the week, especially from Asia.

At the latest council meeting the ECB left interest rates un changed at 4.00%. In the press conference following the rate decision, ECB President Trichet took a similar line as in recent meetings with further warnings over the need to control inflation.

He also warned that the financial-market difficulties would last longer than expected which triggered some speculation that the bank was preparing the markets for a shift in policy later in 2008 if conditions failed to improve.

Trichet also referred to the need to avoid excessive exchange rate volatility, although there was no suggestion at the stage that the authorities were looking to intervene.

The Euro-zone data failed to offer any clear direction with small increases in industrial production for Germany and France in the latest monthly data.

Yen:  

There will be further concern over the Japanese economy as business confidence continues to weaken. There will also be some speculation that the Bank of Japan will be forced to cut interest rates within the next few months, although stability is more likely. The trends in global credit and financial markets will tend to dominate in the short-term and the yen will tend to strengthen when market fears return. Nevertheless, overall capital outflows are likely to be at a higher level which will tend to undermine the Japanese currency during this quarter.
                    
The dollar was unable to push above resistance in the 102.80 region against the yen and weakened rapidly to lows near 100 on Thursday before an equally sharp recovery back to 101.80.

The Japanese currency moves were again influenced strongly by degrees of risk aversion and the yen strengthened sharply as global markets were subjected to renewed selling pressure.

After two rejections, agreement was reached on the nomination of Shirakawa as Bank of Japan governor, although Watanabe's nomination as Deputy Governor was rejected

At the latest council meeting, interest rates were left on hold at 0.50% while the Bank of Japan downgraded its assessment of economic conditions within the economy. Shirakawa was also cautious over the economic outlook in his latest testimony.

There was a sharp 12.7% drop in machinery orders for February, although this followed a strong increase the previous month while wholesale inflation was at a 27-year high as energy prices rose strongly.

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Fears over the economy will continue in the short-term with speculation that difficulties in the credit and mortgage markets will undermine consumer confidence and push the economy into recession. Following the Bank of England interest rate cut this week, there will be expectations of further rate cuts over the next few months to help underpin the economy. The currency is now much more competitive and there are likely to be investment inflows on valuation grounds. In this context, Sterling should be close to a short-term low against the Euro even with housing fears stifling recovery attempts.  
 
Sterling has remained on the defensive over the past week. The UK currency weakened to record lows against the Euro around 0.8030 and struggled to make any headway against the dollar.

The Bank of England cut interest rates by 0.25% to 5.00% following the latest monetary Policy Committee meeting. The bank stated that it expects inflation to fall later in 2008, especially as some spare capacity could emerge.

The bank was also concerned over the tightening of credit standards. The breakdown of the vote will not be known until the minutes are released in two weeks time.

The housing data remained weak with the Halifax Bank reporting that house prices fell by 2.5% in March which was the biggest monthly decline for 12 years. There was also further evidence of tightening conditions within the mortgage market while consumer confidence also continued to weaken.

The visible trade surplus was reported at GBP7.5bn for February from a revised GBP7.9bn the previous month as imports were significantly lower. There was some optimism over investment flows after RWE's approach for British Energy.
 
Swiss franc:

There will be expectations of a slowdown in the Swiss economy in the short-term, especially with the financial sector accounting for a high proportion of the economy as a whole. Levels of risk aversion will tend to remain dominant in determining short-term currency direction and the franc will gain strong support when risk aversion increases. Nevertheless, overall credit fears are likely to be slightly lower which will lessen defensive demand for the currency and the franc is liable to edge weaker.      
 
The Swiss franc found support near the 1.02 level against the dollar and strengthened sharply back to around 0.99 before correcting weaker again. The franc found support close to 1.5950 against the Euro.

Currency moves were again strongly correlated with degrees of risk aversion and a sharp move down in global stock markets on Thursday triggered renewed franc support as volatility levels increased again.

The domestic influences remained of secondary importance over the week. National Bank President Roth sated that he expected inflation to fall during the second quarter. Overall, however, markets were less confident that the central bank would cut interest rates at the June quarterly meeting.

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The Australian dollar was subjected to conflicting pressures over the week, but secured net gains with a move to near 0.9350 against the US currency.

The employment data was firm with the unemployment rate rise held to 4.1% from 4.0% while there was a further 14,800 monthly increase in employment.

The indicators were less favourable with sharp falls recorded in both business and consumer confidence according to the latest surveys.

There was evidence of some capital inflows from China fuelled by rising commodity prices and the underlying increase in commodity price also provided wider market support for the Australian currency.

The Australian currency will maintain support if commodity prices remain firm, but the net domestic risks are liable to increase which will curb support.

Canadian dollar:

The Canadian dollar was unable to break parity against the US currency and weakened back to levels around 1.02 even though the external influences were generally favourable for the currency.

The Canadian trade surplus was higher than expected with a surplus of CAD4.9bn in February from CAD2.8bn the previous month as commodity exports were firm and shipments to the US recovered.

The housing data was generally firm over the month with a rebound in building starts, although confidence in the economy remained fragile given the US downturn.

Domestic economic fears will tend to persist and the Canadian dollar will struggle to secure significant gains even with the near-term strength of commodity prices.

Indian rupee:

The rupee generally traded stronger than the 40.0 level against the dollar during the week with trading ranges relatively narrow. The currency settled around 39.93 on Friday as market confidence was slightly stronger.

There was evidence of exporter dollar selling close to the 40.0 level, but the central bank was active in curbing rupee gains which helped narrow the trading range.

Capital flows were still subdued as global market volatilities persisted, but there were net inflows over the week which provided some support to the currency. The Indian rupee was still hampered by the high level of global oil prices.

The rupee will struggle to secure more than limited gains in the short-term given central bank action, although the general firmness in Asian currencies will provide some background support.

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The Hong Kong dollar found strong support on retreats to beyond the 7.79 level against the US currency and strengthened to highs beyond 7.78 before consolidating.

The Hong Kong dollar gained on wider US currency losses over much of the week

The local currency also drew support from generally firm Asian currencies as the Chinese yuan and Singapore dollar secured strong gains over the week

The Hong Kong currency should remain firm in the short-term, especially with firm regional currencies. Speculation over a revaluation or a abandonment of the currency peg within the next few months will continue to be a significant background feature.

Chinese yuan:

The Chinese yuan continued to strengthen over the week and pushed through the 7.00 level against the dollar for the first time since the 2005 controlled float for the currency. The yuan was close to 7.00 on Friday with central bank caution over allowing further gains triggering market caution.

There were further underlying inflation fears ahead of the CPI release next week which maintained expectations that the central bank would be forced to tighten monetary policy further.

The monthly trade account remained volatile while there was a small decline in the first-quarter surplus to US$41.6bn as export growth showed some signs of a slowdown. There were also strong investment inflows according to the latest data.

The yuan is likely to secure further net gains in the short-term, especially with the US currency still on the defensive. Concerns over the economy will tend to stem buying support and the rate of appreciation should slow unless there is a one-off revaluation.

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New York, February 26, 2008  dbFX, the leading retail online  currency trading platform from Deutsche Bank, experienced the highest  volumes of trading during January 2008 since its launch in June 2006.

Nearly half of all retail trades executed during January over dbFX  were Euro / USD transactions, compared to an average of 15% in the three months prior to the market turmoil that began in August 2007. The surge in Euro / USD trading peaked on January 16th when 70% of  daily trading was between this currency pair.

Immediately after the FED's first interest rate cut of 75 base points on January 22nd , the U.S. dollar lost ground against the Euro as the Euro / USD currency pair accounted for 40% of trading on the following day, and nearly 50% on January 24th. As a result of the FED's cut, the next day's trading of the Japanese  yen was down against the world's other major currencies, most notably against the Euro where volumes were slashed by half to just 8% of daily trading volumes.

Trading of the Japanese yen against the U.S. dollar continued to decline and accounted for less than 10% of  January's total volume on dbFX, down nearly half against the previous  month's figures. dbFX has 34 currency pairs available to investors on  its platform.

Commenting on January's volumes, Betsy Waters, Director and head of dbFX Americas said, "Tumbling equity prices prompted investors to look  for asset classes where they could make money, and FX presented such  an opportunity. In January, we saw a 'flight to quality' in currency  trading."

Launched in 2006, dbFX is available in multiple languages and accessible in over 70 countries around the world. Deutsche Bank was  ranked the No.1 Foreign Exchange Bank in 2007 by Euromoney magazine  for the third year running. The platform can be accessed here