Weekly Forex Currency Review 11-05-2007

Easy-Forex USA is your best choice for an online Forex Trading Platform. FREE live quotes. No commissions, Mini accounts from $25.  Click Here to Register and Receive FREE One on One Trading demo.

Overall strategy

The dollar is likely to attempt a further correction from recent losses, but weak readings for US consumer spending would be likely to result in renewed selling pressure, especially if the housing sector deteriorates further. There are still high risks associated with carry trades given that risk tolerances are liable to decline.

Key events for the forthcoming week

Dollar

The Federal Reserve statement has reduced expectations over a near-term cut in US interest rates. Confidence will, however, remain fragile and there are still important risks associated with the housing and consumer spending sectors. The yield structure will also still make it difficult for the dollar to secure strong support. A closing of global carry trades would be a net positive influence for the dollar and some further correction is realistic, but substantial gains are unlikely.  

The US dollar found support above recent lows early in the week and corrected stronger as the underlying mood of pessimism eased slightly. There was pressure for a correction after recent losses with gains to 1.3470 against the Euro.

The Federal Reserve left interest rates unchanged at 5.25% following the latest FOMC policy meeting. In the statement following the decision, the Fed stated that inflation was still the pre-dominant concern. Fed members were still optimistic that core inflation would ease while it also expected moderate growth.

The US trade deficit rose to US$63.9bn in March from US$57.9bn the previous month as the oil import bill rose strongly. The first-quarter deficit still fell slightly over the year as exports increased.

US jobless claims fell to 297,000 in the latest week which increased confidence that the labour market was holding firm.

The National Association of Realtors downgraded its forecasts for 2007 home sales and corporate retail sales reports were generally disappointing.

Imagine owning a luxury bespoke villa in the most prestigious and private estate in St Lucia. Enjoy stunning views out to Martinique and sunsets over the Caribbean Sea.  Click Here.

Confidence in the Euro-zone economy will remain firm in the short-term and the ECB is set to increase interest rates at the June meeting. There will be a slight downgrading of longer-term interest rate expectations and sentiment will weaken more significantly if there is further evidence of falling property prices. The Euro will remain vulnerable to a correction, but substantial losses should be avoided.

The Euro held firm in early in the week, but was unable to sustain fresh highs against low-yield currencies and corrected weaker over the second half of the week.

The ECB left interest rates unchanged at 3.75% following the latest council meeting.

In the press conference following the meeting, ECB President Trichet stated that the bank would maintain strong vigilance on inflation and this continued to suggest that interest rates would be increased at the June meeting.

German factory orders rose strongly over the month with a 9.9% annual increase, but production levels were more subdued. The French and Italian production data was uninspiring.

There were no major protests against Euro strength from European officials while the election of French President Sarkozy offered slight Euro support on hopes for reform.

Yen  

The Bank of Japan is uneasy over the implications of very low interest rates and is likely to sanction a further rate increase within the next 2-3 months. Markets will still look to extend carry trades given low Japanese yields, especially if market conditions remain benign, but there is a growing potential for a sustained increased risk aversion. Overall capital flows are not likely to support the case for heavy yen depreciation with the risk of a sharp correction stronger.     
                    
The yen fluctuated close to 120.0 against the dollar for much of the week and recovered to 161.6 against the Euro from lows beyond 163.0

There were no major Japanese data releases during the week. Bank of Japan Governor Fukui reported that the bank would continue to increase interest rates gradually and warned against the risks of leaving rates too low for too long.

The latest capital account data recorded net inflows into Japan for the past two weeks.

There were warnings over currency manipulation during US congressional hearings and calls for stronger Asian currencies, but this triggered only limited yen gains.

Track the performance of your favoured currency against the top 20 global currencies. Click here.

There will be speculation that the Bank of England will need to increase interest rates again to stem inflation. Given that a further increase is priced in, Sterling will struggle to secure firm buying support, especially if near-term consumer inflation weakens back to below the 3.0% level. A reduction in carry trades would also undermine the UK currency. With investment flows weaker and concerns over the underlying economic outlook, Sterling is liable to weaken over the next few weeks with increased volatility.  
 
Sterling hit a 1-week high on a trade-weighted index during the week, but then weakened with a retreat to lows below 1.98 against the dollar and beyond 0.6810 against the Euro.

The Bank of England increased interest rates to 5.50% from 5.25% at the latest MPC meeting, the highest level for 6 years.

The MPC expressed confidence that inflation would fall back to around 2.0% later in the year, but still pointed to medium-term upside inflation risks.

There was a 0.2% increase in industrial production for March, but with a 0.2% annual decline. The trade deficit rose to GBP7.0bn from a revised GBP6.9bn the previous month. The latest BRC retail sales survey recorded a 2.4% annual increase for April

Prime Minister Blair announced that he would leave office at the end of June.

Swiss franc

The Swiss fundamentals will remain strong which will provide important background franc support and the National Bank is likely to increase interest rates at the June meeting. Any scaling back of Euro interest rate expectations would also help support the franc within the Europe. The Swiss currency will be in a position to gain strongly if there is a sustained increase in risk aversion and the net risks suggest that the Swiss currency should regain ground. 
 
The Swiss currency found support close to 1.65 against the Euro with a move to 1.6450 while the franc held losses to around 1.22 against the dollar. Weaker global stock markets supported the franc later in the week.

Swiss government officials stated that it was not concerned over franc weakness, but that the National Bank would intervene if necessary.

These comments were reinforced by remarks from National Bank council member Jordan, but there were major protests against franc weakness by bank officials.

The seasonally-adjusted unemployment rate was unchanged at 2.9% in the latest month.

Click here to perform accurate conversions on any major global currency.

The Australian dollar recovered from a brief drop to below the 0.82 against the US dollar and rallied to highs near 0.8350, but was unable to sustain gains above 0.83.

The labour-market data was strong with employment increasing by close to 50,000 in April while the unemployment rate fell to a 32-year low of 4.4%. The latest retail sales data was also strong with a 1.1% increase for April. The federal budget was generally expansionary with the announcement of tax cuts.

Yield considerations boosted the Australia currency in the first half of the week before a reduction in carry trades helped trigger a correction. Australian dollar volatility is liable to increase and the currency will find it difficult to make gains.

Canadian dollar

The Canadian dollar strengthened to highs near 1.10 against the US dollar before a combination of a US dollar rally and overbought conditions triggered a retreat to 1.1120. The Canadian dollar was supported by a hostile bid for Alcan by US company Alcoa which reinforced optimism over inward investment flows.

The trade surplus was slightly lower than expected at CAD4.6bn for March as import levels recovered. Building permits rose strongly in March, but housing starts were slightly weaker.

Investment flows should support he currency, but a further limited correction weaker is realistic given the extent of recent gains.

Indian rupee

The Indian rupee strengthened to fresh nine-year highs against the dollar early in the week, but then retreated and a move beyond 41.0 helped trigger further losses to 41.40 on Friday as regional stock markets fell.

The rupee was undermined by a sharp drop in local money-market rates which increased dollar demand, especially as domestic rates had recently been very high.

There was further speculation that the central bank was intervening to restrain the currency which curbed capital inflows. Government officials also expressed concern that the strong rupee was undermining exports.

The rupee will remain vulnerable to a further correction weaker, especially if there is a sustained drop in global stock markets.

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

The Hong Kong dollar ranges remained narrow and a recovery in US dollar sentiment prevented the local currency from making strong progress with a level of 7.8220 on Friday.

There was further evidence of arbitrage activity during the week, but Hong Kong dollar selling eased once the currency weakened towards the 7.8220 level.

The Hong Kong dollar secured support for much of the week from a firm local stock market and gains for the Chinese market, but the markets weakened on Friday which hurt the currency. Chinese yuan gains failed to have a significant impact.

There was some demand for IPO-related funds during the week which supported the local currency.

The Hong Kong dollar should find further support close to 7.8220, but with only marginal gains realistic.

Chinese yuan

The Chinese yuan strengthened successively for four days during the week before edging slightly lower on Thursday. There were renewed sharp gains on Friday with the mid point at a fresh post-float high of 7.684.

The comments in US Congress calling for faster appreciation of the Chinese currency failed to have a significant impact.

The Chinese central bank pledged a further monetary tightening, but not through significant exchange rate appreciation. The Chinese authorities pledged that the central bank would not sell a large amount of dollars as part of reserve diversification.

Underlying pressure for Chinese yuan appreciation will persist over the next few weeks at least with slow gains realistic with the authorities tolerating only slow gains.