Weekly Forex Currency Review 11-05-2012

The Euro-zone structural vulnerabilities will remain a very important short-term focus. There will be major concerns surrounding the Greek situation given the risk of fresh elections. Uncertainty surrounding France’s policies and the Spanish banking sector will also cause major concerns.  With reduced confidence surrounding the global growth outlook, risk appetite is likely to remain generally fragile in the short-term.  

Key events for the forthcoming week

Dollar:

The recent economic data releases have generally been slightly weaker than expected and there will be concerns surrounding an underlying slowdown.  International considerations will be extremely important in the short-term and there is scope for dollar demand on defensive grounds, especially as there will be a lack of confidence in the global growth outlook. Global intervention policies will also tend to support the US currency as reserve diversification away from the dollar will decline.  There will be speculation that the Federal Reserve will sanction additional quantitative easing if demand falters and this will be important in curbing dollar demand on yield grounds.

There was a weaker than expected US payroll report on Friday with an employment increase of 115,000 for April from a revised 154,000 for March. The dollar was still resilient both following the payroll data and during the week as the Euro lost wider support. There was a sharp drop in oil and gold prices which undermined commodity currencies and was instrumental in pushing the dollar higher as risk appetite remained generally very fragile and the Euro lost ground.

The latest US jobless claims recorded a slight decline to 367,000 in the latest week from 368,000 previously which maintained some degree of relief surrounding US labour-market trends. The latest US trade account recorded a sharp increase in the deficit to US$51.8bn from a revised US$45.4bn previously as imports rose sharply. There will be optimism that consumer spending remains firm, but the impact of the deficit is likely to trigger a downward revision to US first-quarter GDP estimates.

Regional Fed President Kocherlakota stated that monetary policy should start to be tightened within the next 6-9 months, but the impact was limited as he is not an FOMC voting member this year. Fed Chairman Bernanke remained generally cautious, although with no substantive comments.

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Structural fears will be very important in the short-term given the severe stresses within Greece as it attempts to form a government and find a way to maintain its Euro-zone position while relaxing austerity. There will also be major concerns surrounding the economic outlook in the short-term, especially with a notable deterioration in recent indicators.  In this context, fears surrounding Spain are liable to increase with the banking sector under heavy pressure.  There will be speculation over a policy shift towards a growth strategy, which may underpin confidence, but net vulnerabilities are likely to push the currency weaker.

The Euro was unable to gain any significant support from the US payroll data as selling pressure on the currency resumed. Political comments dominated with the French presidential election and Greek parliamentary election. There was no surprise in the French ballot with Socialist Party’s Hollande winning against Sarkozy gaining around 52% of the vote.

There were uncertainties surrounding domestic economic policies given resistance to austerity measures and proposals to increase taxes.  There were also important Euro-zone uncertainties given that the Franco-German relationship under Merkel and Sarkozy was a key influence on policy. There will be calls for Germany to reverse course and France will also put additional pressure for more aggressive ECB action.

The governing Greek coalition parties lost substantial support at the election with particularly heavy losses for Pasok. New Democracy won the most number of seats and won first chance at forming a government, but was unable to gain sufficient backing. The majority of Greeks still want to retain the Euro, but there is also strong opposition to austerity measures and there will be major difficulties resolving this contradiction. Prolonged uncertainty will increase fears surrounding a forced exit from the Euro and wider Euro-zone uncertainty.

After New Democracy and the SYRIZA coalition both failed to form a government, the baton was handed to Pasok who came third in the election. There were some rumours of a coalition deal with Democratic Left which had some impact in lifting market sentiment, although there was no evidence of a deal and caution prevailed.

Within the wider Euro-zone, the Spanish government took a majority stake in Bankia with further capital injections into the banking sector as a whole and confidence in the Euro-zone remained extremely fragile. There were further capital flows into the German fixed-interest market as bund yields hit record lows.

Yen:

There will be little confidence in the Japanese economy with expectations that growth conditions will remain extremely difficult. The Bank of Japan will remain an important focus with pressure for further action to boost the economy There will also be important political pressure from the Finance Ministry for yen gains to be resisted. Defensive considerations will be crucial and a deterioration in risk appetite will support the yen. Nevertheless, regional concerns will also tend to increase the degree of resistance to yen appreciation. There will be important longer-term structural vulnerabilities which will also limit any gains.  

The yen gained ground against the dollar in Europe with the currency boosted by safe-haven demand as risk appetite deteriorated sharply.  The US currency was also undermined by a slide to US bond yields to the lowest level since February as 10-year yields dipped to below 1.8%.

Yen buying accelerated when key technical levels were broken and stop-losses were triggered with the dollar weakening to lows below 79.50 for the first time since February while the Euro tested lows below 103.  There was speculation over possible Bank of Japan intervention which limited speculative yen buying.

Although pessimism eased slightly, there was disappointment at the latest Chinese trade data for April as import growth much weaker than expected at 0.3% which fuelled expectations of deteriorating growth conditions within China and risk conditions remained generally fragile.

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The underlying economic data releases have remained mixed which will create further policy uncertainties. Growth conditions will be undermined by Euro-zone vulnerability and there will be speculation over additional Bank of England quantitative easing if growth fails to respond. These factors will tend to undermine Sterling, but defensive considerations will also remain very important and there will be underlying support as a refuge from Euro fears. Sterling will find it difficult to gain sustained support if there is a sustained deterioration in international risk conditions.

Sterling maintained a generally firm tone over the week as it pushed towards the 0.80 level against the Euro. Technical considerations remained important with an important option barrier at 0.80 and failure to break through this level triggered some profit taking on Sterling positions as the UK currency also retreated from highs near 1.62 against the dollar.

The latest manufacturing data recorded a rebound of 0.9% for March following a revised 1.1% decline previously while the wider industrial production data registered a 0.3% decline. There was also a weaker than expected BRC retail sales report with a 3.3% annual decline for April.

As expected the Bank of England left interest rates on hold at 0.50% at the latest policy meeting while quantitative easing was also held steady at GBP325bn. There had been some speculation that the MPC could expand the amount of bond purchases given that the current programme has been completed and the decision to hold policy boosted Sterling demand.

The latest NIESR GDP growth estimate remained very subdued with a reading of 0.1% for April following a revised 0.2% decline the previous month. There was still evidence of defensive Sterling demand which helped cushion the currency as bond yields remained at historically extremely low levels.

Swiss franc:

There is still the potential for further defensive flows into the Swiss currency in the short-term, especially with increased Euro-zone structural fears and a lack of attractive global alternatives. There is a risk that the 1.20 minimum Euro level will come under severe pressure, especially with evidence that the National Bank has been forced to intervene to prevent Euro losses. The central bank is likely to hold firm in the short-term with unlimited intervention when required, but any change to the Euro area could trigger a reassessment of the SNB situation.

The dollar secured net gains against the franc with a test of resistance in the 0.93 region.  As has been the case throughout May, the Euro was trapped very close to 1.2010 with no significant move higher.

Continuing economic and political stresses surrounding the Euro-zone continued to discourage any capital flows out of the Swiss currency and there were further expectations that the National Bank was being forced to intervene to prevent further Euro losses.

Swiss consumer prices rose 0.1% for April compared with expectations of a 0.2% increase with an annual 1.0% decline in prices. The data will maintain some underlying unease over deflationary pressures and ensure demands for franc appreciation to be resisted will continue.

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The Australian dollar was unable to sustain any gains during the week and the net trend was for further losses as the currency retreated towards the key party level against the US dollar. The currency was undermined by a general deterioration in risk appetite and commodity prices also came under pressure as unease surrounding the global outlook increased.

The domestic data provided some net support for the currency with a much stronger than expected labour-market report as unemployment dipped to below 5%. There was also a stronger than expected release for retail sales. The government pledge to return the budget to surplus for the forthcoming fiscal year which reinforced speculation that there would be further Reserve Bank interest rate cuts.

Unease surrounding the regional outlook are likely to keep the Australian dollar on the defensive with expectations of lower interest rates intensifying selling pressure.

Canadian dollar:

The Canadian dollar retreated over the week as a whole with a test of support beyond parity against the US currency.  There was a sharp decline in oil prices during the week which undermined demand for the currency, especially with gold prices also weaker and there were lows beyond 1.0050.

The domestic influences were limited, but a robust reading for housing starts did have some positive impact on sentiment and helped curb selling pressure.

Although the Canadian dollar should be broadly resilient, unease surrounding the debt profile and weaker commodity-price trends will tend to block any advance.

Indian rupee:

The rupee remained under pressure for much of the week as underlying confidence remained very fragile. There was an important announcement from the Reserve Bank as it introduced new regulations to force exporters to convert 50% of overseas currency holdings into rupees.  There was an immediate impact in boosting the currency, but the gains were not sustained as there were also fears that the measures reflected increased fears over the fundamentals.

There were further concerns surrounding the trade and budget outlooks which continued to trigger net capital outflows from the currency.

The Reserve Bank may have some success in curbing initial selling pressure, but it will be difficult o secure an underlying improvement in fundamentals.

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The Hong Kong dollar was unable to make any headway during the week and rifted weaker towards the 7.7650 area against the US currency.

Risk appetite was generally fragile which was illustrated by six consecutive declines for the Hang Seng index.  This also had an impact in undermining currency. There was still some degree of protection from generally low US interest rates.

Uncertainty surrounding the Chinese outlook and concerns over the regional economic trends will tend to keep the Hong Kong dollar on the defensive for now.  

Chinese yuan:

The PBOC shifted its policy of setting stronger yuan rates during the week with the official rate weakening back towards the 6.30 level against the US dollar.  The spot rate was generally weaker as well, although moves were limited as it settled near 6.3150 with a weaker Euro limiting any scope for yuan gains.

The latest trade data recorded much weaker than expected export and import growth for the year to April which undermined confidence in the economic outlook and raised fresh doubts surrounding the growth outlook.

Risk appetite was also generally fragile which limited demand for Chinese securities while a weaker Euro also pushed the US currency higher

A weaker capital account and domestic economic doubts are likely to keep the yuan on the defensive in the short-term with little scope for short-term gains.

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