Weekly Forex Currency Review 12-04-2013

The Bank of Japan decision to expand monetary policy extremely aggressively will continue to have an important global currency impact. There will be expectations of capital outflows from Japan which would help underpin risk conditions, although volatility is liable to intensify. There will also be important pressure for the ECB to take a more aggressive policy stance to help provide some degree of relief.  Overall, net dollar losses should be limited.

Key events for the forthcoming week

Dollar:

Following the weaker than expected employment data, there has continued to be a more cautious tone surrounding US growth prospects. There will also be expectations that a tighter fiscal policy will have some negative impact on spending. In this environment, there has been fresh doubts surrounding the potential for a tapering of Federal Reserve bond purchases. There will still be expectations that the US economy will out-perform compared with the Euro-zone. The relative outlook will, therefore, continue to provide underlying support for the US currency with a lack of viable alternatives.  The dollar will also gain some support if there is any fresh deterioration in international risk appetite.

The dollar weakened against European currencies during the week with further doubts surrounding the US outlook as the Euro pushed to monthly highs.
 
The latest US employment report was weaker than expected with a headline non-farm payroll increase of 88,000 for March, the lowest gain for nine months, after a revised 268,000 gain for February. Markets had been braced for a relatively weak release following the weaker than expected readings for ADP and the ISM employment index. There was still disappointment that growth was below 100,000. There was some relief that the unemployment rate declined to 7.6% from 7.7%, although this primarily reflected a decline in the participation rate.

Following an inadvertent leak of the Federal Reserve minutes, the report was released five hours ahead of the scheduled release time. There was inevitably a mixed set of opinions within the FOMC. One member, presumably Kansas City President George wanted an immediate tapering of bond purchases. A few members were looking for a reduction in asset purchases by mid year with other expecting action to delayed until next year.

The minutes did have a slightly more hawkish tone, but the impact was certainly lessened by the fact that expectations may have shifted again following the weaker than expected payroll data last week.

Jobless claims data recorded a decline to 346,000 in the latest week from a revised 388,000 previously which offered some degree of reassurance surrounding the labour market and helped stabilise sentiment towards the economy.

Regional Fed President Plosser again called for a reduction in bond purchases by mid 2014 given the recent economic improvement. Plosser, however, remains a  non-voter for 2013 and the overall re-assessment following the Fed minutes which suggested that the Fed was unlikely to shift policy in the short-term. The latest retail sales and consumer confidence data will be watched very closely on Friday for further evidence of underlying trends and a weak outcome would further dampen confidence.

But for too long people have been missing out on the easy profits on the foreign exchange (or forex) market.
Until Now...  Click Here.

There will be further concerns surrounding the Euro-zone outlook after the stream of negative data releases and fresh deterioration in growth prospects. There will be severe concerns surrounding the peripheral outlook and the social costs of rising unemployment are also liable to intensify as political protests increase. There will be strong pressure for additional ECB support in the form of monetary relaxation, although there is widespread scepticism whether interest rate cuts will be effective.  Underling capital inflows are also liable to be generally weaker given fresh peripheral fears.

The Euro was able to maintain a solid tone during the week with advances against all major pairs, although ranges were relatively narrow. There was a significant development in Euro-zone bond yields as German yields fell to the lowest level for eight months. There was also a further sharp decline in French yields as benchmark yields declined to record lows.

The Euro-zone Sentix business confidence index declined to -17.3 for April from -10.6 previously with the index at its lowest level since December.

Portugal remained a significant focus following the ruling that part of the government’s budget cuts were unconstitutional. The government will look to find alternative measures to cover an expected gap of around 0.8% of GDP.  There will be increasing domestic opposition and its certainly possible that the government could collapse and trigger further instability.

Spanish Prime Minister Rajoy stated that the ECB mandate should be altered by the EU. He effectively called for a switch towards a Federal Reserve type mandate which would require employment to be targeted as well as inflation. There is little doubts that Spain will continue to push for a looser monetary policy and there could be a significant impact if political momentum builds.

The EU Commission warned that Spain and Slovenia both needed to take urgent action on budgets. There was important underlying unease surrounding the peripheral economies and lack of policy flexibility. Moody’s warned that underlying deterioration in government finances could trigger a credit-rating downgrade.

ECB council member Asmussen stated that there were more downside risks to the economy then there were 1-2 months ago which will maintain pressure for the ECB to take a more aggressive action to stimulate the economy even with doubts whether there would be a significant impact on the economy.

Yen: 

The Bank of Japan will continue to push for an extremely aggressive monetary policy in the short-term as it looks to double the monetary base in order to boost inflation. The policy will remain a substantial negative factor for the yen. There will also be expectations of strong capital outflows given the heavy Bank of Japan buying of domestic bonds. This will tend to weaken the yen, although overall capital flows are still likely to be highly erratic.  Yen volatility is also likely to be a key feature.
 
On Monday, there were reports that the Bank of Japan would accelerate its bond buying programme with the purchase of JPY1.2trn in bonds of purchases of above 5 years.  In this environment, the yen was subjected to further aggressive selling pressure despite pressure for a limited correction.  

Underlying yen sentiment remained extremely weak following the aggressive Bank of Japan policy shift and bond purchases. There was further speculation over the extent and destination of Japanese institutional funds given that there will be very little scope for domestic bond purchases given the aggressive Bank of Japan intervention.  

Bank of Japan Chairman Kuroda stated that the bank would be relentless in the determination to meet the 2% inflation goal. In this context, the policy of aggressive bond buying could be extended beyond two years. Comments that policy action was enough for now and that policy was not directly aimed at exchange rates triggered a yen correction.

Although machinery orders rose 7.5% for March, there was a sharp annual decline which maintained unease surrounding the industrial outlook. There was strong yen selling on any corrective yen rebounds, but there was option defence of the 100 region which provided some degree of protection.

Earn a tax free income trading, from just 20 minutes a day – no experience needed.  Our powerful trading software will help you decide when to enter trades and how to maximise profits.

Register for a FREE brochure and trading guide, Click Here. 

The latest UK survey data will provide some relief over the likelihood of avoiding a triple-dip recession with marginal growth likely to be registered for the first quarter of 2013. The overall growth dynamics remains very poor with little scope for domestic gains and generally weak export prospects. In this environment, there will still be pressure for the Bank of England to sanction additional quantitative easing and provide a boost. There will also be further concerns surrounding the underlying balance of payments situation.  Overall, Sterling will find it difficult to correct higher significantly further.

Sterling held a firm tone against the dollar during the week and pushed to the highest level since early March with consolidation near 0.85 against the Euro.
 
The latest industrial production data was stronger than expected with a 1.0% increase for February, although this failed to recover the 1.3% decline recorded for January. The NIESR data registered 0.1% growth in the three months to March, unchanged from a revised estimate for the previous month. The data maintained expectations that the UK economy would just be able to avoid a triple-dip recession.

The trade data was weaker than expected with a goods deficit of GBP9.4bn for February from –GBP8.2bn the previous month which maintained a high degree of unease surrounding the export sector and wider balance of payments deficit.

Bank of England MPC member Miles remained uneasy over the growth outlook and expected inflation to retreat with his comments still suggesting that he will favour further quantitative easing. He has been promoting further bond buying consistently over the past few months and comments from swing members will be more important.

Swiss franc:

With business confidence fragile and evidence of renewed deterioration in the Euro-zone, there will be further concerns surrounding the growth outlook and there will be continuing pressure for franc gains to be resisted. In this environment, there is a very strong probability that the Euro minimum level will continue to be defended even with a fresh increase in reserves reported by the bank. There is scope for limited net dollar gains.

The dollar dipped to six-week lows just below 0.93 against the franc before finding some degree of respite as the Euro edged higher to the 1.22 region.
 
The latest currency reserves data registered a fresh increase in reserves to CHF438.8bn for March from a revised CHF430bn previously. This was the first major monthly increase since October and increased speculation that the Cyprus deal had triggered a renewed flow of defensive capital flows into the Swiss currency, especially with sharp losses for the yen.

InterTrader.com provides an award-winning suite of products and tools to help you back your judgement Spread betting in the financial markets. Our aims are simple: to make the markets accessible to all, to make CFD trading and Spread betting affordable and to provide a service that you can trust. Click here

The Australian dollar was able to find solid support on dips during the week and pushed highs just below 1.06 against the dollar, the strongest level since early January. The currency gained support on yield ground and expectations of capital diversification, especially in view of the aggressive Bank of Japan expansion.

There were mixed economic readings with a generally weaker bias as the construction and manufacturing PMI indices both contracted at a faster pace. There was also a sharp decline in employment following last month’s big gain while business confidence was little changed.

The Australian dollar will gain some degree of support on yield grounds and expectations of capital inflows, but there will be a high risk of a quick reversal.

Canadian dollar:

The US dollar was unable to take advantage of strong gains following the much weaker than expected Canadian employment report last week and again dipped to lows in the 1.01 area before stabilisation.

The subsequent domestic data releases failed to have a major impact. The Canadian currency was hampered by a dip in oil prices during the week, but underlying reserve diversification provided net support.

With oil prices remaining subdued, the Canadian dollar will find it difficult to gain strong support, especially with underlying valuation concerns.

Indian rupee:

The rupee was generally confined to narrow ranges during the week, but did prove to be broadly resilient in the face of underlying fundamental doubts. A generally weaker US dollar tone and buoyant global equity markets helped provide underlying support.

There were still important concerns surrounding the balance of payments situation and there was also evidence of persistent overseas selling of domestic equities which maintained a nervous mood. There was also uncertainty ahead of the interest rate decision due in the first week of May.

Despite some improvement in risk conditions, the rupee is likely to be hampered by underlying structural budget and current account deficits with little scope for gains.

..From expert analysts at CML Markets.  Background analysis and how you can profit in these market conditions.  Download your free report now.  Click Here.

The Hong Kong dollar edged weaker in very narrow ranges as it briefly tested support beyond 7.7650 against the US dollar. There was some impact from the Federal Reserve minutes, but the currency was underpinned by expectations of strong capital inflows associated with forthcoming IPO.

The short-term focus will continue to be on attempts to control the property sector. Medium-term speculation over a peg break will continue given inflation concerns.

Chinese yuan:

The Chinese yuan maintained a solid tone during the week and there was a further test of 19-year highs just below 6.20 against the dollar as the PBOC accepted grudging appreciation. There was a strong increase in currency reserves for March which increased speculation over capital inflows and helped support the currency.

The trade data was weaker than expected and there was major uncertainty over the export data given fears that data through Hong Kong was being used to mask underlying capital inflows.

The yuan can maintain a firmer tone in the short-term given expectations of renewed capital inflows, but the trend is liable to reverse within the next few months.

New ADVFN Service - FREE Reports

Get your free report on Isa's, Investment Trusts, Funds,
Sipps Travel and Cars - FREE and Easy service CLICK HERE