Weekly Forex Currency Review 13-07-2007

Overall strategy

Key events for the forthcoming week

Dollar

Mortgage fears will remain a negative influence on the US currency. Although the underlying trade deficit is stabilising, the dollar still needs substantial capital inflows and further stresses in mortgage related bonds would tend to weaken inward capital flows. The economic data as a whole has still indicated firm growth and this should help curb dollar selling, especially as high energy prices will reinforce Federal Reserve determination to maintain a restrictive interest rate policy. Overall, the dollar should be able to resist further heavy short-term selling pressure, but with fragile sentiment limiting recoveries.

The US dollar came under significant pressure during the week with record lows against the Euro close to 1.38 while the trade-weighted index also tested 30-month lows.

The dollar was unsettled by renewed mortgage fears over the week. Ratings agencies moved to downgrade mortgage related bonds which increased unease over the sector. Fears over a prolonged downturn in the housing sector also increased after a profits warning from Home Depot group.

Following the ratings downgrades, there were also concerns over reduced US corporate bond buying by overseas investors.

The labour-market data was firm with jobless claims falling to 308,000 in the latest week from 320,000 which provided some further reassurance over the employment trends.

The US trade deficit rose to US$60.0bn in May from US$58.7bn the previous month. Imports and exports both rose significantly over the month with oil imports rising on increased volumes and prices.

Gains in the Kuwait dollar increased fears over wider Middle East dollar selling and unsettled the currency.

Euro

The Euro has retained a firm tone during the latest week, securing an advance against most of the major currencies as well as the record high against the dollar.

The ECB continued to take a tough stance on monetary policy in public statements this week while the monthly central bank report was also strong.

The French industrial production figures were weak, but wider Euro-zone data was still relatively firm.

The German government rejected French calls for action to stem Euro gains while ECB officials in general expressed confidence that currency strength was not damaging the economy at current levels.

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

The yen strengthened sharply to near 121.00 against the yen before weakening back to 122.50 later in the week.

The Bank of Japan left interest rates on hold at 0.50% following the latest council meeting. There was an 8-1 vote with Mizuno voting for a rate increase.

Bank Governor Fukui stated that the bank would continue to increase interest rates gradually and there was no clear commitment to an August increase.

The Japanese current account remained strong in the latest month which offset sharp short-term capital outflows.

Sterling will look to gain further short-term support from expectations of higher interest rates with carry trades also providing near-term support. The economy is, however, showing signs of cooling and the risk of a more pronounced slowdown will be increased by the very high consumer debt burden. Overall, there is likely to be increased pressure for the Bank of England to at least sanction a significant pause in rate increases to assess economic prospects. A downward shift in interest rate expectations could result in significant UK currency losses given the tightening priced in at existing levels.

Sterling pushed to fresh 26-year highs above 2.03 against the dollar during the week before drifting weaker while the UK currency fell to a one-month low against the Euro.

The latest RICS house-price survey recorded sharp drop in the number of agents reporting an increase in prices to just above 10%, the lowest level since early 2006.

There were mixed comments from Bank of England officials with Sentance retaining a tough stance on policy while Gieve was more balanced on the outlook.

The UK trade deficit narrowed to GBP6.3bn in May, a 19-month low, but the April deficit was revised sharply higher by GBP0.6bn.

Producer price indicators were generally contained for June with markets looking ahead to the June data. The BRC retail sales monitor recorded firm annual sales growth despite a subdued monthly figure.

Projected ROI of between 7-8% in this World renowned resort in St Lucia

Superb buy to let opportunity that allows you to enjoy the benefits of a holiday resort, with a share of room profits.  For more information click here.

The Swiss franc gained from an increase in risk aversion during the week, although a strong recovery in stock markets later in the week resulted in a retreat against the Euro.

There were no significant domestic economic releases during the week, but the National Bank monetary survey hinted that the bank could consider a further interest rate increase before the next scheduled meeting in September.

Australian dollar

The Australian dollar held firm against the dollar during the week, recovering from a brief dip, and was able to strengthen to an 18-year high at around 0.8680.

The labour-market data was weaker than expected with the unemployment rate increasing to 4.3% from 4.2% while the employment increase was held to 2,500 for the month.

The Australian currency gained some support from a high level of commodity prices and a recovery in risk appetite also underpinned the currency late in the week.

The Australian dollar will look to gain from expectations of firm growth and high commodity prices, but will struggle to extend gains given the underlying credit tightening and reduced confidence over a rise in domestic interest rates.

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

The Canadian dollar found support weaker than 1.06 against the US currency and strengthened back beyond the 1.05 level with highs around 1.0450.

The Bank of Canada increased interest rate to 4.50% from 4.25% at the latest policy meeting

The central bank was more cautious over growth prospects and did not provide a clear hint that a further near-term increase in rates would be sanctioned.

The Canadian trade data remained robust with the surplus rising to CAD5.9bn in May from CAD5.8bn the previous month. High crude oil prices supported the Canadian dollar during the week.

A US$38bn bid approach for Alcan from the Rio Tinto group triggered expectations of further merger-related inflows which supported the currency.

Canadian dollar sentiment will remain strong in the short-term, although consolidation of recent gains is likely to be the dominant theme.

Indian rupee

The Indian rupee strengthened near to nine-year highs against the dollar during the week before weakening sharply back to 40.70 during Thursday.

There was evidence of central bank rupee selling which pushed the Indian currency sharply weaker even though underlying rupee demand remained firm. Fears over intervention held the currency close to 40.50 on Friday.

The local stock market held firm during the week despite the volatile performance on Wall Street. Local resilience reinforced optimism over capital inflows, especially after US markets rallied strongly on Thursday.

The Indian government announced plans for additional help for exporters during the week.

The rupee will remain strong while global risk tolerances are high, but there are still high risks of significant corrections weaker while the central bank will continue to block strong gains.

Get the latest Forex news articles here.

The Hong Kong dollar was trapped within generally narrow ranges during the week with little in the way of fresh incentives. The currency weakened to weekly lows around 7.8170 on Friday.

Local inter-bank money market rates remained generally high which supported the Hong Kong dollar initially, but rates drifted weaker later in the week as fund demand eased and this additional liquidity undermined the Hong Kong currency.

There was still evidence of arbitrage Hong Kong dollar selling on significant rallies.

The drop in US yields moderated demand for the US dollar before a slight recovery later in the week

The Hong Kong dollar should remain trapped within a narrow ranges in the short-term with buying support close to the 7.82 level, but with only limited gains realistic.

Chinese yuan

The Chinese currency was supported by general US dollar vulnerability during the week as the US currency tested record lows against the Euro.

The Chinese trade data remained very strong with a record surplus of US$26.9bn in June which maintained underlying pressure for a stronger yuan.

Central bank officials attempted to curb expectations of strong Chinese currency gains, but continued to tolerate gradual appreciation.

The underlying trend should continue to be for a stronger Chinese yuan even though the rate of advance is liable to slow from recent levels.