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Forex Weekly Currency Review
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Forex Weekly Currency Review – Forex Weekly Currency Review
A weekly round-up of the week's activities in the Foreign Exchange market, including a forecast of the week ahead and a table of key events. Find out the latest news on the US Dollar, Euro, Japanese Yen, British Pound, Swiss Franc, Australian Dollar, Canadian Dollar, Indian Rupee and the Hong Kong Dollar. Click here to receive or weekly bulletins.

Weekly Forex Currency Review 15-02-2013

02/15/2013
Weekly Forex Currency Review
 ADVFN III Weekly FOREX Currency REVIEW 
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Weekly Market analysis

Monetary and exchange rate policies will continue to be a very important focus over the next few weeks.  The ECB will be under pressure to resist Euro gains and potentially ease monetary policy. There will also be pressure on the US Federal Reserve to at least slow the rate of quantitative easing to help ease the pressure on other central banks. There will be the risk of a sharp increase in global currency tensions, although the impact suggests that there will be no major consensus on exchange-rate levels.

Key events for the forthcoming week

Date

Time (GMT)

Data release/event

Tuesday February 19th

10.00

German ZEW report

Wednesday February 20th

09.30

Bank of England MPC minutes

Wednesday February 20th

19.00

US Federal Reserve minutes

Dollar:

There will be further expectations of solid US economic growth with consumer spending broadly resilient. There will be fiscal uncertainties with the possible sequester due at the end of February, but the most likely outcome is that some deal will be stitched together. The Federal Reserve will maintain its aggressive policy of bond buying in the very short-term, but there will be growing pressure for an exit strategy within the next few months which would provide dollar support.  There will be expectations that the underlying trade deficit will continue to improve which will provide some degree of US currency support.

The dollar was able to secure a net advance during the week with the trade-weighted index moving higher on fresh concerns surrounding the Euro-zone outlook.
 
The US retail sales report was close to expectations with a 0.1% monthly increase and a core 0.2% gain for the month. There was little reaction, but some degree of relief over the data which suggested spending was holding relatively firm. There were no major comments on exchange rates from Treasury Secretary nominee Lew in Senate testimony on his appointment.

The latest US jobless claims data was stronger than expected with a decline to 341,000 in the latest week from a revised 368,000 previously which maintained a more optimistic tone surrounding the US labour market and economy.

G7 issued a statement on currencies which stated that exchange rates should be determined by the markets. Fiscal and monetary policies should be used to meeting domestic objectives using domestic instruments. The statement also warned against excessive volatility


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Euro

The near-term economic indicators will be watched very closely given the recent signs of improvement as any evidence of a renewed downturn would put the Euro-zone economy under severe pressure with further fears surrounding the peripheral economies in particular. There will also be fears that momentum for structural reform will continue to slow. There will be pressure for further Euro gains to be resisted even though the ECB will be extremely reluctant to get involved in exchange rate management. There will certainly be pressure for the central bank to resist monetary tightening.  

The Euro was able to stabilise initially following sharp losses late last week before being subjected to renewed pressure over the second half of the week with lows in the 1.33 area against the US currency.
 
There were reports on Wednesday that the ECB was concerned over the level of the Euro, primarily due to the negative impact on weaker peripheral economies. In contrast, there were reports that France was isolated within G7 in its calls for action to weaken the Euro. The net impact was for a weaker currency, especially after the references were attributed to bank President Draghi which increased speculation that the bank was serious in its intent.

The currency was undermined on Thursday by a weaker than expected German GDP reading of -0.6% for the fourth quarter and the damage was compounded by a much weaker than expected Italian contraction of 0.9%. In this context, although a weaker reading should have been discounted, there was an important negative reaction to a weaker Euro-zone figure of -0.6%.  The extent of protracted difficulties was illustrated by the fact that the Euro-zone failed to register any quarterly growth for 2012, the first time there had been no positive figures in a calendar year since the Euro’s inception. There was serious concerns surrounding Portugal with a quarterly contraction of 1.8% which increased fears surrounding the peripheral outlook.

Persistent economic weakness maintained speculation that the ECB would be increasingly concerned surrounding the economic outlook and the impact of a stronger Euro which would increase the potential for verbal intervention and possibly consider a relaxation of monetary policy.

ECB member Constancio reminded markets that it was possible for the ECB to cut the deposit rate to below zero which triggered fresh selling pressure on the Euro with a three-week low just above the 1.33 level. Bundesbank head Weidmann also stated that the ECB would not cut interest rates just to weaken the Euro.
    
Yen:

The government will maintain strong pressure on the Bank of Japan to pursue a more aggressive monetary policy in an attempt to meet the new 2% inflation target. The appointment of the new Bank of Japan Governor will be watched very closely with some speculation that an announcement is imminent. There will still be important reservations within the Bank of Japan and financial sector given the threat of a destabilising sell-off in the bond market. G20 reactions will also be monitored closely as there will be opposition to any aggressive yen weakening from current levels.

Yen volatility remained high during the week with a reversal of initial weakness to around the 94.50 area against the US currency.

US Treasury official Brainard commented that intervention should be used very rarely.  She was also supportive of Japanese efforts to end deflation and boost growth. The remarks dampened expectations of US criticism over Japan and pushed the yen sharply weaker markets seeing the comments as vindicating yen selling.

The latest Japanese GDP data was weaker than expected with a 0.1% contraction for the fourth quarter. As expected, the Bank of Japan took no action at the latest policy meeting following a string of additional monetary easing decisions. A proposal from one member that rates should be kept near zero until the inflation target was in reach was rejected. Former bank member Iwata stated that the yen was over-valued on trade grounds and the dollar moved higher to the 93.70 area.

There was further speculation surrounding the next Bank of Japan Governor’s appointment on Thursday. There were reports that a nomination could be made as early this week, although there were also reports that Prime Minister Abe and Finance Minister Aso disagreed on the choice amid internal tensions.

There were some reservations over being aggressively short of the Japanese currency ahead of the  G20 meeting and the US currency weakened to lows just below the 93 level in New York on Thursday.

The yen regained ground in Asia on Friday with some speculation that the next Bank of Japan Governor would be Muto who has served previously as a Deputy Governor. There were expectations that he would back further monetary easing, but resist more controversial measures and the dollar dipped to lows in the 92.25 area.


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Sterling

The immediate growth indicators are likely to remain mixed and the most likely outcome is weak growth with consumer spending still restrained. Bank of England policies will remain an extremely important focus in the short-term following the inflation report. The MPC will maintain a very loose policy and has explicitly stated that it will decide not to meet the 2% inflation target in the short-term given the risk of damaging the economy even further. Negative real yields will remain an important factor tending to keep Sterling under pressure.  There could be some temporary respite in selling if Euro-zone fears intensify again.

Sterling remained under pressure for much of the week with losses accelerating following the Bank of England inflation report and the currency tested six-month lows below 1.55 against the dollar with support close to 0.87 against the Euro.

The latest consumer inflation report was broadly in line with expectations with an annual rate of 2.7% and a slightly higher than expected reading for the RPI rate at 3.3%. Much of the inflation pressure was led by government-led prices and underlying inflation was more restrained. There were still important concerns surrounding the impact of weak disposable incomes on consumer spending and the fact that inflation is persistently above the 2% target.

The GDP growth forecasts were lowered slightly in the latest Bank of England inflation report and Bank Governor King was generally downbeat over the outlook with a warning that pre-recession output would not be recovered until 2015. The central bank also raised its inflation forecasts with a central projected rate of 2.3% in two years time from 1.8% previously.

These projections clearly give the bank an important dilemma over policy as inflation would suggest tightening is required. Governor King, however was very clear in his commitment not to tighten policy given potential damage to the economy.  Monetary policy will remain extremely loose throughout the period with the bank effectively willing to sacrifice the inflation target with important implications for real UK yields.

Sterling fell sharply with initial lows near 1.55 against the dollar and was unable to sustain a limited technical recovery while the Euro advanced to highs around 0.8680. Retail sales fell 0.6% in January, maintaining fears surrounding the economy.

Swiss franc:

There will be unease surrounding the growth outlook, especially with the economy struggling to find any significant traction from exports given weakness in the Euro-zone. Renewed Euro-zone stresses could quickly trigger a resumption of upward pressure on the Swiss franc, especially if conditions in France continue to deteriorate. The National Bank remains strongly committed to the 1.20 minimum level and pledged to engage in further measures to stem capital inflows if required.  

The Euro found support on dips towards the 1.2250 area against the franc during the week. The US currency was able to push towards the 0.9250 area, but struggled to sustain the advance.
 
The Euro was broadly resilient against the Swiss currency despite the very weak GDP figures and the ability to resist losses will tend to dampen that the Swiss franc will be the beneficiary of significant defensive capital inflows.

National Bank President Jordan continued to insist that the minimum Euro rate would be maintained for the foreseeable future and that he expected the franc to weaken further. He also stated that further measures would be taken if necessary, although he did not expect this to be required.


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Australian dollar

The Australian dollar remained under pressure during the first half of the week with lows close to the 1.02 area against the US currency before a partial recovery over the second half. There was some recovery in risk appetite which helped underpin the currency and there were also some reduced expectations that the Reserve Bank would cut interest rates further in the short-term.

A firmer reading for business and consumer confidence helped underpin currency sentiment to some extent despite persistent doubts surrounding the housing sector following another weak reading for home loans.

Despite some scaling back of interest-rate cut expectations, the Australian dollar is likely to remain generally vulnerable to further losses given growth doubts.

Canadian dollar:

The US dollar was generally confined to narrow ranges during the week, but did find support on dips to below 0.9950 and pushed higher on Thursday as oil prices fell.

Bank of Canada Governor Carney maintained a slightly more cautious outlook surrounding the economy which maintained caution towards the currency. There were no significant economic data releases during the week.

There is likely to be a further increase in concern surrounding domestic fundamentals with a particular focus on the housing sector curbing Canadian dollar support.

Indian rupee:

The rupee was unable to make any impression on the US currency during the week and retreated back towards the 54 level. The currency was hampered by a generally softer tone in the stock market amid fears that capital inflows could be weaker.

The latest trade data was weaker than expected and there were further concerns surrounding the underlying current account deficit which could pose important underlying risks to the currency outlook. Markets were also cautious ahead of the annual budget release due in late February.

The rupee will continue to find it difficult to secure strong currency gains given that there will be further concerns surrounding the growth outlook and structural deficits.


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Hong Kong dollar

The Hong Kong dollar was confined to narrow ranges during the week and consolidated around the 7.7550 area with very limited activity given the New Year holidays. There were still longer-term concerns surrounding the potential inflation threat until there is any underlying policy shift by the Federal Reserve.

There may be an easing of immediate speculation surrounding the Hong Kong dollar peg, but medium-term speculation will continue, especially given inflation concerns.

Chinese yuan:

Chinese markets were closed for the Lunar New Year Holidays.

 

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Forex Weekly Currency Review