Weekly Forex Currency Review 16-11-2007

Can you identify the Next Major CURRENCY Trend? ...
with the Electronic Currency Trading System (ECTS) Help You Can! Click Here

Overall strategy: The trends in global carry trades are likely to remain very important in the short-term and the net risks suggest that there will be further selling pressure on the high-yield currencies running into the year-end period, especially if credit fears spike again. The dollar is likely to remain vulnerable in the short-term and will be potentially volatile, but should be able to resist heavy losses from current levels.                

Key events for the forthcoming week

Dollar:

The data this week has not offered any significant fresh insights into US trends. There will be continuing fears over a sharp deterioration in the economy as consumer spending comes under pressure while there will also be expectations of further Federal Reserve rate cuts. The Fed will look to take a more balanced stance which may trigger some reassessment of the situation while the dollar will also gain some support from an improvement in the underlying trade deficit. Any reduction of carry trades would provide some net dollar support, particularly if emerging-markets weaken. There will still be speculation over underlying diversification away from the dollar which will limit rally attempts.    
      
The dollar resisted fresh record lows against the Euro during the week and temporarily strengthened back to near 1.45. There was a also a recovery on a trade-weighted basis, but the currency struggled to make much headway.

The US currency secured some support from an unwinding of carry trades while a drop in commodity prices over the second half of the week also boosted the dollar with a defensive flow of funds into US Treasuries.

There was further speculation over a breaking of Middle East currency pegs which unsettled the dollar at times with the UAE warning that there could be a regime shift due to persistent dollar weakness.

US Treasury Secretary Paulson stated that the dollar would rebound and took a slightly stronger stance over the US currency.

US retail sales rose a headline 0.2% for October while the underlying increase was also 0.2%. Elsewhere, jobless claims rose to 339,000 in the latest week from 319,000.

The New York manufacturing index remained robust while the Philadelphia Fed index rose slightly to 8.2 in November from 6.8 the previous month, although the underlying components were less robust.

Consumer prices rose 0.3% in October as energy prices increased while the core increase matched market expectations at 0.2% to give a 2.2% year-on-year increase. Producer prices rose 0.1% in October with core prices unchanged

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

The ECB will remain concerned over inflation in the short-term and the bank will want to maintain a firm policy stance to contain inflation expectations even if it does not feel in a position to raise interest rates. There will be further concerns over the Euro-zone economic prospects as the credit impact persists and banking difficulties will be an important background consideration. Any evidence of significant deterioration in growth would increase political pressure for Euro gains to be restrained. 

The Euro has retained a generally firm tone over the week, but there was a diversity of performance with the Euro weakening against the yen and Swiss franc.

The German ZEW index fell further to a record low of -32.5 in October which reinforced speculation over a slowdown in the economy.

The third-quarter Euro-zone GDP growth was firm with annual growth of 2.6%, but there were concerns over fourth-quarter prospects. Provisionally, headline inflation was unchanged at 2.6% for October with a core increase of 1.9%.

There were no major protest against the Euro's value from German finance officials over the week, although there were industrial concerns.

Yen:  

The short-term yen moves are likely to be dominated by levels of global risk aversion and the outlook for carry trades. The yen will be sold at times on yield grounds, although the most likely outcome is that there will be a net reduction in carry trades over the next few weeks as risk aversion remains high. There will be Finance Ministry opposition to rapid yen gains with unease over yen gains much beyond the 110.0 level against the dollar.  Nevertheless, there will be some threat of a disorderly unwinding of positions and rapid yen gains.                     
                    
The yen strengthened to highs near 109.0 against the dollar during the week and, although the US currency corrected stronger, it was back on the defensive by Friday.

The Bank of Japan left interest rates unchanged at 0.50% following the latest council meeting by an 8-1 vote with Mizuno voting for an increase for the third consecutive month. The bank also warned over the growth risks caused by US weaknesses.

The central bank left its economic assessment unchanged over the month with a slight upward revision to wholesale inflation estimates.

Japanese GDP growth was firmer than expected with a 0.6% increase for the third quarter as exports remained strong, although domestic demand was broadly steady.

International market trends were still the dominant influences on the yen. There was a general unwinding of carry trades which provided important yen support.

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.

Sterling will be unsettled by the prospect of lower interest rates, especially with the Bank of England taking a generally pessimistic outlook over the economic prospects. Stubborn inflation pressure may limit the scope for lower interest rates and support Sterling, although overall sentiment is liable to deteriorate with pressure for a December rate cut. UK currency moves will also be linked to wider carry trade issues and Sterling will be sold if there is a wider capitulation on carry trades.  There may be some scope for consolidation against the Euro.                    
 
Sterling peaked close to 2.1150 against the dollar at the end of last week, but fell sharply this week with a low near 2.04. The UK currency also weakened rapidly against the Euro with a 54-month low near 0.7170. The trade-weighted index fell to a 15-month low on a trade-weighted basis.

The headline consumer inflation data was higher than expected with an increase to 2.1% for October from 1.8% previously, but the core inflation rate held at 1.5% for the month. Similarly, wholesale prices rose 0.6% while the core increase was held to 0.3% for the month.

Retail sales dipped 0.1% in October which cut annual growth to 4.4%. The labour market data remained firm with a further decline in unemployment claims while headline earnings growth rose to 4.1%. The latest RICS housing survey recorded a further deterioration with the index weakening to fresh two-year low of -22.2.

The Bank of England in its quarterly inflation report stated that the 2.0% inflation target would be met on the assumption of at least one interest rate cut over the next year. Bank Governor King also took a generally downbeat view over the economic prospects while warning that there was the risk of stock market falls.

The commentary reinforced market expectations of a near-term cut in interest rates which undermined the currency. Inter-bank interest rates increased over the week.

Swiss franc:

The Swiss economy is liable to remain firm in the short-term and, even if there is a slowdown in growth, demand should hold firm relative to the Euro-zone economies. The National Bank December interest rate decision will remain open in the short-term with the bank looking to control inflation expectations. The Swiss franc will gain support if there is any general unwinding of carry trades with the possibility of sharp currency gains if there is any major escalation of credit-related stresses.       
 
The Swiss franc has retained a firm tone against the dollar over the week with a test below 1.12, the strongest franc level since 1995. The Swiss currency also regained further ground against the Euro with highs near 1.64.

The domestic economic data had no major impact on the Swiss currency with a 7.1% annual increase in retail sales for September. National Bank member Jordan warned that the Swiss franc could strengthen sharply on a general unwinding of carry trades. Bank President Roth also repeated opposition to franc weakness.

Jordan stated that policy was appropriate for now, but that liquidity could be added if necessary which suggests unease over potential carry trade unwinding.

The Swiss currency drew support from the general reduction in global carry trades, especially as commodity prices also fell over the week.

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

The Australian dollar dropped sharply at the beginning of the week with lows below the 0.88 level against the US dollar and the Australian currency was subjected to fresh selling pressure late in the week after a brief rally to 0.9050.

There was little in the way of Australian data releases over the week with some weakness in housing finance. Business confidence held steady for the month while there was a drop in consumer sentiment.

The Australian currency fluctuated in line with global risk tolerances and the movement in commodity prices. A sharp drop in copper and gold prices helped weaken the currency sharply.

The Australian dollar will be vulnerable to further selling pressure if there is a renewed unwinding of carry trades and volatility is liable to remain high.

Canadian dollar:

The Canadian dollar was unable to strengthen back through the 0.92 level early in the week and weakened sharply to lows beyond 0.98 on Thursday, undermined in part by an unwinding of carry trades as liquidity fears increased.

The Canadian data recorded a further 0.9% drop in manufacturing shipments for September which maintained fears over a deterioration in competitiveness.

Bank of Canada official Jenkins warned that the currency gains could trigger a significant reduction in growth and inflation over the next few months.

The Canadian dollar was unsettled by rumours of substantial debt write-downs within the banking sector The drop in commodity prices and a retreat in oil prices also unsettled the Canadian currency over the week as a whole with high volatility.

There is the potential for some Canadian dollar consolidation close to parity against the US unit after the intense volatility seen over the past two weeks.

Indian rupee:

The rupee held relatively steady over the week within sight of the 10-year highs seen last week. The currency held around 39.35 against the dollar in cautious conditions.

There were firm capital inflows into the Indian markets despite significant volatility in the stock market, although the underlying mood was more tentative.

The Reserve Bank continued to resist rupee gains with sustained intervention in the market. The bank revealed that intervention totalled US$11.87bn in September.

Overall rupee confidence should remain firm for now. There is still the risk of increased volatility, especially if global credit conditions continue to tighten.   

Get the latest Forex news articles here.

The Hong Kong dollar weakened to lows near 7.79 against the US dollar during the week before securing a modest rebound with an advance to around 7.78 on Friday.

The Hong Kong currency drew support over the second half of the week from a significant increase in inter-bank rates which discouraged arbitrage activity against the local currency. The forthcoming IPO offerings also provided some Hong Kong dollar support and contributed to tighter money markets.

The HKMA stated that it was impractical to link the currency with the Chinese yuan, but underlying speculation over a policy shift continued.

The Hong Kong dollar should be able to find some further near-term support close to current levels as the recovery in interest rates will discourage selling.

Chinese yuan:

The yuan was unable to make further progress this week with a broad tone of consolidation after strong gains the previous week. There was also some temporary increase in dollar demand and the yuan settled close to 7.43 against the US currency.

The Chinese trade surplus remained strong for October at a record US$27.1bn. The consumer inflation data also retained high with a 6.5% annual rate for October which prompted further inflation warnings from officials and speculation over higher interest rates. The central bank tightened reserve requirements at the end of last week

There was sustained international pressure from European and US officials that the yuan should be allowed to rise faster

The Chinese central bank resisted further local currency gains over the week, looking for a period of consolidation after strong gains.

The central bank is liable to encourage a further period of consolidation in the short-term. Nevertheless, the underlying pressure for Chinese yuan gains will continue.