Weekly Forex Currency Review 18-11-2011

The Euro-zone debt crisis will continue to dominate in the short term. There will also be increased fears surrounding the global banking sector and impact on lending as sovereign-debt fears trigger a further tightening in lending conditions which will have an important negative impact on global growth.  High volatility is likely to be a key feature as governments and central banks look for an escape route.

Key events for the forthcoming week

Market analysis

Dollar: 

The latest US economic data has continued to show significant signs of improvement and fears over recession should continue to ease in the very short term which will provide some underlying support for the dollar. There will still be an underlying lack of confidence in the fundamentals and the Federal Reserve will stand ready to ease policy again if necessary.  International considerations will tend to dominate in the very short term and there will be further underlying support for the US currency if there is a further tightening in global credit conditions, especially if there are major global banking stresses.

The dollar secured a net advance over the week, primarily due to the impact of defensive demand as risk appetite deteriorated with a further flow of funds into US Treasuries as fears surrounding the banking sector increased. The dollar did find it difficult to make strong headway against the Euro.

The US growth-related data was slightly stronger than expected with a headline retail sales increase of 0.5% and a core 0.6% increase for the month which maintained a slightly more encouraging outlook for spending and the economy as a whole. There was also a recovery in the New York manufacturing PMI to 0.6 from -8.5.

The NAHB housing index rose to the highest level since May 2010 at 20 while there was a bigger than expected 0.7% gain for industrial production. Jobless claims data was again better than expected with a decline to fresh 7-month lows of 388,000 from 393,000 previously, maintaining the solid tone of recent data.

The consumer inflation data was slightly weaker than expected with a headline 0.1% decline in prices, although there was still a 3.5% annual increase. Federal Reserve Governor Dudley stated that a lot of action had already been taken, but that the Fed could take additional measures if there was renewed economic deterioration.

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

The Euro-zone situation will remain severe in the short term with a lack of confidence triggering a further flow of funds out of the peripheral economies and the severity of the contagion threat has been illustrated by the  rise in French yields relative to Germany.  The banking sector will remain a very important focus in the short term and there will be the risk of a major failure as funding costs continue to increase.  There will be intense pressure for a policy reversal by the ECB and German government with increased ECB bond buying.  There will also be further speculation over a medium-term break-up which, ironically, could support the currency on expectations of a hard Euro area.

Initial enthusiasm triggered by the resignation of prime Minister Berlusconi evaporated quickly and there was a further intensification of Euro-zone fear during the week. There was a fresh surge in Italian yields and banking-sector pressures increased. The Euro did decline, but was still relatively resilient given the negative fundamentals with support near 1.34 against the dollar.

There were further important stresses within the financing markets as 3-month Libor rates continued to increase to the highest level since mid 2010. There was also a further increase in the dollar funding costs through the Euro swaps markets as inter-bank lending continued to decline.

The economic data was generally downbeat with a further decline in the German ZEW index while third-quarter Euro-zone GDP growth was held to 0.2% even though the German economy expanded by 0.5%.

Mario Monti was appointed Italian Prime Minister and will also take the key financial posts in the government. Underlying confidence was still extremely fragile, especially with fears over the banking sector.  There was a weak Spanish bond auction which pushed yields higher while French yield spreads over German bunds also rose to fresh EMU highs above 200 basis points. Monti announced a comprehensive economic reform package, although these measures would only have a longer-term impact.

There were reports of more aggressive ECB buying of peripheral debt which put a cap on Italian yields, but there will be major doubts whether the policy is sustainable. There were also rumours that the ECB would lend funds to the IMF which would buy peripheral bonds but, if there is intense German and ECB opposition to direct funding, there will be major reservations over indirect funding as well, especially with internal ECB tensions rising.

Do you know the two most-overlooked property shares? If you did, you’d want to keep them a secret. 2 companies survived the crash, leaving them grossly under-valued, in spite of their track record and skilled management! Find out how these two shares will supercharge your portfolio today.  Click Here.

There will be continuing fears over the Japanese growth outlook, especially given the risks of a wider downturn in the Asian economy. Safe-haven considerations will remain extremely important in the short term and there will be underlying defensive support for the currency, especially with a lack of viable alternatives as a safe-haven currency. There will be the threat of further intervention, although it will be difficult for the Bank of Japan to reverse trends while risk aversion and growth fears remain elevated.

The dollar was unable to make any impression on the yen during the week and retreated to lows below 76.80, although ranges remained extremely narrow. The dollar failed to gain any support from the firmer than expected US employment and housing data during the week.

The Bank of Japan left interest rates on hold in the 0.00-0.10% range and there was no announcement of any further increase in quantitative easing at the meeting. The prospects for intervention will continue to be a very important influence with Finance Minister Azumi continuing to warn over the potential for additional action.

There was a further deterioration in financing conditions during the week and there was a sharp decline in Asian equity markets as global growth concerns increased. In this environment, there was further defensive support for the yen as risk appetite deteriorated. Underlying stresses within the Euro-zone also maintained the threat of capital repatriation with Euro-area bond holdings scaled back.

Sterling:

Confidence in the UK economic outlook is liable to deteriorate further in the short term with fears over the impact of a downturn in the Euro-zone and the threat of a renewed contraction in bank lending as funding pressures increase. There will be expectations of further Bank of England quantitative easing which will tend to weaken Sterling. Defensive considerations will also be very important and Sterling will gain important support as a refuge from the Euro area. These flows are liable to be volatile and any reversal could trigger big Sterling losses.

Sterling dipped weaker against the dollar and tested support below 1.57 before a technical recovery in volatile trading conditions. The UK currency was broadly resilient against the Euro, although there was resistance below 0.85.

The headline labour-market claimant count was better than expected with a 5,300 increase the lowest since February. The underlying data was weaker as unemployment increased to 8.3% from 8.1% while headline inflation data declined to 5.0% from 5.2% previously, although the core data was slightly higher at 3.4% from 3.3%.

In the latest inflation report, the Bank of England confirmed that it is expecting a sharp decline in inflation during 2012. In addition, there was a forecast 1.3% rate in two years time.  With the bank also downgrading its growth forecasts, the implication was that there would be further quantitative easing over the next few months.

The bank continued to warn over the growth outlook and the overall tone of remarks was very downbeat with increased fears over the Euro-zone impact. Bank Governor King also voiced particularly strong concerns surrounding the banking sector with the threat of a fresh credit crunch and recession as lending contracted.

The latest headline retail sales data was stronger than expected with a 0.6% increase for the month. The evidence suggested that the figure had been boosted by retailers discounting ahead of the Christmas period with underlying fears over the outlook.

The banking sector will inevitably be an important focus in the short term, especially with an increase in financing pressures. There will be fears that the banks will cut back on lending which will further undermine growth in the economy.  There will also still be fears that there will be a withdrawal of funds by the European banks which could put Sterling under heavy selling pressure.

Receive this 10 page property report when you sign up to the free version of The Mountain Investor Report monthly newsletter.
Click here 

The National Bank will remain determined to protect the minimum Euro level against the franc with further strong verbal intervention and the potential for franc selling in the forward market as well. The policy is likely to be effective in the short term, but there will be the risk of a renewed surge of capital into the franc if Euro-zone fears intensify which could trigger fresh instability surrounding the franc over the next few weeks.

The dollar hit resistance in the 0.9250 area against the franc on Thursday, but found support on dips to the 0.9150 area and consolidated near the middle of this range as the franc maintained a generally soft tone on the crosses with the Euro able to hold near the 1.24 area.

The latest ZEW business confidence index retreated to -64.3 for November from -54.4 the previous month, which will maintain fears over a sharp deterioration in economic conditions. There has been further speculation that the National Bank will look to push the franc weaker, although high volatility will be a key feature, especially if there is further instability in the European banking sector.  

An increase in speculation over additional National Bank action prevented any significant defensive support for the franc as Euro-zone fears intensified and also helped trigger a move into the Japanese yen.

Australian dollar:

The Australian dollar was subjected to very choppy trading conditions during the week.  There was fresh selling pressure after a sharp recovery to the 1.03 area against the US dollar with a test of support below parity late in the week.

Global risk conditions remained extremely important and the currency was vulnerable when confidence deteriorated. In particular, there were fears surrounding the global banking sector which also undermined confidence in regional growth prospects.

Domestic influences were limited, although there was backing from the Reserve Bank minutes which indicated that the November decision to cut rates had been a close call.

Volatility is likely to remain high in the short term and there is the thrAeat of further net losses given the underlying risks, especially if banking-sector fears increase.

Canadian dollar:

The Canadian dollar resisted losses for much of the week, but there was tough resistance close to the 1.01 area with a slide towards 1.03 late in the week.

The Canadian currency did draw support from a rise in oil prices as benchmark crude prices moved to the highest levels since July, but the impact was offset by a fresh deterioration in risk appetite and fears surrounding the banking sector.

The Canadian dollar will be vulnerable to some further selling pressure given the global risk conditions, especially if domestic debt fears start to increase.

Click here for you FREE Report.

The rupee generally remained under pressure and dipped to test levels just beyond the 51 level against the dollar which was the weakest level since March 2009.  Global risk conditions remained negative for the currency and this was a major factor in pushing the currency weaker, especially with a lack of inflows into the local stock market.

A lifting of foreign investment limits into India did not have a major impact on the currency market. The Reserve Bank also appeared to be very cautious over intervening to support the rupee.

The rupee trends will continue to be influenced strongly by trends in risk appetite and it is liable to remain generally on the defensive in the short term.

Hong Kong dollar:

The Hong Kong dollar was unable to secure renewed gains during the week and retreated towards the 7.785 area against the US dollar, although losses were still measured.  Risk appetite deteriorated again which undermined the currency, especially with further significant losses for the Chinese stock market.

The impact was offset to some extent by tightness in the local money market which curbed any speculative demand for the US currency as the HKMA continued to voice strong support for the existing Hong Kong peg.

Risk conditions will continue to sap support, but the Hong Kong dollar should remain resilient given a lack of confidence in the US fundamentals.

Chinese yuan:

The yuan was again unable to make any headway during the week and the spot rate drifted slightly weaker towards the 6.36 area against the US currency.  There were reduced tensions within the market as the PBOC and market rates moved closer.

There was further speculation over a slowdown in the economy and there was market talk of a lowering reserve ratio requirements.

There was a scaling back of yuan appreciation expectations given the Chinese economic trends, especially with further evidence of a slowdown in export growth.

Speculation surrounding an easier monetary policy by the PBOC and a weaker economy will limit the scope for yuan appreciation in the near term.