Weekly Forex Currency Review 19-04-2013

The global growth outlook will continue to be watched very closely in the short-term. There has been a sharp sell-off in commodity prices at the same time as global central banks have committed to additional monetary easing. This combination will increase unease surrounding the underlying growth trends and risk appetite is liable to be fragile. There will also be strong pressure on the ECB to take additional policy action.

Key events for the forthcoming week

Dollar:

The US data has maintained a generally softer tone this month with continued speculation that fiscal tightening is having some negative impact on spending. In this context, expectations of Federal Reserve tightening and a tapering of bond purchases is liable to be lower in the short-term. The dollar will, therefore, tend to have reduced yield support over the next few weeks. There will still be expectations that the economy will out-perform Europe this year, especially if there is a bounce back in the next employment data. The dollar is also likely to gain significant outlook from general unease surrounding global growth and a continuing lack of attractive alternatives.

The dollar pushed sharply higher at times, although it failed to hold the best levels as risk conditions tended to stabilise. High volatility in gold prices was the principal market focus as it dipped by over $100 per ounce in two working days.
 
The US housing starts data was stronger than expected with an annualised rate of 1.04mn from 0.97mn, although permits did weaken slightly while industrial output rose 0.4% for March.

Jobless claims were marginally higher than expected at 352,000 in the latest week from a revised 348,000 previously which maintained a more cautious tone surrounding the labour market. The Philadelphia Fed index was weaker than expected at 1.3 for April from 2.0 previously while leading indicators declined. A Bloomberg survey suggested that consumer confidence was at a five-year high.

The headline consumer prices data recorded a decline of 0.2% for month while there was a 0.1% core increase. The lower than expected inflation data will provide reassurance for the Federal Reserve over the lack of inflationary pressure in the economy. Fed speakers generally promoted an unchanged stance in comments on Tuesday with Governor Dudley stating that the current amount of quantitative easing was appropriate, a stance backed up by Vice-Chairman Yellen.

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There will be further concerns surrounding the Euro-zone growth outlook, especially as there has been evidence of some deterioration within Germany which would have extremely negative implications for the peripheral economies.  There will be strong pressure on the ECB to take some form of action even though there are important reservations surrounding the effectiveness of any cut in interest rates.  If the ECB insists on resisting any further easing, the Euro is unlikely to benefit as growth fears would intensify. Despite aggressive monetary expansion elsewhere, the Euro is unlikely to make much impression.

The Euro fell sharply to re-test support in the 1.30 region against the dollar, but again proved to be broadly resilient during the week.  

The latest German ZEW survey was weaker than expected with a decline to 36.3 for March from 48.5 previously. Markets had, however, been braced for an even weaker release and there was some relief surrounding the outcome, especially with ZEW officials still relatively optimistic over the outlook.  

In the latest German auction, benchmark 10-year bund yields fell to a record low of 1.28% from 1.6% previously which increased speculation that defensive flows into the German fixed-income market had increased again.

The Euro was undermined at the New York open by comments from former ECB member Bini-Smaghi who stated that the ECB needed to find a way to resist Euro gains. Bundesbank head Weidmann who warned that the period of Euro crisis could extend to 10 years. The main focus of his remarks was on interest rates with comments that there could be a reduction in benchmark rates if conditions warranted

There was a solid Spanish bond auction with a small decline in yields and robust bid/cover ratios which helped narrow the Spanish yield spread over German bunds and bolstered confidence in the Euro.

There was further uncertainty surrounding the Italian political situation with the Presidential candidate failing to secure a sufficient majority in the two rounds of voting as divisions intensified and there will be further voting on Friday with a lower threshold for victory.  Another failure would have a potentially significant negative impact on Euro sentiment.

Yen:

The Bank of Japan will continue to push for an extremely aggressive monetary policy in the short-term as it looks to increase inflation expectations through a doubling of the monetary base. There will be further expectation of net capital flows from Japan as domestic funds are forced to look elsewhere both on availability and yield grounds.  There is the risk of destabilisation in the bond market which would pose important risks and could lead to a cascade of yen selling.  There will also be the risk of capital repatriation and yen volatility will remain substantially higher.

Yen volatility remained very high during the week with the dollar briefly retreating to lows below 96 before recovering back to above 98.
 
The latest Japanese trade data recorded the ninth successive monthly trade deficit, but the shortfall in narrow from JPY362bn from JPY778bn the previous month as exports recorded a 1.1% annual increase. The data will help reinforce expectations that the weaker yen will have a positive trade impact. There was still no evidence of major capital outflows from Japan in the latest weekly data which triggered further caution over selling the yen aggressively.

The Bank of Japan announced its intention to buy bonds more frequently in the open market which will tend to dampen erratic market moves as the central bank remains uneasy over the aggressive policy implications for the bond market as a whole. The bank commitment of doubling the monetary base remained a key negative yen factor.

G20 comments remained under close scrutiny and there was fresh yen selling as Prime Minister Abe stated that there was no G20 opposition to Japan’s policies.

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On balance, there will be expectations that the UK economy avoided a GDP decline for the first quarter. There will still be important fears surrounding the growth outlook, especially as a further slowdown in the rate of earnings growth will reinforce unease surrounding consumer spending. There will be expectations of further Bank of England quantitative easing within the next few months, especially with Governor King’s tenure coming to a close. Given underlying balance of payments vulnerability, Sterling is unlikely to make much headway.  

Sterling proved broadly resilient during the week with support on dips to 1.52 against the dollar and 0.8650 against the Euro.
 
The headline consumer inflation rate was unchanged from the previous month at 2.8% and was also in line with market expectations while there was a softer than expected producer prices release. The overall impact was limited with markets continuing to assume that the Bank of England will effectively ignore the inflation rate in the short-term and will concentrate on supporting growth.

There was a stronger than expected headline figure for the UK claimant count with a decline of 7,000 for the month following a revised 5,300 decline the previous month. There was, however, an increase in the ILO unemployment rate to 7.9% from 7.8%. There was also a further slowdown in the rate of earnings growth to 0.8% which maintained fears over the outlook for consumer spending as real incomes fell

The Bank of England minutes recorded another 6-3 vote in favour of leaving the amount of quantitative easing on hold at the April meeting with King again voting for a further expansion. There was still speculation that the central bank would push for further easing. There were no significant references to Sterling which encouraged speculation that the bank was happy with a slow decline in the exchange rate.

The latest retail sales data was close to expectations with a 0.7% decline for March following a 2.1% gain the previous month. A significant decline was expected given the adverse weather conditions which triggered a dip in spending on household goods.   

Bank of England MPC member Weale stated that it was not correct to suggest that quantitative easing was not working despite his vote not to back any further increase in bond purchases. He commented that weaker inflationary pressure would add to the stimulus case and that there had been a discussion surrounding negative interest rates.  

Swiss franc:

The National Bank will remain on high alert over the threat of deflation. 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. Overall, there is scope for limited net dollar gains.

The dollar dipped to lows around 0.92 against the franc, the weakest since the middle of February. The Euro did find support on dips to below 1.2150, but was unable to make any significant impression as the franc secured additional defensive support.  

There were reports that the National Bank had contingency plans in case of any intensification of pressure on the 1.20 minimum Euro level and this discouraged any speculative attack on the minimum level even with a general deterioration in risk conditions which should underpin the Swiss currency.

National Bank member Zurbreugg continued to defend the Euro minimum level with a warning that any franc rise would have severe consequences for the economy and that the 1.20 level would be defended aggressively.

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The Australian dollar was unable to break above the 1.06 area against the US dollar and retreated sharply during the week as a whole with a test of support below the 1.03 level. The currency was unsettled by a general deterioration in risk appetite as equity markets fell sharply, although there was some stabilisation later in the week.

The domestic data releases did not have a major impact with a series of comments surrounding underlying over-valuation of the Australian currency.

Although, the Australian dollar will gain some degree of support on yield grounds, it will remain generally vulnerable, especially given that it is over-valued.

Canadian dollar:

The US dollar was able to push higher during the week as a deterioration in risk appetite and lower commodity prices had an important negative impact on sentiment.

The Bank of Canada left interest rates on hold at the latest policy meeting and the statement was broadly neutral for rate expectations. There was a stronger than expected reading for manufacturing sales which provided some degree of support for the currency, although there was a subdued reaction.

The Canadian dollar will find it difficult to gain strong support, especially with underlying fundamental concerns and weakness in global commodity prices.

Indian rupee:

The rupee maintained a firmer tone during the week as a whole as it tested resistance levels beyond the 54 level against the US currency. The currency gained support from a decline in oil prices.

There was a stronger than expected trade report as March exports secured a year-on-year increase which helped increase sentiment towards the rupee. There were also expectations that there would be an easing of monetary policy at May’s meeting.

The rupee will gain some degree of support on trade grounds and relief over lower oil prices, but strong gains look unlikely given the current account situation.

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The Hong Kong dollar was confined to narrow ranges with resistance close to 7.76 against the US dollar during the week.

There was speculation that any widening in the Chinese yuan trading band would put underlying upward pressure on the Hong Kong dollar.

The initial focus will continue to be on attempts to cool 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 with fresh 19-year highs beyond 6.18  against the dollar before a limited correction. There were reports that the Chinese yuan trading band would be widened which provided important underlying support with expectations of capital inflows.

The US Treasury again decided against calling China a currency manipulator which provided some relief on political grounds. There was speculation that the central bank was pushing for a stronger currency ahead of the G20 meeting.

There was further uncertainty surrounding the domestic economy with unease over the risk of excessive credit and bad loans within the banking sector.

The yuan can maintain a firmer tone for now given expectations of renewed capital inflows and a wider trading band, but the trend is liable to reverse later in 2013.

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