Weekly Forex Currency Review 23-03-2012

The global economic outlook will remain an important market focus. The dollar will gain support from expectations that the US economy will out-perform other regions in the short-term. If there is any further evidence of deterioration in the Chinese and Euro-zone outlooks, then there is also likely to be a more defensive stance on risk appetite with a shift into more instruments such as the yen and dollar.
 

Key events for the forthcoming week

Date	Time (GMT)	Data release/event
Monday March 26th	09.30	German IFO index
Tuesday March 27th	15.00	US consumer confidence

Dollar:

The US economic data is likely to have been boosted artificially to some extent by favourable weather conditions and there will be scope for some disappointment over the next few weeks. There should still be confidence that the US will out-perform the Euro-zone which will provide continuing yield support.  The Federal Reserve will maintain a very expansionary monetary policy which will continue to limit the scope for US support and fundamental doubts are liable to increase. Global considerations will remain important and there is scope for additional dollar demand on defensive grounds if fear increases.  

The dollar recovered from lows during the week as there was fresh buying support on defensive grounds as risk appetite deteriorated. The US currency also gained some net support on yield grounds as US Treasuries were generally on the defensive.
 
The US housing starts data was close to expectations at an annual rate of 0.70mn for February while permits increased to an annual rate of 0.72mn, the highest figure since 2008. The data helped maintain a degree of optimism towards the US economy and helped push US Treasury yields higher. There was still some suspicion that the data should have been even stronger given the favourable weather conditions.

In comments on Tuesday, Fed Chairman Bernanke stated that it would be a mistake to withdraw monetary stimulus too quickly, maintaining expectations that the Fed will be very cautious in removing monetary stimulus which will also limit dollar support.

There was a commentary from PIMCO that it was expecting the dollar to strengthen in the short-term even though it remained uneasy over the currency in the longer-term.
The weak Euro-zone data, following on from the weak Chinese PMI release had a significant impact in damaging risk appetite as global growth fears increased. These fears had an important impact in boosting defensive dollar demand as equity markets were subjected to fresh selling pressure.  

The US jobless claims data was slightly stronger than expected with a decline to 348,000 in the latest week from 353,000 the previous week and close to four-year lows. House prices were broadly stagnant with no change reported for January. Regional President Bullard maintained the more constructive Fed tone towards the economy while Fisher stated that he would not support further quantitative easing, although neither of these are voting members this year.

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The ECB has had some important success in stabilising credit conditions and easing an immediate liquidity crisis.  There will still be fears surrounding the banking sector and the threat of credit de-leveraging. In this context, there will also be fears surrounding the economic outlook as the peripheral economies remain trapped in recession which will maintain the threat that weaker economies will eventually be forced out of the Euro area.  The ECB will be forced to maintain a very expansionary policy which will limit Euro support.

The Euro was blocked on rallies towards the 1.33 level against the US dollar during the week as underlying sentiment remained fragile on longer-term economic doubts. Greece formally approved the loan package which had only a limited impact and the Euro proved broadly resilient.

The currency was subjected to heavy selling pressure during the European session on Thursday as sentiment was undermined by weak economic data. The flash Euro-zone PMI manufacturing index weakened to 47.7 for March from 49 previously, dashing hopes of a further monthly improvement while the services-sector index was also trapped below the 50 level.

The data had a dual negative impact on the Euro with a renewed increase in unease surrounding the regional growth outlook which undermined confidence directly. There has been further evidence of credit-deleveraging and a tightening in lending conditions which will have an important impact in damaging activity. There were also renewed fears surrounding the peripheral economies and yield spreads rose significantly during the day as confidence in Spain was particularly fragile. Spanish bond yields rose to the 5.5% level for the first time since January.

Yen:

The yen will remain vulnerable on interest rate grounds, especially given the increase in US Treasury yields. There will also be speculation that the Bank of Japan will look to ease monetary policy even further if necessary.  There will also be speculation that there will be competitive regional devaluation policies which will limit yen support. There is the potential for near-term gains on seasonal grounds ahead of the fiscal year-end and there will also be the potential for defensive yen support if there is a sustained deterioration in risk appetite.

The dollar hit resistance above the 84 level against the yen during the week and dipped sharply to lows below 82.50 as risk appetite deteriorated and the yen rebounded strongly on the major crosses.
 
The dollar was unable to make any fresh impression on the yen during Thursday and dipped sharply during European session. Despite a brief recovery following the US data, there were fresh lows below 82.50 during New York trading. The Japanese currency gained sharply on the crosses with the Euro dipping to lows near 108.50 while Sterling also retreated to near 130.

The yen gained support from the significant deterioration in risk appetite as global growth doubts increased and equity markets were subjected to significant selling. There will be the potential for exporter selling and capital repatriation ahead of the fiscal year-end.

Japanese officials moved to counter yen strength through verbal intervention and there was importer dollar buying at lower levels which helped the US currency recover.

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Although sentiment surrounding the UK economy has been slightly more positive, there will still be important reservations surrounding the outlook, especially with serious doubts over the consumer spending. The medium-term fiscal outlook also remains precarious and only a small shift in sentiment could trigger a serious deterioration in international confidence. In this context, there will also be renewed fears surrounding the banks, especially if there is a wider deterioration in global risk appetite. With the Bank of England maintaining an aggressive monetary expansion, Sterling support is liable to be limited.

Sterling hit resistance above 1.59 against the dollar during the week and retreated to lows below 1.58 before stabilising. The UK currency was unable to sustain a move through 0.83 against the Euro.
 
The headline consumer inflation rate was in line with expectations as it declined to 3.4% from 3.6%, although the RPI rate was higher than expected and there was some disappointment that the rate did not decline further. The latest government borrowing data was much weaker than expected with a requirement of GBP12.9bn from a revised surplus of GBP10.9bn the previous month as tax receipts were weaker. The data increased unease over the medium-term budget outlook.

There was no surprise in the Bank of Minutes interest rate decision with a 9-0 vote to leave rates on hold at 0.50%. The quantitative easing vote was more surprising with a 7-2 vote at the meeting as both Posen and Miles voted for an additional GBP25bn in bond purchases. The majority of members were more circumspect surrounding the inflation outlook and opted for an unchanged policy at this month. The more dovish than expected tone had a significant impact in undermining Sterling.

The budget was broadly neutral in overall economic terms with the OBR revising its GDP forecasts slightly higher, although uncertainty remained high. The overall stance continued to illustrate that the government had very little room for manoeuvre.

The latest retail sales data recorded a headline decline of 0.8% for February following a revised 0.3% gain the previous month, the sharpest decline for 9 months. The data reinforced unease over consumer spending trends and dampened the slightly greater mood of optimism surrounding the economy seen over the past few weeks. There was also a decline in the latest Nationwide consumer confidence index.

Swiss franc:

Fears over the economic outlook are likely to ease slightly in the very short-term with an easing of the deflation threat. The National Bank will maintain its commitment to the minimum Euro level in the short-term, especially as any apparent faltering in commitment would inevitably invite massive speculative capital inflows and destabilise both the currency and the Swiss economy.  The franc will also tend to gain any defensive support if there is any deterioration in confidence surrounding the global outlook.

The dollar dipped sharply from highs above the 0.93 level and dipped to lows just below the 0.91 area before finding some support. The Euro was trapped in very low ranges close to the 1.2055 area during the week.

National Bank member Danthine stated that the franc cap applies day and night as the bank maintained its policy of verbal intervention. There will still be unease that the Euro has been unable to make any headway and there will also be fresh doubts surrounding the Euro-zone economy which will increase the risk of defensive demand for the Swiss currency.

The IMF stated that the National Bank should remove the Euro minimum level once the deflation threat had eased, although it gave no timescale for such a move.

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The Australian dollar rallied initially towards the 1.0650 region against the US dollar during the week, but it was unable to sustain the gains and was subjected to renewed selling pressure with a decline to two-month lows below 1.0350.

The Australian currency was undermined by a sharp deterioration in risk appetite following weaker than expected Chinese and Euro-zone data. There were further concerns surrounding the regional economy which contributed to selling pressure.

There was little impact from domestic economic data while the latest Reserve Bank minutes continued to suggest that there was scope for a cut in interest rates if required.

Given fears over the domestic economic outlook and further unease surrounding the Chinese outlook, the Australian dollar is liable to remain generally vulnerable.

Canadian dollar:

The Canadian dollar attempted to strengthen beyond resistance in the 0.99 region against the US currency during the first half of the week, but it was unable to sustain the gains and dipped back to lows just beyond parity.

The Canadian currency was hampered by a deterioration in risk appetite as equity markets weakened while a dip in oil prices and a weaker than expected reading for retail sales also tended to undermine the local currency.

The Canadian dollar should be resilient on hopes for North American economic out-performance and high oil prices, but valuations remain generally unattractive.

Indian rupee:

The rupee was on the defensive for much of the week with significant selling pressure as confidence in the global economy deteriorated again following weaker than expected Chinese and Euro-zone data. The Indian currency weakened to lows beyond 51.30 against the US currency.

Local equity markets were weaker, not helped by a scandal surrounding coal privatisation and there was also further strong dollar demand from oil importers as energy prices remained at elevated levels. The rupee recovered from its worst levels with a suspicion of Reserve Bank intervention.

The rupee is likely to remain generally on the defensive, undermined by high oil prices and doubts over capital inflows, especially when risk appetite is weaker.

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The Hong Kong dollar was unable to make a challenge on levels towards the 7.7550 against the US currency during the week and dipped to lows beyond 7.7650.

Risk appetite was generally weaker even though equity markets attempted to rally from lows. There were fresh concerns surrounding the regional economy following weaker than expected Chinese data which undermined the Hong Kong dollar.

Fresh uncertainty surrounding the Chinese outlook will tend to curb Hong Kong dollar support, especially if US Treasury yields remain higher.

Chinese yuan:

There was higher volatility as markets and the PBOC clashed on the yuan’s value. The PBOC effectively reversed policy and set a mid-point stronger at a record level just beyond 6.29 against the US currency. The spot rate was still weaker than 6.30.

Underlying confidence in the economy weakened following a weaker PMI manufacturing reading of 4.1 for March and there was also evidence of a heavy short dollar position as fears over a hard landing increased. There was, therefore, speculation that the PBOC was looking to push the currency stronger to lessen the risk of underlying selling pressure. There was also speculation that the PBOC would slow yuan the process of liberalising the domestic currency market.

The yuan will still find it difficult to gain much underlying support given unease over the Chinese economy. The PBOC will battle to retain tight market control.

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