Weekly Forex Currency Review 24-02-2012

The immediate threat of a Greek debt default has been alleviated by the second loan deal, but the medium-term situation is far from secure as there will be intense opposition to the agreement within Greece and major reservations throughout the Euro area. It will still be difficult to secure a sustained boost in risk appetite given the growth doubts with a particular focus on the Chinese outlook.  The aggressive monetary policies should still help underpin risk appetite to some extent.

Key events for the forthcoming week

Dollar:

The US economic data has remained generally favourable during the month with gains in the housing sector and slid consumer spending levels. Monetary policy will inevitably remain an important focus and there will be some reductions in speculation that the Fed will sanction a further round of quantitative easing. Interest rates will still remain extremely low which will curb any yield support and longer-term fundamental doubts will remain important influence. Global risk appetite will continue to have an important influence and there will be reduced dollar demand when confidence improves, but the net risk profile should limit selling pressure.  

The dollar secured buying support at times, but it was unable to make sustained headway during the week and was subjected to net losses against the Euro as position adjustment had an important impact with the Euro pushing to 2012 highs. The US currency was more resilient against commodity currencies.

The US existing home sales data was slightly weaker than expected with a figure of 4.57mn from 4.38mn previously, although this was still a four-month high as the sector continued to show an underlying recovery.  

The US labour-market data was again firm with jobless claims unchanged at 351,000 in the latest week while there was an increase in house prices according to the latest monthly report.  The dollar gained some support on yield grounds while defensive demand for the currency was generally weaker with the US currency unable to secure sustained support.

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The easing of an immediate default threat surrounding Greece will have some positive influence on the Euro as fear has eased.  There will still be serious misgivings over the underlying situation, especially as there will be a high degree of resistance within Greece and risk of changes following scheduled elections in April.  There will be concerns surrounding the Euro-zone economy as a whole even with generally optimistic sentiment surrounding the German economy. The ECB will have to maintain an expansionary policy to support the economy which will undermine Euro support.

There was further optimism that the Eurogroup meeting would agree on a loan package for Greece at Monday’s meeting.  Over the weekend, there had been speculation that a decision could be delayed until March, but German officials were keen for the issues to be resolved at Monday’s meeting. There was also a mood of cautious optimism, in public at least, with Greek officials also expressing hopes that a deal could be finalised.

The ECB announced that it had not bought any peripheral bonds during the week for the first time since the programme was restarted in August 2011, fuelling market expectations that the ECB and Euro as a whole had moved to an important new phase with a more aggressive monetary policy the instrument for keeping bond yields down.

In the event, a deal was reached with the EUR130bn second loan package in place for Greece. The private-sector debt haircut will be 53.5% and replacement bonds will have an initial coupon of 2%.

There were still fears surrounding the longer-term implications of the deal, especially as there are elections in April which is liable to trigger a fresh reassessment of the deal within Greece.  Immediate concerns eased slightly following suggestions that the IMF would be willing to provide additional funding, but there were very important longer-term misgivings over the underlying deal, especially with expectations that Greece would remain in a deep recession which would severely test the domestic willingness to back austerity measures.

As far as the economic data is concerned, the Euro-zone PMI manufacturing index was slightly weaker than expected with only a marginal increase of 49 from 48.8 previously while the services figure dropped to 49.4 from 50.4 as there was a significantly weaker result from Germany. The data did dampen expectations that the economy would be able pull out of downturn.

The German IFO index was again stronger than expected with an increase to a eight-month high of 109.6 from 108.3 the previous month. The Institute remained confident that recession would be avoided, maintaining a more optimistic tone towards the German economy. In contrast, the European Commission issued a generally downbeat assessment of the economic outlook, forecasting a GDP contraction for the Euro area as a whole with a decline in Spain and Italy.

Yen:

There will be further concerns surrounding the industrial and trade outlook, especially following the reporting of a record trade deficit for 2011. There will be competitiveness fears and pressure for a weaker yen to help support the manufacturing sector.  The yen has been undermined by the Bank of Japan action to expand quantitative easing and there will be expectations of further action if the yen is subjected to renewed gains. The yen will tend to lose support if there is a sustained improvement in global risk appetite, but there is still likely to be caution over underlying trends which will curb yen selling pressure.

The dollar continued to gain underlying support on yield grounds following a generally robust set of economic data releases. Underlying yen sentiment remained weak as players also looked to maintain momentum, especially as the currency was able to break important resistance levels. The dollar pushed to a 7-month peak above 80.50 against the yen with the Euro at the highest level since November.

The yen was undermined by the Bank of Japan’s decision the previous week to expand quantitative easing which undermined sentiment.

The yen was also undermined by high oil prices, especially given the increased impact on Japan from major closures within the nuclear industry. There was still some speculation that there would be capital repatriation flows back into the yen which curbed selling pressure to some extent and there was some pressure for a correction.    

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There will be further concerns surrounding the consumer spending outlook. The overall economic data has been more favourable with a rebound in key business surveys and the general tone of data releases has eased immediate fears that the economy will slide back into recession.  There will be speculation that quantitative easing could be expanded further and underlying yield support remains very limited for the currency. Sterling will tend to lose defensive support if there is a sustained improvement in Euro-zone sentiment with volatility liable to remain high.

Sterling was unable to make headway against the dollar during the week with resistance above 1.58 and retreated to 2012 lows against the Euro with lows near 0.85.

As expected, the Bank of England minutes recorded a 9-0 vote for interest rates to be left on hold at 0.50%.  There was a split 7-2 vote on the decision to raise quantitative easing by GBP50bn at the meeting. Posen and Miles votes for a GBP75bn boost to quantitative easing while there were other members of the committee who had reservations about any further boost even though they voted with the majority.

The central bank was slightly more optimistic surrounding the growth outlook, but estimated that further easing was required to prevent inflation under-shooting in the medium term. The minutes were more dovish than expected and pushed Sterling significantly weaker. Technical considerations also played an important part as the Euro advanced on stop-loss buying and investor demand once it broke above 0.84.  

The latest CBI industrial orders survey was stronger than expected with a 6-month high of -3 from -16 previously as fears surrounding the export sector eased slightly. There was also a stronger reading for mortgage approvals according to the latest data as buyers secured deals ahead of an ending of tax breaks.
 
Swiss franc:

Fears over the economic outlook are likely to ease slightly in the very short-term. National Bank policies will remain an extremely important focus in the short-term. The bank has remained determined to block gains, but there is still the risk of a fresh attack on the minimum Euro level. The franc could also gain some defensive support as an alternative safe-haven if there is a sustained reduction in confidence surrounding the yen. This would be offset by reduced capital inflows if there is an improvement in underlying Euro-zone sentiment.

The dollar was unable to make any headway against the franc and tested support close to 0.90. The Euro remained an important focus and there was a dip to lows below 1.2050 where the National Bank is rumoured to be intervening.

The Swiss Economy Minister expressed hopes that the franc would weaken towards its estimated purchasing parity value around 1.40 against the Euro, although the government has no powers over the central bank.
The Swisscom business group warned that there would be no growth during 2012, but the survey was less pessimistic than in the previous report issued last year as the organisation no longer feared that demand would collapse.

The yen movements will be watched closely in the short-term and further weakness could lead to increased defensive support for the Swiss currency. In this environment, the Euro dipped to lows below 1.2050 against the franc before finding some support.

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The Australian dollar hit tough resistance above the 1.08 level against the US dollar during the week and dipped to test support below 1.06 before consolidating in the middle of this range.

The Reserve Bank minutes were slightly more dovish than expected as the central bank again stated that interest rates could be cut if necessary given a decline in inflation, although Governor Stevens was cautious surrounding the possibility of lower rates. Underlying risk appetite was steady which helped underpin sentiment.

Domestically, political uncertainty had a negative impact on the Australian currency as Prime Minister Gillard announced a leadership election next week following destabilising criticism from former leader Rudd.

The Australian dollar will remain vulnerable to volatile trading and it will be difficult to make strong headway given the underlying global risk profile.

Canadian dollar:

The Canadian dollar traded stronger than parity for most of the week, but there was US buying support close to the 0.9950 area as US demand increased on dips.

The currency secured some degree of support from high oil prices as crude traded at 2012 highs. The impact was offset to some extent by fears that high energy prices would stifle economic activity. There was a subdued report for retail sales which limited Canadian dollar support to some extent.

The Canadian currency should prove to be broadly resilient, although it will be difficult to sustain gains beyond parity given US demand at lower levels.

Indian rupee:

The rupee held a slightly firmer tone during the week, although it was unable to break through the 49 area against the US dollar. The currency gained some support from an improvement in Euro confidence as there was reduced demand for the US dollar.

There was optimism surrounding potential capital inflows if the Reserve Bank shifted towards a more accommodative policy stance, although the equity market performance remained generally disappointing over the week.

The rupee will be hampered by underlying doubts surrounding the Asian economic outlook and will find it difficult to extend gains.

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The Hong Kong dollar maintained a generally firm tone during the week and again tested resistance beyond 7.7550 before edging slightly weaker. The US currency was generally on the defensive which limited demand and risk appetite was solid following the Greece loan deal which helped support the Hong Kong currency.

Risk conditions will remain very important and any fresh doubts surrounding the Chinese outlook would limit the potential for further Hong Kong dollar gains.

Chinese yuan:

The yuan maintained a broadly steady tone over the week as the PBOC encouraged the currency to remain slightly weaker than the 6.30 level despite a firmer Euro.

The central bank announced a cut in the reserve ratio requirements over the weekend which boosted risk appetite and there were expectations that policy would be relaxed further even though the central bank was generally cautious over the outlook for lower interest rates.

The latest HSBC PMI index remained below the 50 level and there were further doubts surrounding the property sector.

The yuan is likely to be hampered by continued speculation over a sharp slowdown in growth, especially given fears surrounding the property sector.

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