Weekly Forex Currency Review 26-04-2013

The global growth outlook will continue to be watched very closely in the short-term. Monetary policy will be a key market focus with the Federal Reserve and ECB both due to meet next week. Their policy decisions will be an important driver for underlying exchange rates with the ECB under strong pressure to sanction further easing.

Key events for the forthcoming week

Dollar:

There have been further uncertainties surrounding the US growth outlook as fiscal tightening takes effect.  The latest jobless claims data may ease concerns slightly, but there will be a high degree of uncertainty. There have been some suggestions that the Federal Reserve will move even further away from tapering bond purchases and could even consider further easing. There will still be expectations that the US economy will out-perform and there will also be some underlying dollar support from unease surrounding the global economy. A lack of attractive alternatives should still help to underpin the US currency.

The dollar sustained a generally solid tone during the week, although it was unable to make any significant headway as narrow ranges dominated against the Euro.
 
The US durable goods orders was significantly weaker than expected with a headline 5.7% decline for March compared with expectations of a 2.9% decline. The monthly data is volatile, but there was also a significant decline in the underlying figure with a 1.4% decline. The data will maintain doubts surrounding the underlying US outlook, especially as solid growth and robust corporate earnings should be an important catalyst in boosting capital spending levels.

There was a weaker than expected reading for US existing home sales with an annual rate of 4.92mn for March from a revised 4.95mn the previous month. There was some immediate negative impact on risk appetite, although the overall moves were limited.

There was a weaker than expected US PMI reading with a decline to 52.0 from 54.6 previously.  The new home sales data was close to expectations at an annual rate of 4.16mn which did not have a major impact while the Richmond Fed index fell to -6 from 3 previously. The net impact was increased unease over the global outlook and expectations that the US was continuing to out-perform the Euro-zone.

The latest jobless claims data was stronger than expected with a decline to 339,000 in the latest week from a revised 355,000 previously which helped stabilise sentiment towards the US economy, at least to some extent. The GDP data will be important on Friday, especially with some speculation that the Federal Reserve will move to a more dovish tone next week. Fed Governor Dudley continued to back quantitative easing.

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There will be further concerns surrounding the Euro-zone growth outlook, especially as there has been further evidence of some deterioration within Germany.  Although there are important reservations surrounding the effectiveness of any cut in interest rates, there will be strong pressure for an interest rate reduction, potentially as early as May, which will tend to erode Euro support. Intensification of political and social stresses within peripheral economies would also tend to undermine the Euro.  

The Euro edged lower during the week, especially on the crosses as it continued to find support below 1.30 against the dollar.
 
After initial relief following better than expected French PMI data, the mood turned sharply following the German release. The manufacturing index fell to 47.9 for April from 49.0 and the composite index dipped below the 50 level for the first time in five months. The index edged lower for the Euro-zone as a whole, undermining confidence in the economic outlook.

The German IFO index was significantly weaker than expected with a decline to 104.4 for April from 106.7 the previous month. Companies were more cautious over the outlook, although they were also still broadly confident surrounding the outlook. The Belgian business confidence index was also close to record lows which maintained caution over the outlook.

The Bank of Spain estimated that the economy contracted by around 0.5% for the first quarter, a slower rate of decline from the fourth quarter of 2012, but hardly a significant cause for optimism. There was a very sharp increase in Spanish unemployment to over 27% for the first quarter.

There was a significant move in bond yields as German benchmark yields declined to the lowest level for 2013 while there was a further decline in Spanish and Italian yields to 18-month lows with a narrowing of yield spreads over bunds.  

The Italian president announced that centre-left politician Letta would be given  a mandate to form a new government. Expectations of an administration helped underpin the recent confidence in the Italian bond market, but there will still be concerns over the difficulties involved in forming a stable government.

There was a further shift in ECB expectations with Goldman Sachs the most prominent investment house changing its forecast to a cut at next week’s meeting. There were reports from sources within the ECB that there was momentum building towards taking greater action to support the economy. There will be speculation over a rate cut, together with direct measures to support the peripheral economies such an expansion of credit. Bundesbank head Weidmann commented that there could only be a further cut in rates if there was some deterioration in economic conditions.

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 and trigger a change in consumer mindset with increased spending.  There have been expectations of strong capital outflows from Japan in search of yield, but the latest capital account data ahs still not provided any evidence of a such a shift with a net selling of overseas holdings. The yen could also gain some net protection when global risk appetite deteriorates.

There was further speculation over changes in asset allocations by the major Japanese pension funds to boost yields. As has been the case throughout the past few weeks, however, the latest capital account data recorded net Japanese selling of foreign bonds of over JPY800bn which was a faster rate of selling than the previous week. The lack of supportive evidence for capital outflows supported the yen.

There was a weaker than expected Chinese HSBC PMI index reading for April which damaged risk appetite and triggered yen buying.

There were no surprises from the Bank of Japan with policy on hold at the latest policy meeting following the aggressive action last month. There was a slightly weaker than expected inflation reading with a 0.5% core annual decline in prices, illustrating the underlying battle to curb deflation.

There was evidence of exporter dollar selling ahead of the Golden Week holidays and the US currency retreated back to below the 99 level.

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There will be some relief that the UK avoided a triple-dip recession with modest growth for the first quarter. There will still be important reservations surrounding the economic outlook with consumer spending still undermined by a lack of income growth. The budget situation remains precarious and  there will still be pressure for an aggressive monetary policy from the Bank of England. With exports unable to make much headway, Sterling will find it difficult to make much further headway despite initial relief.

The UK credit rating was downgraded to AA+ from AAA by Fitch with all major agencies having now downgraded the rating and the outlook was described as stable.

The latest government data recorded a borrowing requirement of GBP16.7bn for March from GBP7.2bn previously. The monthly data was significantly weaker than expected and there was only a marginal underlying decline for fiscal 2012/13 to GBP120.6bn from GBP120.9bn previously which is around 8% of GDP.

Bank of England MPC member McCafferty was more optimistic surrounding the outlook as business optimism has improved and was also uneasy over inflation trends. In this environment, he may again be reluctant to back additional quantitative easing.

The first-quarter UK GDP data was stronger than expected with an increase of 0.3% from the previous quarter and a 0.6% annual increase as demand bounced back from the previous quarter’s decline.  There was also a strong reading for March’s services sector reading, although the three-month view was less encouraging.  

There was important relief that a triple-dip recession had been averted and there was also an impact on Bank of England policy expectations with reduced speculation over an expansion of quantitative easing in the short-term with the bank potentially on hold until Carney takes office in July.

Swiss franc:

The franc could gain some degree of support from expectations that the ECB will cut interest rates. The National Bank will continue to defend the minimum 1.20 Euro level in the short-term, especially with further concerns surrounding deflation. There has been some speculation that the bank will look to raise the minimum level, although they are more likely to concentrate on maintaining the existing level for now. There will be a high degree of uncertainty surrounding capital flows, especially with uncertainties surrounding the outlook for the Japanese yen and gold.

The dollar moved to a high near 0.95 against the franc before finding some resistance as the Euro advanced to a high near 1.2350 before dipping lower with uncertainties surrounding the outlook for capital inflows.
 
There was some renewed speculation that the National Bank would raise the minimum Euro level to 1.25 from 1.20 now which pushed the Euro stronger and weakened the Swiss currency. Domestic Finance Chiefs were also generally more optimistic that the minimum Euro level would hold. 

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The Australian dollar remained under pressure during the first half of the week and dipped to lows just above 1.02 against the US currency before securing a limited recovery as risk conditions also stabilised.

There was a weaker than expected inflation reading for the first quarter with a headline increase of 0.4% while the core increase held to 0.3%. The data reinforced expectations that the National Bank would have scope for lower interest rates.

Although, the Australian dollar will gain some degree of support on yield grounds, it valuation and regional growth trends are likely to trigger further underlying losses.

Canadian dollar:

The US dollar was unable to push above the 1.03 level against the Canadian currency during the week and she retreated to lows just below 1.02.

There was a stronger than expected release for retail sales which helped underpin the currency on domestic grounds. Bank of Canada Governor Carney re-iterated the fact that interest rates would eventually need to increase.

Despite a more positive tone this week, the Canadian dollar will find it difficult to gain strong support, especially with underlying fundamental concerns.

Indian rupee:

The rupee was unable to sustain moves towards the 54 level against the US currency during the week and settled around 54.20. The currency was hampered by strong demand from importers and oil refiners while gold demand also increased.

There was optimism surrounding capital inflows which helped underpin the currency. There were also expectations of capital inflows associated with the sale of a Jet airways stake to Etihad airlines.

The rupee will continue to gain some degree of support on expectations of renewed capital inflows, although it will be difficult to make much headway.

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The Hong Kong dollar drifted slightly weaker during the week with a move towards 7.7650 in very narrow ranges.

Hong Chief Executive Chan reinforced the commitment that the HKMA would be able to manage the inflation risk associated with the Chinese economy and would also hold the dollar peg steady. The underlying inflation concerns were illustrated by the 4.4% annual inflation rate. There was speculation that any Chinese yuan trading band widening would put underlying upward pressure on the Hong Kong dollar.

There will be further uncertainties over the implications for Hong Kong of imported inflation, especially if the Chinese yuan trading band is widened.

Chinese yuan:

The Chinese yuan maintained a solid tone during the week with fresh 19-year highs around 6.17  against the dollar. The PBOC allowed the yuan to strengthen and there appeared to be a commitment to let the Chinese currency advance closer to the spot rate and give the market greater control.

There were further reports that the Chinese yuan trading band would be widened which provided important underlying support with expectations of capital inflows.

Expectations of renewed capital inflows and a wider trading band will put underlying short-term strengthening pressure on the yuan, a trend liable to reverse later in 2013.

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