Weekly Forex Currency Review 30-03-2012

Overall strategy: The global economic outlook will continue to be an important market focus. The dollar will gain support from expectations that the US economy will out-perform other regions in the short term. The generally dovish Federal Reserve tone will, however, limit the potential for dollar gains, especially with continuing speculation that there could be additional action to boost the economy through further quantitative easing.

Key events for the forthcoming week

Dollar: 

The US economy is likely to have been boosted artificially by favourable weather conditions during the first quarter and there will be further scope for some disappointment over the next few weeks. This will dampen any expectations that the Federal Reserve will move towards a policy tightening and there is also likely to be fresh speculation over additional quantitative easing. There is still likely to be confidence that the US will out-perform Europe which will provide some underlying dollar support. The currency will also tend to gain additional defensive demand when confidence in the global economy deteriorates and substantial dollar selling pressure looks unlikely.

The dollar advanced at times during the week, but it was unable to sustain gains and retreated again for the week as a whole with some portfolio adjustment at the end of the first quarter undermining the currency and it failed to hold gains.

The latest US consumer confidence reading was slightly weaker than expected with a reading of 70.2 for March from a revised 71.6 previously. Headline US durable goods orders rose 2.2% for February following a revised 3.6% decline the previous month while core orders rose 1.6%. The US GDP data was in line with expectations at 3.0% for the fourth-quarter final reading. Jobless claims were higher than expected at 359,000 for the latest week from a revised 364,000 previously which also cast some doubts over the US outlook as it maintained the run of slightly weaker data releases.

The US Federal Reserve Chairman was slightly more optimistic surrounding the growth outlook, but he also stated that the labour-market situation was far from normal. He also stated that it would not be the right time to withdraw monetary stimulus. The dovish comments put the US currency under wider selling pressure as yield support declined on renewed speculation over further quantitative easing.

Fed Governor Dudley remained cautious over the outlook, but also stated that there was unlikely to be any immediate action to provide fresh stimulus to the economy. The comments had some impact in reversing quantitative-easing expectations

The dollar was unable to gain further support on yield grounds and also failed to sustain the advance against the Euro as it retreated back towards the 1.33 area on expectations that US interest rates would stay very low

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

There will be further concerns over the peripheral economies in the short term as recession continues to bite. Demands for further budget cuts will also increase fears that policies are unsustainable which will increase structural fears and invite another phase in the Euro-zone crisis. The ECB has stabilised credit-market conditions, but the net effect has been quantitative easing which will tend to devalue the currency on a medium-term view, especially as it will have to maintain a highly-expansionary policy which will tend to sap any Euro strength.

The Euro was able to resist selling pressure during the week with evidence of solid buying support on dips and it re-tested monthly highs.

The German IFO index was slightly stronger than expected with a headline figure of 109.8 for March from 109.7 previously which was the fifth consecutive monthly increase. An initial Euro rally was not sustained as there were slightly more cautious comments from IFO economists which dampened the mood to some extent.

There had been speculation over the weekend that the German government’s opposition to running the EFSF and ESM in tandem was softening and this stance was confirmed by Chancellor Merkel in comments on Monday. Although there was a continued rebuttal of any move to increase the size of the ESM, the remarks boosted confidence that the Euro-zone firewall would be strengthened which would in theory lessen the potential contagion threat if tensions increased again and this provided background Euro support.

There were further concerns surrounding the Euro-zone outlook with a particular focus on Spain and Italy. Spain’s general strike and uncertainty ahead of Friday’s budget presentation had a significant negative impact on sentiment. There were also fresh concerns surrounding the Italian outlook as yield spreads over German bunds also widened again.

There was also a renewed deterioration in business confidence which reinforced growth doubts and offset the impact of a larger than expected decline in German unemployment, especially as it maintained concerns that the peripheral divergence would continue over the next few months. The dollar also gained some support on the latest OECD report which suggested that the US economy would out-perform Europe. These fears were offset by optimism that EU leaders would agree to a stronger set of support funds at their meetings on Friday and Saturday.

Yen:  

There will be further speculation that the Bank of Japan will look to ease monetary policy even further if necessary and will act to block any yen appreciation. There will also be further speculation over competitive regional devaluation policies which will limit yen support, especially if Chinese conditions deteriorate further. There is also the potential for defensive yen support if there is a sustained deterioration in risk appetite. There will be a change in market dynamics at the start of the new fiscal year which will increase the potential for capital outflows from Japan which would curb yen support.

The dollar was blocked in the 84 region against the yen during the week and retreated back to 82 as it was subjected to significant selling pressure.

There was further speculation that last-minute year-end capital flows were boosting the yen as it regained some ground on the crosses. The currency also continued to gain some degree of support from weak equity markets as global growth doubts remained an important focus.

The dollar regained some ground after the Japanese Finance Ministry warned that it was on guard against rapid yen rises. The latest Japanese data was mixed with stronger reading for household spending and a slightly higher PMI reading offset by a surprise drop in industrial production. In choppy trading, the dollar was unable to sustain any limited recoveries.

Earn a tax free income trading, from just 20 minutes a day – no experience needed
Our powerful trading software will help you decide when to enter trades and how to maximise profits.

Register for a FREE brochure and trading guide, Click Here.

There will still be important reservations surrounding the UK economic outlook, especially with serious doubts over the consumer spending. With the OECD warning that the economy is back in recession, there will be further speculation that the Bank of England will decide on additional quantitative easing. Global considerations will remain very important and sentiment will tend to weaken when confidence deteriorates, especially as there will be increased fears surrounding the banking sector and Sterling is unlikely to make much headway.

Sterling maintained a solid tone during the week with technical considerations playing an important role as markets challenged key levels. There was interest in breaking reported option barriers in the 1.60 region with a temporary push above this level while the UK currency was also trading close to the 200-week moving average.

Fourth-quarter UK GDP was revised down to -0.3% from -0.2% previously which had a significant negative impact, especially as there was annual growth of only 0.5% with the economy basically stagnant since the Autumn 2010. There were further concerns over the implications of a decline in disposable income, but investment was revised slightly higher.

Mortgage approvals data was sharply weaker than expected with a fall to 49,000 for the month from 58,000 previously. There was also a decline in the latest Nationwide house-price index with a -1.0% decline for the month following a revised 0.4% gain the previous month which reinforced expectations that the ending of tax reliefs was undermining housing-sector support and revealing underlying vulnerability.

There was a solid reading for consumer lending, but a sharp decline in money supply reinforced fears surrounding bank lending. The net impact was to increase speculation that the Bank of England would have to resort to further quantitative easing.

Swiss franc:

The National Bank will maintain its commitment to the minimum Euro level in the short term, especially as any evidence that commitment is weakening would inevitably invite massive speculative capital inflows. The franc will still tend to gain any defensive support if there is any deterioration in the global outlook. Any renewed fear surrounding the Euro-zone would also risk potential capital flows into the Swiss currency and discourage net outflows which would provide a stern test of National Bank policies.

The dollar found some support on dips towards the 0.90 level against the franc during the week, but was unable to make significant headway region. The Euro was unable to make further progress and dipped back to the 1.2050 area against the Swiss currency. There was no aggressive verbal intervention from the National Bank, but there was inevitably speculation that the bank had intervened.

Fresh concerns over the Euro-zone outlook will tend to increase the potential for capital outflows into Switzerland, especially if Spanish fears intensify. The main impact may be to deter outflows which would tend to push the currency higher given the structural current account surplus. 

InterTrader.com provides an award-winning suite of products and tools to help you back your judgement Spread betting in the financial markets. Our aims are simple: to make the markets accessible to all, to make CFD trading and Spread betting affordable and to provide a service that you can trust. Click here

The Australian dollar generally remain on the defensive throughout the week and retreated to 10-week lows close to 1.03 against the US currency before a partial corrective recovery as the currency was vulnerable on the crosses.

There were further concerns surrounding the regional economy with a particular focus on the Chinese outlook with fears that a downturn would damage demand for Australian commodity exports. There was also a generally cautious attitude towards risk appetite while there were little fresh incentives on domestic grounds.

With 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 found support weaker than the parity level against the US currency and strengthened back towards the 0.99 level, but it was unable to sustain the advance and ended up little changed for the week.

The currency was hampered by a generally cautious attitude towards risk appetite as equity markets were on the defensive and global growth doubts also had a significant impact in curbing Canadian demand. The latest federal budget release did not have a major currency-market impact.

The Canadian dollar should be broadly resilient given optimism surrounding the fundamentals, although global growth doubts are likely to stifle CAD demand.

Indian rupee:

The rupee attempted to recover at times during the week, but it was unable to sustain gains and retreated to lows near 51.50 against the US dollar with the biggest daily decline for three months.

There was a lack of confidence in the economic fundamentals with fears that persistent inflation and a trade deficit would undermine capital inflows. AS well as being a short-term factor, there were medium-term uncertainties.

There was also continuing dollar demand from oil importers. There was further evidence that the Reserve Bank was intervening to curb rupee losses.

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.

..From expert analysts at CML Markets.  Background analysis and how you can profit in these market conditions.  Download your free report now.  Click Here.

The Hong Kong dollar retreated to lows near 7.77 against the US dollar during the week before finding support and moving back to the 7.7650 area.

Risk appetite was generally fragile for much of the time with Asian stocks weakening for the week as a whole, but there was a slightly more optimistic tone later in the week which helped underpin the currency.

Continuing uncertainty surrounding the Chinese outlook will tend to curb Hong Kong dollar support, but there will be support from expectations of a loose US Fed policy.

Chinese yuan:

The yuan traded in slightly narrower ranges during the week with the PBOC consistently setting the central rate stronger than 6.30 level. Underlying selling pressure on the currency eased slightly with reduced corporate dollar demand.

There was still underlying unease surrounding the Chinese economic outlook as a decline in industrial profits maintained fears that the economy was faltering.

Trading levels dipped later in the week ahead of market holidays next week and wider caution also prevailed, especially with PMI data due over the weekend.

The yuan will still find it difficult to secure gains much beyond current levels, especially as there will be persistent doubts surrounding the economic outlook.  

New ADVFN Service - FREE Reports

Get your free report on Isa's, Investment Trusts, Funds,
Sipps Travel and Cars - FREE and Easy service CLICK HERE