Weekly Forex Currency Review 30-09-2011

Fears surrounding the Euro-zone and global economy will remain extremely important in the short-term. Signs of greater urgency by Euro-zone governments has provided some relief to risk appetite, but there are still major barriers to a durable solution and there will also be fears that the global economy is deteriorating with important stresses in Asia. There is unlikely to be much in of the way of sustained in improvement in risk appetite.

Key events for the forthcoming week

Dollar:

The US data releases have remained uninspiring at best and there will be continuing fears that the economy is moving back into recession. The Federal Reserve will maintain interest rates at extremely low levels and will look at additional policy action, although the monetary data should prompt caution. There will also be further medium-term stresses surrounding the budget outlook. The global economic outlook will also be watched very closely and there will be a further lack of confidence which will continue to trigger defensive dollar demand, especially if there is no improvement in the Euro-zone financial crisis.

The dollar secured strong advances at times, but was unable to hold its best levels as there had already been a substantial speculative shift in the US currency’s favour and the trade-weighted index fell from 8-month highs.

The US consumer confidence index was little changed at 45.4 for September from 45.2 previously and remained trapped near historic lows while house prices fell 4.1% in the year to July according to the Case-Shiller index while jobless claims fell to below 400,000 in the latest week.

The US durable goods orders data was marginally weaker than expected with a 0.1% decline for August, although the impact was limited as markets continued to concentrate on risk appetite. There was a sharp Wall Street decline in late trading on Wednesday which undermined confidence and triggered fresh dollar demand, but it was unable to hold gains.

The latest IMM positioning data recoded the largest net long dollar position since July 2010 and a further increase in Euro short positioning which lessened the potential for additional dollar buying.

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

The Euro-zone outlook will remain extremely precarious. Greece may be able to secure the next loan tranche which would keep the economy afloat for a few weeks, but a default remains inevitable in the medium term. There will be further concerns surrounding the economy as a whole and the banking sector will also remain a critical focus.  Political tensions, notably in Germany, will be extremely important as barriers to more aggressive measures will be formidable. There will still be strong pressure for the ECB to cut interest rates which would undermine Euro support. In this environment, the currency is unlikely to secure a strong recovery, but bank recapitalisation would be supportive.   

During the week, there was greater urgency by Euro-zone leaders following the weekend IMF meetings had this had some positive Euro impact. There was increased speculation that the ECB would restart its covered-bond issuance policy to provide additional liquidity. There was also further speculation that the EFSF would be leveraged through the ECB to provide greater market impact. There was a strong rally in European financial share prices as panic surrounding the banking sector eased.

Underlying confidence remained extremely fragile, especially as there are extremely important splits within governments and central banks.  The German Finance Minister stated that there was no need to increase the rescue fund. There were also very strong comments by Bundesbank head Weidmann against using the ECB to fund EFSF bond purchases and there will certainly be further major policy divisions.

There was some relief that the latest German IFO index fell less than expected which suggests some resilience in the industrial sector. Steady German consumer confidence and firmer money-supply growth provided some Euro support.

Markets were relieved that the IMF-led troika would resume its negotiations over Greek fiscal policy on Thursday with increased optimism that there would be a positive recommendation that the next loan tranche should be approved.  There was also relief that the Finnish parliament voted to approve expanded EFSF powers.

The German parliament also passed the EFSF legislation on Thursday with Merkel able to secure a narrow majority of her own coalition. There was still a high degree of uncertainty over the situation, especially as there were reports that the German government was looking to re-negotiate the terms of the second Greece bailout package, fuelling fears over policy divisions. More importantly, underlying fears will persist, especially as the EFSF even in its stronger form will not be able to stabilise the debt situation and there will be demands for even more aggressive actions. The Euro was able to stabilise above 1.36 against the dollar.

Yen:   

A lack of confidence in the global economy will continue to provide support for the yen with a reluctance to engage in aggressive carry trades.  The yen’s global position as a safe-haven has also been boosted by the blocking of Swiss franc gains and this will be important in providing defensive support. There will also be the potential for further capital repatriation from Europe. There will be additional measures designed to prevent further yen gains and intervention will remain a possibility. In the short-term, the yen is likely to resist significant losses given the deterioration in risk appetite.  

At the weekend IMF meetings, there was no additional measures to weaken the Japanese currency and officials also stated that Japan was not in a position to pursue the same policy as Switzerland. This dampened speculation that there would be any concerted G7 action to weaken the yen.

The dollar found support near 76 against the yen and rallied slightly, although ranges remained very narrow as risk conditions continued to dominate both currencies.

The yen did retreat on the crosses when risk appetite improved, although there was still a high degree of caution over aggressive selling. There was further speculation over capital repatriation on fears over the global economy while there were also reports that Japanese institutions were lowering their holdings of European bonds.

The latest retail sales data was weaker than expected with a 2.6% decline in retail sales in the year to August which will increase doubts over the sustainability of any domestic rebound. The data will also tend to increase pressure for more aggressive Bank of Japan action to curb yen appreciation

Do you know the two most-overlooked property shares? If you did, you’d want to keep them a secret. 2 companies survived the crash, leaving them grossly under-valued, in spite of their track record and skilled management! Find out how these two shares will supercharge your portfolio today.  Click Here.

There will be further concerns over the UK economy in the short-term with weak consumer spending compounded by a much less favourable global outlook. There will be strong pressure on the Bank of England to sanction further quantitative easing in an attempt to boost demand and a move is certainly likely during the fourth quarter. Sterling will be much more vulnerable to selling pressure if there are renewed fears over the banking sector. There could still be some protection from the UK position outside the Euro-zone, especially if there are measures to protect the financial sector as this would also benefit the UK banks but Sterling is unlikely to make strong headway.

Sterling found firm support on dips below 1.5450 against the dollar, advancing to highs around 1.57, and held its ground against the Euro, although Sterling was generally out of the spotlight.

The UK BBA mortgage data was slightly stronger than expected which provided some degree of confidence surrounding the housing sector, although international developments remained dominant. The economic data did not have a significant impact with the CBI retail survey weakening to  -15 in September from -14 the previous month. Bank of England MPC member Miles stated that he was close to voting for additional quantitative easing in September, echoing remarks made by Broadbent the previous day.

Sterling gained support from a strong recovery in banking stocks and there were increased hopes that the UK would effectively get a free ride from any Euro-zone rescue attempts. Any increased support for the European banking sector would also tend to improve the UK banking-sector outlook. The Swiss National Bank announced that it would increase the Sterling proportion of its reserves.

The latest Bank of England survey reported some improvement in credit conditions during the third quarter, but there was still a high degree of uncertainty over the situation and doubts whether the improvement would be sustained which maintained an underlying lack of confidence.

Swiss franc:

The National Bank will remain determined to protect the minimum Euro level against the franc in the short-term and there will also be additional speculation that there could be a move to increase the base level. The is still the potential for an underlying shift of assets into Swiss institutions if confidence in the Euro-zone banking sector continues to intensify. Nevertheless, the franc is unlikely to advance far in the near term, given that the cap will remain in place and there will also be reduced confidence in the banking sector following the UBS losses.  

The Euro continued to test support below 1.22 against the franc, but was able to resist heavy selling pressure. The dollar found it difficult to sustain gains above 0.90.

The National Bank in its quarterly report and speech by President Hildebrand repeated that the Swiss franc cap against the Euro would be defended with the utmost determination. There was a further reluctance to take on the central bank at this stage which curbed any franc buying support. Bank member Jordan stated that the franc cap was very, very credible and reiterated that the central bank would take all necessary steps to defend the lower Euro limit and prevent renewed franc appreciation. He repeated that the bank can effectively create francs without limit.

Fears over a sharp deterioration in the Swiss economy also maintained speculation over an aggressive defence of the franc cap. The UBS consumption index fell to 0.79 in September from 1.28, the lowest reading since the fourth quarter of 2009.

Receive this 10 page property report when you sign up to the free version of The Mountain Investor Report monthly newsletter.
Click here 

The Australian dollar was subjected to heavy selling pressure early in the week before rallying from the 0.96 area and almost reaching parity. The currency was unable to sustain the gains and dipped again later in the week. Global risk conditions remained the dominant influence with the currency coming under strong selling pressure when fear dominated. There were also increased underlying fears surrounding the Chinese and Asian economies which undermined confidence.

The domestic impact was limited with housing sales looking to stabilise at lower levels while markets continued to speculate over a Reserve Bank interest rate cut.

Australian dollar volatility is likely to remain higher in the short-term. The international and domestic risk profile suggests further net losses are likely.

Canadian dollar:

The Canadian dollar found support in the 1.04 region against the US currency during the week and strengthened back to the 1.0150 before it was subjected to renewed selling. There currency was undermined by lower commodity prices and a deterioration in confidence towards the global economy.

The Canadian dollar is liable to remain on the defensive in the short-term, although aggressive selling should be resisted unless credit conditions deteriorate very sharply.

Indian rupee:

The rupee found some support on retreats to 28-month lows near 49.50 against the dollar and attempted a limited recovery, helped by hints over Reserve Bank intervention, although it was unable to make much headway as underlying caution continued to prevail.

There was still important caution surrounding risk appetite which curbed buying support and there was also evidence of month-end dollar demand form oil importers which undermined the local currency.

The rupee will continue to be hampered by caution over the global economy and risk conditions. Heavy losses from current levels should be resisted.

Click here for you FREE Report.

The Hong Kong dollar was confined to relatively narrow ranges during the week as it found support on dips towards the 7.8050 area before a move back towards 7.79.

Underlying risk appetite remained weaker which undermined the currency, butt here was still longer-term speculation over upward pressure on the currency and a possible change in the currency peg which provided important support.

Even with weak risk appetite, the Hong Kong dollar should gain further near-term protection given speculation over a medium-term move to revalue the currency.

Chinese yuan:

The central bank continued to push the fixing rates for the yuan stronger with record highs beyond 6.3650 against the US currency. The spot rate was less responsive as it drifted back towards the 6.40 area. There was month-end dollar demand from importers which curbed yuan gains and doubts surrounding the economy increased

Trading activity declined during the week with local markets closed for national holidays and this is traditionally a time when the bank likes to keep very close control of the market, especially with important political meetings also on the calendar.

There will be increased speculation that the yuan could face depreciation pressures, especially if there is evidence that growth conditions are deteriorating.