Weekly Forex Currency Review 31-05-2013

Expectations surrounding the Federal Reserve stance will continue to be extremely important. The dollar has been underpinned by expectations of a policy tightening and any reversal in expectations would undermine near-term dollar demand.  Underlying dollar sentiment should still be solid, especially with a deterioration in confidence surrounding key emerging markets which will trigger inflows into the US currency.

Key events for the forthcoming week

Dollar:

Markets have built a dollar bullish case on the back of expectations of stronger growth and an early move by the Federal Reserve to scale-down the rate of bond purchases.  In this context, the dollar will be vulnerable if forthcoming data is weaker than expected, especially as there would also be a negative impact on yields.  There will still be expectations of overall US out-performance, especially in comparison with the Euro-zone. There is also likely to be a further net improvement in US fundamentals as the trade and budget deficits narrow. There will be the potential for inward capital flows if emerging market confidence deteriorates and the dollar should be resilient.

The dollar strengthened sharply during the first half of the week before retreating on a combination of position adjustment and a scaling back of Fed expectations.
 
The latest IMM positioning data recorded a further increase in net long dollar positions across all major currencies with an increase in net Euro shorts to around 80,000.  The aggressive dollar long positioning will make it more difficult for the US currency to secure further gains.

Consumer confidence rising to 76.2 in the latest month from a revised 69 previously. This was the highest reading since the first quarter of 2008 which maintained a positive assessment towards consumer spending. There was also a stronger than expected 10.9% annual increase in the Case-Shiller house-price index.

The firm data helped trigger a further increase in US Treasury bond yields with 10-yr benchmark yields rising to 2013 highs above 2.15% with fresh speculation that the Federal Reserve will slow the rate of bond purchases.

Later data releases were weaker than expected with the first-quarter GDP estimate revised down slightly to 2.4% from 2.5%. There was also an increase in weekly jobless claims to 354,000 from a revised 344,000. There was also a lower than expected gain for pending home sales.

The dollar has been boosted substantially by expectations that the Federal Reserve will move to a tapering of bond purchases within the next few months at the latest. In this environment, the latest data had a significant impact in dampening expectations of a policy tightening which also served to curb dollar demand.

TorFX is one of the country’s leading foreign exchange companies, offering competitive currency exchange rates and providing unbeatable customer service. TorFX ensures you get the best possible exchange rate, at the right time; offering unbeatable rates which are often 3% better than banks. TorFX saves you both time and money.
Click here

There have been some tentative signs of improvement in the Euro-zone economies, but any recovery comes from an extremely low base and conditions are still extremely fragile in the peripheral economies. Policy changes announced so far will tend to have only a minimal impact and there will be pressure for a more robust policy shift with looser fiscal policies and a much more aggressive ECB policy. The central bank will consider the possibility of negative interest rates, but internal opposition is likely to be high. There is also a high risk of social tensions which would un-nerve international investors. Overall, the Euro will find it very difficult to make sustained gains.

The Euro proved resilient during the week and found support in the 1.28 region against the US dollar. Following two successive declines, the closely-watched German IFO business confidence index strengthened to 105.7 in the latest release from 104 previously. Group economists were more confident surrounding the outlook with reports that exports were performing strongly.

Developments within the peripheral bond markets were less encouraging with a further increase in Spanish bond yields. There was also an increase in Italian benchmark yields with unease over the implications of rising bad debts within the banking sector. A further increase in bad debts would make it more difficult for banks to purchases domestic government bonds.

There was a strengthening of Euro-zone money-supply growth for April, but there was a further contraction in private lending and the series has been negative since August 2012 which continues to suggest a serious reluctance to lend.

While the ECB will continue to look at direct measures to boost lending, there will also be further pressure for the bank to announce additional monetary support. The OECD in its latest global outlook called for the ECB to take more aggressive action and introduce negative deposit rates. There is certainly evidence of a vigorous debate within the bank ahead of the  next policy meeting.  The bank is technically ready to introduce negative rates, but Constancio, for example, reiterated that the ECB is along way from taking such a decision and there would inevitably be strong opposition.

There was some adjustment in ECB forecasts with reduced speculation over a further near-term cut in rates following slightly better data.

Yen:

Monetary policy will remain highly expansionary in the short-term which will tend to undermine the yen. There has, however, been further instability in the bond market which will risk substantial damage to the underlying Japanese economy which will create some pressure for a more conservative approach. Expectations of substantial capital outflows in search of high yields have also not yet been forthcoming. In this context, there will be the risk of a sharp yen correction stronger, especially if global risk appetite deteriorates.  

The latest Bank of Japan minutes revealed significant stresses within the monetary policy committee. There was unease surrounding instability within the bond markets and there were doubts surrounding potential effectiveness of the 2% inflation target in two years time. There will be some speculation that the bank will have to be circumspect in aggressive easing which could provide some yen respite.

There was some speculation that the Finance Ministry would look to target a dollar/yen range of 100-105 in the short-term to help minimise the risk of a further destabilising increase in Japanese bond yields.

There was evidence of defensive yen demand and increased profit taking as equity markets dropped sharply. There was further erratic Nikkei index trading on Thursday with a slide towards 1-month lows supporting the Japanese currency. The latest capital account data recorded a second successive week of sharp net inflows in the bond sector with capital repatriation more than offsetting fund allocation overseas.

There was a wire report suggesting that the Japanese Government Pension Investment Fund (GPIF) was considering allowing a greater allocation of funds into equities following the monetary policy change and gains in Japanese stocks.  Although there had been similar reports previously, there was a surge in demand for the dollar against the yen with a move to 101.80 before retreating to the 101 area.

The latest Japanese data registered an increase in Tokyo core prices of 0.1% in the year to May which suggests deflationary pressure is easing. There was also a 1.7% increase in industrial production, but household spending was weaker than expected.

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 be expectations of growth this year, but it will be difficult to secure expansion at the pace needed to secure a meaningful decline in the budget deficit. Bank of England policies will, therefore, be critical over the next few months with uncertainty exacerbated by the arrival of Carney as new Bank of England Governor in July. There will be speculation over a more aggressive monetary policy and a weaker currency either as a direct policy or a by-product of further monetary easing. In this context, Sterling is likely to be vulnerable to selling pressure even if heavy losses are avoided.

Sterling was able to find support on dips towards 1.50 against the dollar during the week as the US currency retreated from its best levels and moved above 1.52 as it also found support close to 0.86 against the Euro.

Bank of England member Tucker stated that the MPC had been clear on the short-term trade-off between growth and inflation which continued to suggest that the bank would tolerate an over-shoot of inflation in the short-term to help promote growth.

The latest CBI retail sales survey was weaker than expected with a figure of -11 for May from -1 previously and this was the lowest reading since January 2012. Although there was an improvement in consumer confidence, the data will maintain unease surrounding the consumer spending outlook and fuel speculation that new Bank of England Carney will look to expand monetary policy. There were also some expectations that Carney would be looking to weaken Sterling.

Swiss franc:

In the short-term, there will be expectations of reduced defensive inflows into the Swiss currency. There will also be speculation that the national Bank will take advantage of any vulnerability to raise the minimum Euro level. If global risk appetite deteriorates, there could still be a rapid flow of funds back into the Swiss currency and the National Bank will be very wary over tinkering with the minimum level given the risk of further instability.
 
The dollar strengthened to 2013 highs just below the 0.98 level against the franc before retreating back towards the 0.95 area as the Swiss currency also found support beyond 1.25 against the Euro.

There was renewed demand for the Swiss currency area as European equity markets were subjected to fresh selling pressure. Volatility is liable to remain the main feature in the short-term with uncertainty over underlying capital flows. There will still be some speculation that the National Bank will look to raise the Euro minimum level.

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 main feature was high volatility in the Australian dollar during the week. The currency dipped to lows below 0.9580, for the first time since 2011 before correcting higher. There were further concerns surrounding the domestic and international growth outlook as sentiment remained extremely fragile.

There were mixed data releases with a sharp decline in investment spending offset by strong gains in building approvals. The net outcome, especially with a weaker Australian currency was reduced speculation over a further near-term cut in Reserve Bank interest rates.

After a potential recovery from over-sold conditions, the Australian dollar will remain vulnerable on domestic and Chinese growth concerns with capital-account pressures.

Canadian dollar:

The Canadian dollar remained under pressure over the first half of the week and dipped to 2013 lows beyond 1.04 against the US dollar before finding some degree of support and rallying to the 1.03 area.

The Bank of Canada left interest rates on hold at 1.00% following the latest policy meeting. The statement was broadly in line with expectations with some modest reduction in policy accommodation after a further initial period of stability.

Domestic economic doubts will continue to hamper the Canadian dollar and selling pressure will return if there are fresh concerns surrounding the global outlook.

Indian rupee:

The rupee was unable to gain any significant traction during the week and dipped sharply to 11-month lows beyond 56.50 against the US currency. Emerging-market sentiment remained fragile, especially with further sharp losses for the South African rand and this hampered the Indian currency.

From a domestic perspective, there were doubts whether there would be scope for a further near-term cut in interest rates following central bank comments, dampening hopes of firmer growth following a second successive expansion of less than 5%. The currency was also hampered by month-end dollar demand from oil importers.

Doubts surrounding the Indian economic outlook and important reservations surrounding emerging-market assets as a whole will limit potential rupee support.

Download your FREE 'Gold Volatility' Trading Report, courtesy of Tradenext. 
Click Here.

The Hong Kong dollar was trapped within very narrow ranges as it found support on approach to the 7.7650 area against the US currency. There were concerns surrounding a slowdown in regional economies and a general loss of confidence in emerging markets which had an impact in curbing Hong Kong dollar demand.

Underlying upward pressure on the Hong Kong dollar could ease slightly given concerns over emerging-market conditions and Chinese economic concerns.

Chinese yuan:

The Chinese yuan edged weaker over the week with a retreat to beyond 6.14. Initially, the PBOC set weaker fixings. Competitiveness issues remained important even with a slight recovery in the yen which will maintain pressure for currency gains to be resisted. The yuan weakened late in the week despite a firmer PBOC fixing with evidence of rising dollar demand due in part to new capital account regulations.

There were further concerns surrounding the domestic growth environment and there were also fresh doubts over the accuracy of export data. Although this may be used to mask speculative capital inflows, there was unease over the structural trade position.

Competitiveness issues will be important in restraining the Chinese yuan and the capital account is also likely to weaken which will tend to weaken the currency.

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