Weekly Forex Currency Review 02-10-2009

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The comments from global policy-makers will be watched very closely in there. The evidence suggests that there is greater concern over the risk of a sharp dollar decline, especially within Europe, and that will be a more concerted effort to stabilise the US currency.  There is a small possibility that there will be a more decisive effort to keep currencies within narrow ranges.

Key events for the forthcoming week

Dollar:

Underlying confidence in the dollar will remain fragile with continuing fears over medium-term reserve diversification. The dollar is likely to gain some support from speculation over a more aggressive Federal Reserve policy on interest rates.  There is also evidence that the G7 countries will look to put a floor under the dollar, especially as a sharp US currency decline would tend to destabilise global markets and the markets. The dollar will still find it very difficult to make strong headway given a lack of confidence in the fundamentals. 

The dollar secured a slightly firmer tone over the week with an advance to near 1.45 against the Euro, but was unable to make strong headway. There was a slightly more cautious attitude towards risk as equity markets came under selling pressure and some expectations that G7 would move to underpin the dollar which curbed selling pressure. ECB President Trichet stated that it was extremely important to have a strong dollar which reinforced speculation that the global authorities are looking to stabilise the US currency.

The Chicago PMI index was significantly weaker than expected with a decline to 46.1 from 50.0 the previous month, contrary to expectations of a further modest advance. Although the Chicago data is erratic on a monthly view and is influenced by the auto sector, there were some concerns over the economic situation.

The ISM index for manufacturing was also weaker than expected with a small decline to 52.6 for September from 52.9 and compared with expectations of an increase to 54.0. The PMI data had a greater market impact with a retreat for commodity prices.

The US housing data was firmer than expected with the Case-Shiller index recording a third successive monthly increase which cut the annual decline to 13.3%. US pending home sales data was stronger than expected with a further 6.4% increase for August which was the sixth successive monthly increase.

In contrast, consumer confidence was weaker than expected with a fall to 53.1 in September from 54.5. The deterioration is particularly surprising given that the University of Michigan confidence index had registered a significant advance.

The ADP employment report was also weaker than expected with recorded net job losses of 254,000 for September following a revised 277,000 decline the previous month. The data overall will maintain expectations that the economy is recovering, but that it remains fragile with the labour market still very weak

Regional Fed President Fisher gave generally downbeat comments on the housing sector. However, he also stated that a policy reversal by the Federal Reserve could be equal in speed to the policy easing seen in 2007/08. These comments follow hawkish comments from Governor Warsh and maintained speculation over a more aggressive Fed policy even though Fisher is not an FOMC voting member this year. Kohn stated that it was not possible to predict how rapidly interest rates would be increased.

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The Euro-zone data has continued to suggest a gradual improvement in conditions, but there will also be persistent fears that the recovery will not prove to be self-sustaining given the underlying structural vulnerabilities.  There will also be some unease over the risks to the economy posed by any further Euro strength, especially as the currency is fully valued at current levels and there is likely to be some further rhetoric cautioning against further appreciation.       

The CDU victory in Germany’s Federal election provided an initial Euro boost, but the Euro was unable to sustain momentum during the week as a whole.

The Euro-zone data recorded a better than expected figure for German unemployment with a 12,000 seasonally-adjusted decline for August. There was a poor German retail sales report with a reported monthly decline of 1.5% which put some initial downward pressure on the Euro.

The inflation data was slightly weaker than expected with a flash consumer inflation reading of -0.3% for September compared with expectations of -0.2%.  The provisional German consumer inflation data was weaker than expected with a 0.4% decline in consumer prices for September to give an annual 0.3% fall. 

EU's Almunia stated that the Euro's level would be discussed at the weekend G7 meeting. The comments reinforced market speculation that officials were looking to take a more determined tone in curbing Euro gains.

In testimony to the European parliament, ECB president Trichet stated that there was a gradual economic recovery, but that it was not yet time for an exit from the highly-accommodative monetary policies.

Yen:  

Capital repatriation should be less of a feature over the next few weeks which will tend to limit the scope for yen support. There will be confusion over official currency policies. The Finance Ministry will tend to be opposed to intervention, but there will also be reservations over allowing rapid yen appreciation. The yen will still gain support if global risk appetite deteriorates. The net fundamentals suggest that the yen will not be in a position to sustain strong gains.   

After a spike stronger, to highs near 88.20, the yen had a slightly weaker tone against the dollar, but remained generally resilient. Finance Minister Fujii stated that he would not rule intervention and the comments suggest that rapid yen gains have unsettled the government.

The headline Tankan business confidence index improved to -33 for the current quarter from -48 previously which was close to market expectations while there was a further downgrading of capital spending intentions to a 10-year low. There has been some divergence in stock-market performances with most regional bourses out-performing the Nikkei index which weakened to a two-month low.

The Japanese data recorded a slowdown in industrial production with a 1.8% monthly increase for August. The data helped sustain hopes for an economic recovery, but also maintained unease that the recovery will fade quickly as stimulus is withdrawn.

Core nationwide consumer prices also declined 2.4% in the year to August, maintaining deflation fears and there will be pressure for yen gains to be curbed given that a strong domestic currency will exacerbate deflation pressures.

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Confidence in the economy and Sterling will remain fragile in the  with persistent fears over the debt situation. Despite Bank of England denials that it wanted a weaker currency, there will be further speculation that the government and central bank will be content with gradual currency depreciation.  Degrees of risk appetite will remain very important with Sterling correlated significantly with trends in equity markets. Overall, the UK currency is liable to remain vulnerable to further losses over the next few weeks. 

Sterling fell sharply early in the week with multi-month lows beyond 0.92 against the Euro and a dip to below 1.58 against the dollar. The UK currency secured some corrective recovery with rallies still attracting selling pressure.

The current account position was weaker than expected with a GBP11.4bn deficit for the second quarter following a revised GBP4.1bn shortfall the previous quarter. Although the data is erratic, a deterioration in the net investment position will tend to undermine overall sentiment. There was a significantly stronger than expected CBI retail survey for September with the headline reading rising to +3 from -16.

There were reported Bank of England comments that it would not consider a cut in deposit rates in the  while there were suggestions that the bank was unhappy with the market reaction to King’s earlier comments on Sterling.

These remarks suggested that there is unease over the risk of a sharp downward Sterling move with the bank looking to curb market expectations of a sharp decline.

The PMI index for manufacturing was weaker than expected with a dip to 49.5 for September from 49.7 previously. The data has been in contrast to gains in European PMI indices which maintained a generally cautious market tone towards Sterling.

Swiss franc:

The latest industrial survey evidence has remained more encouraging for the Swiss currency and will provide some support.  Deterioration in risk appetite would also tend to underpin the Swiss currency. National Bank policies will remain extremely important and there is likely to be further intervention to weaken the franc if there is any advance against the Euro. In this context, there looks to be little potential for Swiss currency gains.       
 
The franc generally proved resilient during the week before being jolted weaker with rumours that the National Bank had intervened to weaken the Swiss currency. The franc recovered from initial losses and consolidated near 1.04 against the dollar.

From lows below 1.51, the Euro rallied strongly to test the 1.52 region before consolidating around 1.5165. As usual, the central bank declined to comment on the intervention rumours and markets remained very edgy over the threat.

The Swiss KOF index was significantly stronger than expected with a sharp increase to 0.85 for September from -0.4 the previous month and this was the highest figure since the middle of 2008. The data will reinforce confidence in the industrial sector, although there will be further doubts over the consumer spending outlook. The PMI index for September was stronger than expected with an increase to 54.3 from 50.2.

The UBS consumption index was again weaker than expected with a further small decline for September which will maintain some unease over domestic economic trends and should be a negative influence on the franc

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The Australian dollar maintained a generally firm tone for much of the week with a challenge on 14-month highs around 0.8850 against the US dollar. There was a significant currency retreat late in the week as risk appetite faded in the new quarter with a test of technical support below the 0.87 level.

The Australian Reserve Bank warned over potential asset price bubbles and the comments reinforced market speculation over higher interest rates which underpinned the Australian dollar in local trading on Tuesday. There was a further boost from a stronger than expected 0.9% increase in the latest retail sales figure.

Confidence in the Australian dollar should remain broadly firm in the , but the net global risk suggests that the upward movement is liable to stall.

Canadian dollar:

The Canadian dollar strengthened to test US dollar support levels below 1.07 over the first half of the week before reversing course. There was initial support from firm energy prices and a weaker tone in the US dollar.

There was another reversal later in the week as risk appetite faded and commodity prices also retreated. Canadian official comments on the risks posed by a strong currency did not have a major impact and neither did the political stresses.

The Canadian currency will remain vulnerable to choppy trading in the  and the international risk profile will make it difficult to secure significant gains.

Indian rupee:

The rupee maintained a generally firm tone and challenged 2-month highs around 47.80 against the US dollar over the second half of the week. Dollar demand from importers also faded as the new month started which underpinned the currency.

The local bourse retained a firm tone with a challenge on the 17,000 level and there were net portfolio inflows of close to US$4.0bn for September which helped underpin the currency. There was a mood of greater caution late in the week.

The rupee will continue to gain support when there are wider US dollar losses. The net risks suggest that the currency will struggle to make significant near-term gains.

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The Hong Kong dollar maintained a firm tone close to the 7.75 band limit against the US dollar throughout the past few days. There was further HKMA action in the market to prevent Hong Kong dollar appreciation.

Confidence in the regional economy remained firm with solid readings for the Chinese PMI data and this helped maintain firm net capital inflows.

The Hong international risk conditions are liable to be less favourable in the  which should make it easier for the HKMA to maintain the currency band.

Chinese yuan:

The central bank maintained tight control of the yuan during the week with stability always a strong policy objective surrounding the October Chinese holiday period.

The Chinese PMI data was firm with both indices holding comfortably above the 50 level and little changed from the previous month. The PBOC maintained its pledge of an easy monetary policy which stifled demand for the yuan to some extent. Market expectations were still focussed on potential medium-term currency appreciation.

The medium-term pressures for yuan appreciation will continue to build. In the , stability is still likely to be a key priority for the central bank.