Weekly Forex Currency Review 10-07-2009

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Trends in risk appetite and the global economy will continue to have a strong influence on currency-market trends in the short-term.  Confidence in the global economic recovery is liable to remain weaker in the short-term which will also maintain some degree of support for the dollar on defensive grounds with a more cautious stance towards high-yield currencies.

Key events for the forthcoming week

Dollar:

The US data releases have been generally mixed and, although there have been some positive signs, there will still be fears that any recovery will stall very quickly given the underlying pressures.  The dollar will tend to gain some defensive support if there are renewed fears over the global economy. Reserve management policies will remain very important and official comments will continue to be monitored closely. There will be underlying fears over a move away from the US currency, but central banks have a strong incentive to maintain stability which should curb selling pressure.

The dollar strengthened sharply in the middle of the week, primarily due to a surge in risk aversion. The US currency still found it very difficult to sustain gains as underlying sentiment remained weak with underlying ranges relatively narrow.

The Chinese Foreign Ministry offering further reassurance on the dollar which helped underpin the currency. Comments from Russian and Indian officials were less supportive.  The debate remain a very important underlying issue with more equivocal comments from Chinese officials later in the week increasing speculation over policy divisions. There were no strong references to currencies at the G8 meetings during the week with members generally cautious over recovery prospects.

The US ISM index for the non-manufacturing index strengthened to 47.0 for June from 44.0 the previous month and this was above market expectations. Most components improved, although employment was still at a very low level.

US initial jobless claims fell to 565,000 in the latest week from a revised 617,000 the previous week and this was the first week below the 600,000 level sine January. The data will tend to revive hopes that the economy is stabilising, although there was still be a high degree of uncertainty given the seasonal considerations.  The number of continuing claim also rose sharply which suggested that conditions are still very tough which limited positive sentiment towards the economy.

US consumer credit declined for the fourth consecutive month according to the latest data while the retail sales reports were generally weak, illustrating that consumer spending levels will tend to be subdued

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The Euro-zone data has continued to suggest some stabilisation in conditions, but overall confidence will remain very fragile with the probability that any recovery in conditions will be very limited and fragile. There will be further structural vulnerabilities and there will also be fears over the banking sector, especially if there are renewed concerns over the Eastern European economies. In this environment, the Euro will continue to find it difficult to make any significant headway from current levels.

The Euro weakened sharply against the yen in mid week and also dipped to lows near 1.38 against the dollar. There was an interim recovery against the dollar before renewed selling on Friday with significant weakness on the crosses.

The Euro-zone Sentix index was weaker than expected with a deterioration to -31.3 for June from -27.0 the previous month which reinforced fears that any improvement in the economy would stall quickly. In addition, there were renewed fears over the regional banking sector following larger than expected losses at the German IKB bank. Confidence in Eastern Europe also tended to deteriorate during the week.

In contrast, the German factory orders data was sharply stronger than expected with a 4.4% monthly increase in orders compared with expectations of a marginal increase. Industrial production also rose 3.7% for May following a revised 2.6% decline the previous month. The data increased hopes that the economy had hit a low point and alleviated underlying fears to some extent

The German trade surplus was slightly higher than expected at  EUR10.3bn for May which provided some degree of relief over trends in exports with a marginal 0.3% increase in shipments for the month

Yen:  

The latest Japanese economic data will reinforce fears that the Japanese economy will remain in difficulties.  The yen will continue to gain some significant defensive support when risk appetite deteriorates, especially with short-term players positioned for yen losses. Japanese officials will be very wary over the impact of yen strength on the economy, especially given deflation fears and there is, therefore, likely to be further verbal intervention to curb currency gains if thee are gains much beyond current levels. 

The dollar was unable to make any significant headway against the Japanese currency over the first half of the week and weakened to test important levels near the 94 level. Once support here was broken the Japanese yen strengthened sharply with dollar lows just below the 92 level before a corrective recovery.
The yen was supported by a sudden deterioration in risk appetite as global growth fears increased and stock markets were subjected to sustained selling pressure.

The Japanese core machinery orders data was significantly weaker than expected with a 3.0% decline for May following a 5.4% decline the previous month and this pushed orders to the lowest level for over 20 years. Although there was some recovery in key manufacturing orders, there was evidence of a notable deterioration in the services sector which increased fears over the wider economy.

Bank of Japan Governor Shirakawa stated that the financial system was calmer, but there were still increased doubts over the global economy and Japanese 10-year bond yields fell to a three-month low during the week. 

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Confidence in the economy will be generally fragile with fears that the limited improvement in growth conditions will not be strong enough to prevent a further substantial rise in unemployment. There will also be fears that the underlying weakness will intensify the very serious underlying debt difficulties. Sterling could still prove to be broadly resilient in the short-term, but will be much more vulnerable to selling pressure if there is a sustained deterioration in risk appetite and the overall risks suggest at least limited net losses.

Sterling weakened sharply in mid week as domestic doubts were compounded by a spike in risk aversion although the currency still proved broadly resilient. There was support near 1.60 against the dollar and beyond 0.8650 against the Euro.

The industrial data was significantly weaker than expected with a 0.6% decline in output for May following a revised 0.2% increase the previous month with manufacturing production also declining. The NIESR reported a 0.4% GDP decline in the three months to May following a revised 1.3% decline the previous month. The institute reversed its view that the economy had bottomed in April and stated that conditions were now broadly stagnant.

The Halifax house price index recorded a 0.5% decline in prices for June for a 15.0% annual decline which suggested that the underlying pressures have eased, at least on a short-term basis. The growth-related data overall tended to be a negative factor for Sterling as it raised further doubts over recovery prospects.

The UK trade deficit narrowed to a three-year low in May with a goods deficit of GBP6.3bn which will provide some underlying Sterling support.

As expected, the Bank of England left interest rates on hold at 0.50% following the latest MPC policy meeting. The central bank also announced that the quantitative easing programme would be maintained at GBP125bn, contrary to some expectations of an increase and this provided an immediate boost to Sterling.

The bank announced that there would be a review at the August meeting when the latest inflation report will be available. There were still some expectations that the bank will increase the bond buying next month and this tended to curb any significant improvement in sentiment towards the currency.

Swiss franc:

The Swiss franc has continued to be broadly resilient in global markets and has resisted selling pressure. The National Bank will remain on high alert over the situation and there is still the strong probability of further intervention to weaken the currency if there are gains from current levels. Volatility could, therefore, be an important risk if the markets look to take on the central bank. 

The dollar was unable to make a significant challenge on resistance levels near 1.10 against the franc during the week and weakened to lows below 1.08 before correcting higher again. The franc was also able to secure a renewed advance against the Euro with highs near 1.51.

There was some further speculation over fresh intervention by the Swiss National Bank, although there was no actual sign of the bank or the BIS in the market.

The Swiss unemployment data was weaker than expected with an increase in the seasonally-adjusted rate to 3.8% from 3.6% which maintained unease over the domestic economic trends.

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The Australian dollar was unable to push back above the 0.80 level against the US currency and weakened sharply to lows below the 0.7750 level in mid week before staging a subdued corrective recovery. The local currency was hampered by a general deterioration in risk appetite and downward pressure on commodity prices.

The domestic construction PMI data was weaker than expected which dampened confidence to some extent. The Reserve Bank of Australia left interest rates on hold at 3.0%, which was in line with market expectations and did not have a major impact.

The labour-market data was close to expectations with the unemployment rate rising to 5.8% from 5.7% while employment fell around 21,000.

The Australian dollar will remain vulnerable to some further selling pressure in the short-term due to a more sober assessment of the global economic prospects.

Canadian dollar:

The Canadian dollar maintained a generally weaker tone over the week, although it did find support weaker than the 1.17 level against the US currency.

The domestic data was stronger than expected with a sharp recovery in building permits according to the latest release while the PMI index also strengthened to above the 58 level. The currency was unable to derive much immediate support from the releases as international conditions dominated.

The Canadian currency was unsettled by a drop in risk appetite and, in particular, by a sharp fall in energy prices on doubts over the global economy.

The Canadian dollar is liable to remain on the defensive in the short-term due to unease over the global economic trends, although sharp losses should be resisted.

Indian rupee:

The rupee weakened to 8-week lows beyond 49 against the dollar before correcting to 48.65 on Friday. The budget release undermined the currency with the government taking a very cautious tone which contributed to significant selling pressure on the local stock market. Markets were uneasy over the 2009/10 budget deficit forecast of 6.8%. with fears that such a large shortfall could jeopardise the credit ratings.

There was still evidence of net inflows into the stock market which provided some degree of protection for the currency

The rupee will continue to be influenced strongly by trends in international risk appetite as well as the domestic fiscal trends. Rupee losses should be limited from current levels with little immediate prospect of significant gains. 

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The Hong Kong dollar edged marginally weaker against the US dollar during the week, although moves were very limited and it was still near the strongest limit.

The currency was undermined very slightly by weaker risk appetite during the week and caution over the global economic trends, although underlying confidence in the economy was still firm 

The Hong Kong dollar is likely to maintain a firm tone in the short-term even if the currency does weaken slightly from current levels.   

Chinese yuan:

The yuan was again confined to generally narrow ranges near 6.83 over the week with the central bank unwilling to sanction any significant moves. The yuan failed to benefit from improved yield spreads.

There was caution ahead of the economic data releases due next week while unofficial data suggested a weaker than expected trade performance. There was some weakness in the NDF markets which helped curb upward pressure on the spot rate.

Chinese officials continued to comment on the dollar and international reserve policies during the week with some further evidence of divisions between ministries as the Foreign Ministry took a generally more positive stance towards the US dollar

There will be expectations of at least limited medium-term yuan gains, especially given pressure for reserves diversification. Given the economic uncertainties, the bank is likely to maintain the policy of near-term stability.