Weekly Forex Currency Review 13-03-2009

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Following the Swiss National Bank move to intervene and stem currency gains, the wider issue of exchange rate management and targeting will be very important for markets.  There will be an increased risk that more central banks will look to promote weak currencies which would increase the threat of trade tensions and policy conflicts while it would also risk destabilising currency markets as a whole.  

Key events for the forthcoming week

Dollar:

Although the retail sales data was slightly firmer than expected, overall confidence in the economy will remain very weak in the short-term, especially with jobless claims still at very high levels. The financial sector will remain an important focus as underlying tensions continue while credit-card developments will also be important even though immediate banking-sector fears have eased. The dollar will continue to gain some defensive support at times, but it will be increasingly difficult for the US currency to make sustained headway given the severe US fundamental deterioration.

Major currencies continued to find difficulties in securing a decisive direction as all remained prone to very important weaknesses. Libor rates were generally higher as credit fears increased again and the dollar continued to attack three-month highs as defensive demand continued. The US currency still weakened for the week as a whole as equity markets rallied and it lost ground after being blocked at resistance levels.

Following another huge reported 650,000 employment decline reported late last week, the data had less impact over the past few days. The US retail sales data was stronger than expected with a 0.1% headline decline for February as auto sales continued to decline while there was a 0.7% underlying increase for the month.

In contrast, the jobless claims data was weaker than expected with a further increase to 654,000 in the latest week from a revised 645,000 previously. The four-week average of initial claims was at the highest level since October 1982 while continuing claims was at a record high which continued to indicate major labour-market stresses.

Fed Chairman Bernanke stated that big banks would not be allowed to fail and this may provide some temporary relief to sentiment, especially with Citigroup and Bank of America also providing a reassuring statement, although a high degree of uncertainty surrounding the banking sector continued.

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The Euro-zone economy will remain under pressure with a sharp downturn in the industrial sector. There will be the risk of increased tensions within the ECB and demands for additional policy action by the bank.  The issue of quantitative easing will be very important and there will be currency support if the bank resists such a move. The Euro will also gain some support if fears surrounding European banks subside, especially if wider risk appetite improves. The depth of the downturn will make it difficult for the Euro to make strong headway.       

The Euro generally had a firmer tone, primarily benefiting by default. A lack of confidence in the Euro area was offset by severe difficulties in other major currencies and an improvement in risk appetite with a move above 1.29 against the dollar.

The Euro-zone economic data was generally weaker than expected with the Sentix confidence index, for example, dipping to a fresh record low of -42.7 for February.

The German trade surplus weaker than expected at EUR8.3bn for January from a revised EUR10bn previously with a 4.4% monthly decline in exports. The industrial data was extremely weak with a further 8.0% decline in factory orders for January after a revised 7.6% decline for December while output fell by 7.5% over the month.

There were generally downbeat comments from some ECB officials. Orphanides, for example, stated that the recent data indicated a worsening outlook and the economy may not even recover in 2010. In contrast, Mersch stated that he was sceptical about excessively low interest rates while Weber suggested that 1.0% would be a floor for rates. The net tone of comments suggested that interest rates would be cut again.

The Swiss National Bank policy move increased speculation that the ECB would also move to non-standard policy measures and direct measures to boost credit.

Yen:  

The Japanese economy will remain in severe difficulties in the short-term with production set to decline further. There will be additional speculation of more aggressive Bank of Japan moves to stem deflation, especially after the Swiss central bank move to intervene.  The Japanese currency will continue to gain some support from capital repatriation before the end of March, but overall yen sentiment is liable to remain weak and the currency will lose ground if there is a sustained improvement in risk appetite.

The Japanese currency found support weaker than the 99 level against the dollar and then strengthened sharply to beyond 96 while the yen also regained some ground on the crosses.  There was additional speculation over heavy capital repatriation ahead of the fiscal year-end which, allied with renewed stock market falls triggered yen gains.

Confidence remained weak and it quickly lost ground with three-month lows against the Euro. Following the Swiss move, there was speculation that the Bank of Japan could intervene to weaken the yen. The Japanese economic data continued to illustrate the sharp deterioration with a headline current account deficit for the first time in 13 years for January, although there was a small seasonally-adjusted surplus.

Revised GDP data for the fourth quarter recorded a revised 3.2% decline compared with the original 3.3%, but the improvement reflected a further increase in inventories which reinforced fears over a further downturn in production. The Bank of Japan stated that it would consider increasing government-bonds buying if the crisis deepens

Wholesale prices fell 1.1% in the year to February, the weakest figure for six years. Core machinery orders also fell 3.2% in January, although this was slightly better than expected. Sentiment towards the regional economy weakened following much weaker than expected Chinese trade data with February exports falling over 25%.

The evidence suggests that the US Treasury may take a less aggressive stance on the Chinese yuan, dropping references to currency manipulation. An easing of underlying tensions would lessen the risk of destabilising dollar decline against Asian currencies.

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The economic conditions will continue to deteriorate in the short-term. The Bank of England will maintain a very low interest rate policy and the move to buying long-term bonds will tend to lower yields which will also lessen Sterling support.  The UK currency will continue to gain some degree of support from serious difficulties elsewhere in the G7 area and it is also probably still over-sold following recent losses.  Sterling will still find it difficult to recover much ground given the fundamental weaknesses.

Sterling dipped to lows near 1.36 against the dollar, but resisted a test of 26-year lows and rallied back to 1.40 on Friday. Sterling also found support weaker than 0.93 against the Euro. There was no significant improvement in domestic confidence, but increased fears over the outlook in other major economies provided some respite.

The UK data offered no support on Tuesday with the BRC recording a 1.8% decline in like-for-like sales in the year to February. Housing activity was at the lowest level since 1978 despite some increase in purchaser interest as credit difficulties persisted.

UK manufacturing output fell a sharper than expected 2.9% in January and it was the steepest quarterly decline on record. There were increased fears over a very sharp GDP downturn for the first quarter of 2009.

The UK goods deficit widened to GBP7.7bn in January from a revised GBP7.2bn the previous month which reinforced fears that trade will not be able to provide any support for the economy. Indeed, exports fell at a record rate of over 9.0% over the latest three months while imports also declined.

The Bank of England bought the first tranche of government bonds under the new quantitative easing policy as benchmark 10-year yields remained near record lows.

Swiss franc:

The National Bank policy to intervene and weaken the franc will continue to have a very important impact and will Swiss franc sentiment will remain much weaker in the short-term. Overall confidence in the Swiss economy will also tend to remain weak as deflation fears increase. The franc could still gain some defensive support if equity prices come under renewed downward pressure, but the bank action will severely curtail any advance with further losses realistic. 

The Swiss currency strengthened to test highs near 1.15 against the dollar and 1.46 against the Euro, but then weakened sharply later in the week

Swiss adjusted unemployment rose to 3.1% for February from a revised 3.0% the previous month as domestic weakness persisted although central bank actions and degrees of risk appetite were the principal focus. At the quarterly monetary meeting, the Swiss National Bank lowered the benchmark interest rate by a further 0.25% to 0.25%, equalling the record lows seen during 2003.

The rate decision matched market expectations, but the other actions were more aggressive than expected. The bank announced that it would buy bonds and it also stated that there would be intervention to weaken the currency in another form of quantitative easing..

As well as the warnings over intervention, the bank moved immediately to sell the Swiss franc in the markets with bank Chairman Roth stating that the intervention was designed to stem any franc appreciation. Following the move, the franc weakened sharply to near 1.54 against the Euro and lows around 1.1950 against the dollar

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The Australian currency again tested support levels below 0.64 against the US dollar during the week, but proved resilient and rallied back to 0.6570 late in the week.

The employment data was firmer than expected with a small monthly increase, but unemployment rose by more than expected to 5.2% from 4.8% previously . The property loans data was weaker than expected, but did not have a major impact.

Currency moves were still influenced strongly by degrees of risk appetite and a strong rally on wall Street, coupled with an easing of immediate fears surrounding the banking sector, provided a net boost to the Australian dollar.

There is scope for further sharp currency swings as sentiment fluctuates with short-term Australian dollar advances still vulnerable to a reversal given underlying fears.

Canadian dollar:

The Canadian dollar weakened to 2009 lows beyond 1.30 against the US dollar early in the week, but found support beyond this level and recovered back towards 1.2750.

The Canadian currency was still undermined by fears that the economy would be badly damaged by its heavy exposure to the US economy. A rally in oil prices and improved risk appetite provided some significant degree of relief.

There were no significant data releases over the week with some nervousness ahead of the monthly employment report with fears over further sharp job losses.

There is scope for a further Canadian currency recovery given an easing of immediate financial-sector fears with the sharp domestic downturn still limiting support.
 
Indian rupee:

The rupee consolidated stronger than the recent record lows against the dollar, initially consolidating around 52. There were holidays on Tuesday and Wednesday which lessened market activity while the rupee advanced to 51.70 on Friday.

The local bourse initially fell to 40-month lows which damaged rupee sentiment, but markets rallied late in the week which provided significant support. The rupee was hampered by strong dollar buying by oil importers as energy prices rallied.

Rupee confidence is liable to remain fragile in the short-term, but there is scope for some further respite from selling if global equity markets can maintain a positive tone. 

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The Hong Kong dollar had a generally firmer tone over the week and pushed to highs around 7.754 against the US dollar over the second half of the week.

Currency moves were again influenced strongly by trends in the local stock markets and the Hong Kong currency gained ground as global equity markets attempted to rally from multi-year lows and risk appetite improved.

The Hong Kong dollar moves will remain correlated strongly with risk appetite and any renewed downward pressure on regional stock markets would trigger some limited selling pressure on the local currency, although broad stability should persist.  

Chinese yuan:

The Chinese authorities continued to block significant currency moves over the week even though there was increased volatility in the NDF market over the week with the spot rate close to the 6.8350 region against the US dollar.

Confidence in the Chinese economy was undermined following the latest trade data with the February surplus declining very sharply to US$4.8bn while exports fell 25.7% over the year. Output data was also weak with production rising 3.8% over the first two months of 2009, but new loans again rose rapidly. Premier Wen was still very cautious over near-term prospects for the economy.

The political developments remained important and suggestions that the US Treasury would drop references to China being a currency manipulator eased underlying tensions and lessened the risk of potential near-term upward pressure on the yuan.

The domestic economic developments will continue to be watched closely and underlying confidence will deteriorate again if the data suggest renewed deterioration in the economy. The central bank will still aim for near-term stability.