Weekly Forex Currency Review 13-11-2009

The markets will continue to focus on yield considerations in the short-term and there will also be further expectations of a fundamental medium-term shift away from the US currency. The dollar is better placed on valuation grounds and this factor should help lessen aggressive selling pressure from current levels.

Key events for the forthcoming week

Dollar:

Confidence in the US economic recovery will remain fragile and there will be further expectations that interest rates will remain at very low levels. Without any indications of higher interest rates, the dollar will remain vulnerable to selling pressure and being used as a funding currency. There are, however, also important vulnerabilities in other major economies which will provide some degree of dollar protection, especially if risk appetite deteriorates. There is the possibility of sharp corrective US currency gains even though it will be difficult to sustain any notable advance.

The dollar remained under pressure during the first half of the week and  weakened to 2009 lows against core European currencies. The US currency then found some degree of support on technical grounds.

The headline US employment change reported at the end of last week was slightly weaker than expected with net job losses of 190,000 for the month following a revised 219,000 fall previously. The unemployment rate gained the most attention with a larger than expected increase to 10.2% from 9.8% previously. As well as pushing above the psychologically important 10% level, it was the highest rate since 1983.

Data on the weekly hours was generally discouraging with a further 0.2% decline for October, the third successive fall. The data reinforced fears over the consumer spending outlook, especially as confidence is liable to deteriorate further while consumer credit continued to decline.

There were even less expectation of any near-term Federal Reserve move to raise interest rates which tended to maintain dollar vulnerability on yield grounds.

The US consumer confidence data was also weaker than expected with the IBD index declining to 47.9 for October from 50.3 the previous month. Although not a major survey, the data maintained the recent run of generally disappointing consumer confidence data and fears over weak spending trends.

The US jobless claims data was better than expected with a decline to 502,000 in the latest week from a revised 514,00 previously which sustained cautious optimism that there will be a very slow improvement in the labour market.

There were several remarks from Fed officials during the week with all confirming a mixed picture for the economy. Governor Yellen stated that the Fed should monitor asset prices to assess the risk of any bubble developing and the general tone of the Fed comments suggested that there is increased unease over the threat of excessive asset-price rises on the back of very cheap financing.

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The Euro should be able to maintain a firm tone in the short-term on expectations that the ECB will gradually withdraw the stimulus measures. There has been some faltering in business confidence and confidence in the Euro-zone economy is likely to remain fragile. There are also still important structural vulnerabilities and fears over the financial-sector weaknesses will tend to intensify if fears over the economic rebound also increase.  Credit trends will be watched closely in the short-term and the Euro is likely to face stern resistance.

The Euro challenged 2009 highs against the dollar and also advanced on the crosses, but was unable to break resistance levels with significant losses late in the week.

Increased speculation surrounding renewed yuan appreciation against the dollar dampened expectations that there would be further European currency gains and this was a negative Euro influence.
ECB President Trichet stated on Monday that currency levels had not been a subject for discussion at the BIS meetings, further dampening expectations of any official dollar support.

The Euro-zone data was stronger than expected with a further recovery in the Sentix business confidence index to -7 from -12.6 the previous month and this was the strongest figure since 2007. In addition, there was a further increase in German industrial production for September

In contrast, the ZEW business survey weakened to 51.1 for November from 56.0 the previous month, maintaining a trend of slightly weaker confidence reports from Germany, although the indices are substantially above 2008 lows. There were also generally cautious comments from ZEW officials suggesting that the recovery had paused for now.

The German government announced that it would provide additional capital to WestLB which reminded markets of the underlying structural weaknesses and bad-debt problems surrounding the Euro-zone economy. ECB President Trichet stated that the extraordinary liquidity measures would be withdrawn in a timely manner which provided some currency support.

Yen:  

Trends in the bond market will continue to be watched closely in the short-term. Rising yields would tend to support the yen on interest-rate grounds, but would also increase fears over the financing burden, especially with government debt at extremely high levels. Confidence in the domestic economic recovery will also still be generally fragile despite some encouraging data on machinery orders. The yen will continue to gain some support when risk appetite deteriorates. Contradictory forces may lead to narrow ranges in the short-term.

The yen was generally trapped within narrow ranges against the dollar during the week with neither currency able to sustain firm buying support. The dollar found support below the 89.50 level against the Japanese currency.

Increased speculation of a policy shift and a resumption of Chinese yuan appreciation provided some degree of background yen support on expectations of regional currency gains, although the immediate impact was limited.

The latest reading for Japanese services-sector confidence recorded a decline to a five-month low of 40.9 from 43.1 previously which maintained unease over the economy even though it remained above recent lows recorded at the turn of the year. Wholesale prices fell 6.7% in the year to September, maintaining fears over deflation and pressure to avoid yen gains while maintaining an aggressive monetary policy.

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The latest economic data has remained generally encouraging with evidence of rising activity while the housing-market data has also remained firm. In contrast, the Bank of England remains very cautious over the outlook and there is little evidence of a near-term interest rate increase. There are also still very important vulnerabilities surrounding the government debt position, illustrated by the Fitch ratings warnings. Any evidence of a renewed downturn in survey confidence could have a very serious negative impact on the currency. Overall, it will be difficult to extend rallies much beyond current levels.

Sterling continued to exhibit volatility during the week. There were sharp losses following the Bank of England inflation report, but it maintained a generally firm tone for the week as a whole with Euro selling above the 0.90 level while Sterling was able to regain the 1.66 level against the dollar.

The latest RICS house-price and BRC retail sales data was stronger than expected, maintaining the recent trend of generally favourable data.  Sterling was, however, undermined on Tuesday by a warning from Ratings agency Fitch that Sterling was vulnerable to a credit-rating downgrade.

In its quarterly inflation report, the Bank of England forecast that inflation would rise significantly over the next few months, but would decline to be slightly below the 2.0% target on a two-year view if interest rates were at expected market levels.

Bank Governor King was again generally downbeat on the economic prospects warning that would need to be a prolonged period of balance-sheet adjustment. King also suggested that the bank was open to all possibilities on quantitative easing, which increased speculation that there could be a further expansion while the Governor also repeated recent comments that Sterling’s decline was helpful.

Swiss franc:

The Swiss franc is likely to gain some support from speculation that the National Bank will stop its intervention efforts within the next few months. The franc is also proving to be resilient even when risk appetite improves which suggests limited underlying selling pressure. Nevertheless, it will still be difficult for the franc to extend gains much beyond current levels.
 
The Swiss franc strengthened to highs just beyond 1.0050 against the US dollar during the week before a retreat to the 1.02 area late in the week.
 
The latest ZEW business confidence survey recorded a decline to 56.4 from 65.0 the previous month which suggested that the recovery maybe slowing, although the near-term impact was limited as recent survey evidence has still been generally firm.

National Bank member Jordan stated that the policy of intervention had been successful and that the bank was still aiming to prevent franc appreciation against the Euro. The comments tended to dampen near-term speculation that the policy will be abandoned and this tended to curb franc buying. 

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The Australian dollar maintained a robust tone for much of the week, quickly finding support on any significant retreat. There was a peak above the 0.93 level against the US currency with a quick rebound from lows near 0.92. The currency continued to draw support from firm risk appetite and further gains for gold prices.

There was a further 24,500 increase in employment for October, in contrast to expectations for a monthly decline and this renewed speculation that the Reserve Bank would sanction a further interest rate increase at the December policy meeting.

Australian dollar sentiment will remain strong initially with continuing expectations of higher interest rates, but gains from current levels will be difficult to sustain.

Canadian dollar:

The Canadian dollar dipped sharply at the end of last week following worse than expected labour-market data with job losses of over 40,000 for the month. From lows beyond 1.0750, the currency advanced back to near 1.04, supported by firm risk appetite and higher oil prices.

Both these trends tended to reverse late in the week which hampered the Canadian dollar as the US currency secured a technical rebound.

Trading conditions are liable to remain choppy in the short-term. The net risks suggest that Canadian dollar gains are liable to stall near the 1.05 region.

Indian rupee:

The rupee was generally stronger during the week and pushed to three week highs around 46.30 against the dollar. The currency was unable to sustain the advance and weakened later in the week as the US dollar recovered.

The latest industrial production data was slightly stronger than expected with a 9.1% annual gain in the year to September which provided some degree of rupee support on hopes for an economic rebound.

The rupee will still gain support on a fundamental lack of US dollar confidence. It will be difficult to sustain any initial rupee gains as caution surrounding the global economy is liable to prevail.

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The Hong Kong dollar maintained a position very close to the 7.75 limit against the US dollar during the week and the HKMA was again forced to add additional liquidity to maintain the permitted band. So far during November, the bank has sold added around HK$140bn into the money markets to curb appreciation.

There were further fund inflows associated with forthcoming IPO offerings while there was also some speculation that yuan appreciation talk boosted capital inflows. Third-quarter GDP growth was slightly weaker than expected at 0.4%

The Hong Kong dollar is likely to maintain a robust tone in the near term unless there is a serious spike in international risk aversion

Chinese yuan:

The yuan remained blocked in narrow ranges during the week, although there was certainly increased market speculation surrounding the currency.

The latest quarterly report from SAFE state that there would be improvements to the yuan’s rate-setting mechanism and this triggered strong speculation that the authorities would soon allow renewed yuan appreciation, especially with the fixed rate causing increased monetary tensions.

Markets also remained on high alert ahead of US President Obama’s visit to China next week as international pressure for yuan gains persisted

Despite expectations of renewed medium-term yuan appreciation, the central bank is still likely to resist pressure for substantial currency gains in the short-term.