Weekly Forex Currency Review 17-04-2009

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Overall strategy:  Markets are liable to remain in a generally tentative mood in the short-term. There will be some optimism that the global economy is starting to stabilise and this will tend to reduce defensive demand for the dollar and yen. The economic data is still liable to be very weak, especially for employment. In this context, only a small deterioration in confidence could trigger serious stresses and a renewed spike in risk aversion.   

Key events for the forthcoming week

Dollar:

The latest US economic data releases have continued to offer some hopes that the economy is starting to stabilise as the very aggressive de-stocking period eases while credit conditions have improved slightly. There are still very important weaknesses and there will also be fears that rising unemployment will undermine consumer spending over the next few months. There is still a lack of attractive alternatives to the dollar which will provide important US currency protection, especially if the ECB also moves to non-standard policy moves. 

The dollar weakened sharply on Monday, reversing gains seen at the end of the previous week with lows close to 1.34 as liquidity was limited. Over the remainder of the week, the dollar edged firmer and challenged important Euro support levels near 1.31, although it was unable to make much headway against other major currencies.

The US consumer spending data was weaker than expected with a headline 1.1% decline in retail sales for March while there was a core 0.9% fall, although there was an upward revision to the February data which offset the impact.

Industrial production was weaker than expected with a further 1.5% decline for March to give the worst quarterly decline for 60 years. In contrast, the more forward - looking New York manufacturing index was stronger than expected with a recovery to -14.7 in April from a record low of -38.2 the previous month. The Philadelphia Fed index also improved to -24.4 in April from -35.0 with a very weak employment component. The housing sector data remained very fragile with starts falling to an annual rate of 0.51mn for March from 0.57mn the previous month. This was the second lowest reading on record while permits also declined to 0.51mn for the month.

Initial jobless claims fell to 610,000 in the latest week from 663,000 previously which suggests that the rate of layoffs may be slowing slightly, but continuing claims were again above expectations at a record level above 6.0mn. The steep rise in continuing claims will continue to act as a drag on the economy and restrain confidence.

Headline consumer prices fell 0.1% for March which gave a year-on-year decline of 0.4% and this was the first annual decline since 1955. Core prices rose 0.2% for the month, however, and there was a 1.8% annual increase which illustrated that there is only a limited risk of deflationary pressure at this time. The Fed’s Beige book reported that the rate of economic contraction declined in five of the 12 Fed districts while there was some evidence of very weak stabilisation in the housing sector. The employment situation remained very weak across all regions

Fed Chairman Bernanke stated cautious optimism that the rate of decline in the economy was starting to slow and that this was a pre-requisite for a recovery. Markets continued to watch the corporate earnings data very closely with better than expected earnings from the banking sector curbing defensive dollar demand.

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Confidence in the Euro-zone economy is likely to remain weaker in the short-term  as the industrial sector remains under pressure. Although the ECB has been keen to play down the threat of deflation, there is strong evidence that the bank will cut interest rates again and also move to non-standard policy moves. In this environment, the Euro will find it difficult to gain strong support, especially with speculation that they will resist any Euro appreciation.  
      
The Euro had a generally weak tone on the crosses over the week, notably against Sterling, and the underlying weakness also had a negative impact on its performance against the dollar with a further test of important technical support near 1.31.

The Euro-zone economic data did not have a significant impact with industrial production declining by 2.3% for February for an annual decline of close to 20% while the core inflation index was slightly stronger than expected at 1.5% for March.

ECB council member Weber made potentially significant remarks. He stated that inflationary pressures were continuing to ease which suggested the scope for lower interest rates. Very importantly, Weber also suggested that non-standard policy measures would probably be introduced at the May council meeting. Given that Weber is traditionally a hawk on monetary policy measures, the remarks were significant, although there is still the risk of divisions within the council.

President Trichet also stated that a strong dollar was in its interest while the Euro could not be described as weak and this renewed speculation that the bank would resist any significant Euro gains to help preserve competitiveness.

Yen:  

Confidence in the Japanese economy will remain fragile in the short-term  and there will be continuing pressure on the Bank of Japan to adopt more aggressive non-standard policy measures.  There will be some cautious optimism that the economy is starting to stabilise which should curb negative sentiment. The yen will also tend to gain some protection if there is a renewed increase in risk aversion while capital repatriation will also be a feature at times. Nevertheless, there looks to be little scope for strong yen appreciation.

The yen was trapped in narrower ranges over the week with the dollar consolidating around the 99.50 level. The markets looked to challenge technical levels, but moves quickly reversed as there was little confidence in underlying trends.

The Chinese GDP data was close to expectations, but there had been hopes that a stronger figure would be reported and this triggered a reversal in initial yen selling.

The Japanese monthly Tankan index edged higher to -76 in April from -78 previously which will maintain hopes that there will be some stabilisation in the domestic and regional economy which will also lessen the negative impact of very weak data. The consumer confidence data also strengthened to a six-month high.

There was some evidence that Japanese investors were adopting a more cautious attitude again and there has also been some capital repatriation from Europe. 

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The most recent UK indicators have continued to offer some grounds for optimism that the rate of economic contraction is slowing. Sterling will also gain some protection in relative terms from fears over the Euro-zone outlook. There will still be important reservations over the fiscal position, especially as the budget deficit forecasts are liable to be extremely high.  The currency trends will also continue to be influenced strongly by degrees of risk appetite with Sterling much more vulnerable to renewed selling if global confidence deteriorates again.

Sterling pushed to highs just above 1.5050 against the dollar, the highest level since the beginning of January, but failed to sustain the gains and dipped to lows below 1.4800 on Friday. Sterling also retreated from highs near 0.88 against the Euro.

The BRC recorded a 1.2% decline in like-for-like retail sales in the year to March which will maintain caution over the spending outlook. Some Bank of England members expressed some optimism that the worst of the recession had passed, but Blanchflower again warned over a crisis in the labour market.
The latest UK RICS data was also stronger than expected for March with increased buyer interest for the fifth consecutive survey although 73% of surveyors still reported that house prices declined in the latest month.

The UK fiscal conditions were watched closely ahead of next week’s annual budget and fears over the debt outlook tended to restrain Sterling. The budget deficit is expected to be over 10% of GDP for the current fiscal year which will certainly limit the scope for any further fiscal measures to support the economy.

Swiss franc:

The Swiss economy will remain weak in the short-term  with exports unlikely to recover significantly given the wider Euro-zone downturn. The National Bank will remain concerned over the threat of deflation, especially with producer prices continuing to decline. In this environment, there will be will be the high risk of further open-market intervention by the central bank and this will be a key factor in lessening the chances of significant franc appreciation. 

The dollar found support close to the 1.13 level against the franc and strengthened to highs near 1.16 on Friday. The franc initially proved resilient against the Euro and strengthened to test levels below 1.51 before weakening back to near 1.52.

Underlying risk appetite remained slightly firmer and this tended to limit franc support, although market movements were generally subdued.

The producer prices data recorded a 0.5% monthly decline for a 2.8% annual decline and this reinforced expectations that the National Bank would continue to be concerned over the threat of deflation.

These concerns also increased the threat of renewed bank intervention to weaken the Swiss currency which limited franc support. Bank Chairman Roth stated that intervention would continue as long as needed.

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The Australian dollar has maintained a firm tone over the past week and strengthened to a high close to 0.73 against the US dollar which was the strongest level for 2009. It struggled to sustain the gains and retreated back towards the 0.72 region.

There were little in the way of major domestic developments over the week with trends in optimism towards the global economy and risk appetite still dominant.

There was initial support from gains in industrial commodity prices, although the momentum faded over the second half of the week as caution prevailed.

The Australian dollar should maintain a firm tone in the short-term , although it will be difficult to extend the recent advance following recent strong gains.

Canadian dollar:

After a hesitant start to the week, the Canadian dollar made significant gains against the US dollar and also made progress on the crosses. The Canadian currency strengthened to a high near 1.20 against the US unit before a correction weaker.

The manufacturing data recorded a recovery in shipments from February while the Bank of Canada reported that loan conditions were still tight, but the domestic data did not have major impact as degrees of risk appetite remained dominant.

The Canadian currency should be able to resist significant selling pressure in the short-term  even if further near-term gains are limited.
 
Indian rupee:

The rupee strengthened to a two-month high near 49.35 against the US dollar during the week before retreating from its best levels. A firmer US dollar tone stifled rupee support and it retreated back towards 49.75 on Friday.

There was further evidence of net inflows into Indian markets which helped underpin the local currency, especially as underlying risk appetite was still firmer.

The rupee will gain further near-term support if risk appetite remains stronger. It will still be difficult for the currency to make strong gains as domestic and international confidence could fade relatively quickly. 

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The Hong Kong dollar continued to trade near the 7.75 strongest limit of the currency band against the US dollar as ranges generally were very narrow over the week.

The currency continued to draw support from an underlying improvement in risk appetite and net investment capital inflows into the Hong Kong market.

The Hong Kong dollar moves will continue to be influenced to a large extent by trends in risk appetite and it should be able to maintain a firm tone in the short-term .  

Chinese yuan:

The yuan has remained trapped close to 6.8350 against the dollar with the central bank still active in controlling the rate while forward rates were also little changed

The latest US Treasury report on global currency regimes held back from openly calling China a currency manipulator and this lessened the immediate threat of increased tensions which curbed strong yuan buying.

The Chinese GDP data was close to expectations with year-on-year growth of 6.1% for the first quarter which was the slowest on record.

The producer prices data was also weaker than expected with a 6.0% annual decline, but fixed investment was stronger than expected. Domestic officials were hopeful that the worst of the downturn had been seen, but they were still cautious over prospects.

The yuan will continue to be in a stronger position to advance if the authorities are more confident over the domestic and international growth outlook. Given the high degree of global uncertainty, stability is liable to remain the short-term priority.