Weekly Forex Currency Review 24-04-2009

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The net evidence suggest that markets want to take a more optimistic tone towards the global economy and this will limit the scope for yen and dollar gains as defensive demand is liable to be reduced. This mood of optimism could still prove to be very brittle given the vulnerability of consumer spending in the major economies and heavy losses for these currencies should be resisted at this stage.   

Key events for the forthcoming week

Dollar:

There will be further near-term optimism that the US economy is at least starting to stabilise from the severe downturn seen over the past two quarters. There will still be a high degree of unease over consumer spending levels, especially as the unemployment data is likely to remain very weak in the short-term. The US currency will lose defensive support if risk appetite improves, particularly as the evidence suggest that underlying long-term capital inflows are still weaker which will pose a medium-term threat. The dollar should be able to resist heavy selling pressure given the lack of confidence in realistic alternatives.

The dollar pushed stronger over the first half of the week, but it struggled to make decisive gains and then weakened against most major currencies. Markets were still split over economic direction, although they were still trying to take a relatively optimistic stance over the outlook. There some Chinese comments warning over potential reserve diversification and this was an important factor in restraining dollar demand late in the week.

The banking-sector results were mixed over the week. Headline results from the Bank of America, for example, were better than expected which offered brief reassurance, but there was unease over the further rise in troubled loans with particular fears over the credit-card sector.

There was caution ahead of the Friday announcement on bank stresses tests with the Treasury due to provide full methodology and this guidance will give a good idea as to the outcome of the tests. There were rumours that several banks would effectively be declared insolvent which undermined confidence in the economy and also curbed risk appetite which provided some degree of initial dollar support.

As far as the US economic data is concerned, initial jobless claims increased to 640,000 in the latest week from a revised 613,000 previously, dampening hopes of a labour-market improvement, while continuing claims also rose sharply again to a record 6.137mn which also indicated that new jobs were still very hard to find.

Existing home sales slowed to an annual rate of  4.57mn in March from 4.71mn the previous month. Prices were generally firmer for the month, while there was still a sharp decline over the year.

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There is scope for some stabilisation in confidence surrounding the Euro-zone economy following the business confidence recovery. This confidence could still prove to be very fragile and there will also be further underlying structural vulnerabilities.

The ECB policies will be a very important short-term focus with a further rate cut realistic. Uncertainty and expectations of non-standard measures are liable to weaken the Euro sentiment. In this context, the Euro will struggle to gain strong support even if the immediate selling risks have eased. 
        
The Euro struggled to secure clear direction over the week with a mixed performance on the crosses, but proved broadly resilient. As fears over the economy eased very slightly, the Euro gained significant ground late in the week with a move to above 1.32 against the dollar.

The German ZEW business confidence index rose to 13.0 for April from -3.5 previously which was the first positive reading for two years and the sixth consecutive gain. The data provided some support to sentiment towards the Euro-zone economy even though the current conditions component remained at extremely weak levels. The IFO index also rose by more than expected for April.

The other Euro-zone data was also generally better than expected with the PMI index for manufacturing rising to a six-month high of 36.7 from 33.9 the previous month while the services-sector index strengthened to 43.1.

ECB President Trichet tried to play down the possibility of splits within the central bank council in comments during the week. He also stated that interest rates could be cut by a further 0.25% to 1.00%, but not by more. The comments had only a limited impact on sentiment towards the currency with markets still speculating over significant policy divisions ahead of the May council meeting.

Yen:  

Although there has been some evidence that economic conditions are starting to stabilise, underlying confidence in the Japanese economy will remain fragile. The yen will lose ground if confidence surrounding the global economy improves, especially as it would tend to boost capital outflows from Japan. There will still be caution over pushing funds aggressively overseas, particularly if the global data starts to deteriorate again. Overall, the Japanese currency will find it difficult to gain more than limited traction.

The Japanese currency was trapped within relatively narrow ranges for much of the week overall even though there were periods of choppy trading. There were gains to a four-week high near 96.80 against the dollar on Friday while the yen regained some ground against the Australian dollar.

With markets still looking to take a slightly more optimistic tone over the global economy, yen demand was generally subdued, although there was some speculation over capital repatriation from Europe which provided underlying support. Uncertainties over the financial sector also provided some degree of yen backing.

The headline Japanese trade account was slightly stronger than expected with a small surplus for March. There was still a severe annual downturn in exports, but there was a small monthly increase in shipments for the first time in for 10 months which triggered some hopes that the industrial downturn was at least easing.

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There will be some further hopes that the UK economy is starting to stabilise at very weak levels. The budget deficit position will continue to be a source of vulnerability for the UK currency, especially given the extremely high levels of debt issuance which would risk a loss of overseas confidence. These risks will intensify if there are renewed fears over the banking sector or an acceleration in rising unemployment while credit-rating downgrade would also be very damaging for confidence. Overall, the UK currency will struggle to secure more than limited support given the debt fears.  

Sterling dipped sharply in the middle of the week following the UK budget release, but it still proved generally resilient and recovered ground against the dollar. Sterling did weaken significantly against the Euro with lows beyond 0.90.

The headline consumer inflation rate fell to 2.9% in March from 3.2% the previous month while the RPI rate was -0.4%, the first negative reading since 1960. The impact was limited as all figures were close to market expectations.

The CBI forecast that 2009 GDP would decline by more than expected previously, but it was optimistic that the worst of the decline was now over. In this context, the latest headline CBI industrial orders data was little changed for April at -57. There was some evidence of stabilisation, but overall sentiment remained very weak.
 
GDP fell by a sharper than expected 1.9% for the first quarter of 2009, the weakest performance since 1979 while retail sales edged higher for April. The headline UK unemployment claimant count increase was lower than expected at 73,600 for March which provided some slight relief given expectations that unemployment would increase by more than 100,000.

The government announced an expected budget deficit of GBP175bn for the fiscal year starting in April with only a marginal decline the following year and gilt issuance of GBP220bn. Borrowing at this level would represent 12% of GDP and this assumes that the economy can start to stabilise before the end of 2009. Tax increases were also announced for the following year to help trim the deficit.

Borrowing at these levels remains a very important underlying risk factor for Sterling as the deficit is certainly at a level which could trigger heavy and aggressive selling pressure on the currency, especially if the credit ratings are downgraded.

Swiss franc:

The Swiss economy will remain weak in the short-term with exports still under pressure, although there has been some stabilisation in domestic demand. The National Bank policies will remain of critical importance in the short-term and there will be a high risk of further intervention to weaken the currency if it makes strong gains. The franc will still gain support at times if there is a deterioration in risk appetite, but substantial gains are unlikely given the National Bank threat to cap the currency.

The Swiss currency was generally resilient over the week and found support weaker than the 1.17 level against the dollar before sharp gains to near 1.14 while it also found support weaker than the 1.52 level against the Euro.

The Swiss trade surplus fell to CHF0.12bn for March from a revised CHF0.72bn the previous month with a further sharp decline in exports which will tend to undermine confidence in the economy. In contrast, the latest ZEW confidence survey recoded a significant monthly improvement to -27.7 from -57.1.

National Bank member Hildebrand again warned that the central bank would aim to prevent franc appreciation, maintaining the threat of persistent intervention to weaken the currency if there are further gains.

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The Australian dollar struggled to overcome resistance levels against the US currency, but retreats quickly attracted firm buying support, especially when the currency dipped to below the 0.70 level against the US dollar. Although the currency secured some support from an underlying move into high-yield currencies, it under-performed on the major crosses with selling against the yen.

The headline inflation data was weaker than expected with the quarterly increase held to 0.1% compared with expectations of a 0.5% increase, but the underlying rise was higher than expected.

Bank Governor Stevens confirmed that the Australian economy was in recession and warned over the international downturn, although the comments were measured.

The Australian dollar should be able to resist heavy selling pressure in the short-term given hopes for stabilisation in global demand even if strong gains are unlikely.

Canadian dollar:

There was a significant increase in Canadian dollar volatility. The currency weakened sharply surrounding the Bank of Canada interest rate decision, but then regained ground strongly later in the week with a move to near 1.22 against the US currency.

In an unexpected move, the Bank of Canada cut interest rates by a further 0.25% to 0.25%. The bank downgraded its economic forecasts and also stated that interest rates could he held at the 0.25% level for at least 12 months. The bank also outlined quantitative easing measures, but there was no immediate move to implement them.

In the subsequent monetary report, the bank suggested that it would not implement quantitative easing at this time and this provided Canadian dollar support despite a forecast that first-quarter annualised GDP could contract by at least 7.0%.

The Canadian dollar will remain vulnerable to a higher degree of volatility and the overall risks suggest that there will be scope for only limited near-term gains.
 
Indian rupee:

The rupee was generally weaker over the week, although selling pressure on the currency was contained with support beyond the 50.0 level and it settled near 49.90 against the US currency in cautious trading.

Although there was optimism over potential capital inflows, confidence was still relatively fragile, especially with the IMF downgrading global growth prospects. The central bank cut interest rates for the sixth time since October with a 0.25% reduction in the repo rate to 4.75%

The rupee trends will remain correlated strongly with degrees of global risk appetite. Overall, the currency should be able to secure only limited net gains.  

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