Weekly Forex Currency Review 27-03-2009

For the latest investment opportunities in high growth markets across the world, visit the ADVFN Property Investment Channel.  Click Here.

Overall strategy:  Central bank and government policies will remain very important in the short term. Any evidence of increased friction between the major authorities would risk a rapid reversal in confidence towards global equity markets while risk appetite could also deteriorate sharply. In this context, the G20 meeting will have a significant impact next week with markets on alert over fiscal and exchange rate policies. 

Key events for the forthcoming week

Dollar:

The Federal Reserve and Administration’s policies will continue to have an extremely important influence in the short term. There will be underlying fears that the medium-term implications of buying long-term bonds will result in currency depreciation.  Any confidence triggered by moves to bolster the banking sector could quickly falter, especially if the US economic data does not improve significantly. Defensive dollar demand could still be a significant feature at times. The US currency should be able to avoid heavy losses even if there appears little scope for substantial appreciation.

After a decisive trend last week with the dollar under pressure, the trends over the past few days have been less clear as wider uncertainty over economic and policy trends contributed to indecisive currency trading, especially with pressure for a consolidation. The US dollar secured a net recovery against the European currencies.

The Treasury announced over the weekend plans to use US$75-100bn of TARP funds in combination with private capital to boost the potential for troubled assets to be cleared. The Administration will effectively provide a discount for private-sector purchasing of assets with guarantees provided by the FDIC.  There was a generally favourable reaction with strong Wall Street gains.

The issues of reserve currencies and exchange rate management were again important influences following recent comments from China over the possibility of greater use of an alternative reserve currency such as the SDR

Treasury Secretary Geithner initially stated that the Administration was open to the idea which weakened the dollar sharply, although he then made a series of clarifications that the dollar would remain the dominant reserve currency.   

Risk appetite remained an important feature and confidence was generally weaker later in the week. This was most obvious in the fact that 1-month Treasury bill yields fell below zero for the first time since December.

The US economic data recorded an increase in existing home sales to an annual rate of 4.72mn in February from 4.49mn the previous month. Activity was stimulated by lower costs as prices fell by over 15% over the year while inventories remained historically very high. New home sales also rose to an annualised rate of 337,000 for February from a revised 322,000. Durable goods orders also recorded the first increase for seven months.

Initial jobless claims increased by slightly more than expected to 652,000 in the latest week from 644,000 previously. Continuing claims rose to a fresh record high of 5.56mn which suggested that it is still very difficult to find new employment.

JNFX are a city-based FSA Regulated provider of corporate foreign exchange services. Offering competitive foreign exchange pricing and same day cost-free international payments we are a direct alternative to the banks. For further information click here

The Euro-zone economy will continue to weaken in the short term, especially with further pressure on the export sector. The ECB policies will remain under very close focus and the most likely outcome is that rates will be cut further. The bank is likely to resist more aggressive non-conventional measures at this stage. There will be the risk of internal tensions and there will also be the risk of protests against Euro strength if the currency appreciates strongly.

The Euro retained a firm tone on the European crosses and also pushed to a five-month high against the yen, but it was unable to gain any traction against the dollar and drifted weaker towards 1.35 after firm gains earlier in March.

The PMI surveys recorded a small monthly improvement in headline indices for March which suggested that activity may be stabilising to some extent, although the employment data remained extremely weak. The German IFO index edged lower to 82.1 from 82.6 which was a fresh record low for the survey with some optimism in the construction sector while other sectors were more pessimistic

ECB members, including Chairman Trichet, have suggested that there is scope for a further reduction in interest rates, but also expressed doubts over the potential over zero rates with resistance to any further non-conventional measures.

The headline Euro-zone trade deficit increased to EUR10.5bn for January from a revised EUR1.7bn previously. Although the seasonally-adjusted deficit was lower, there was still an important deterioration as exports again weakened sharply.

Yen:

Fears over the Japanese economy will continue in the short term as the industrial sector continues to contract rapidly. There will be further pressure on the Japanese authorities to move towards quantitative easing and there will also be pressure for yen gains to be resisted. The seasonal factors will be less favourable for the yen during the second quarter which will limit appreciation potential and a sustained improvement in risk appetite would also tend to undermine the yen.

The yen was generally on the defensive over the week as rallies quickly attracted selling pressure due to a lack of confidence in the Japanese economy, but the dollar continued to hit tough resistance above 98.50 against the yen.

The Nikkei index rose to a two-month high and underlying demand for the currency remained weaker. The Japanese Finance Minister stated that reserves should be used to maintain currency stability and, although there were no suggestions of an immediate move to intervene, there will be further speculation that the Japanese authorities will deter any renewed yen appreciation.

The Japanese trade account returned to surplus for February for the first time in five months. The main focus was on the continuing plunge in trade volumes with exports falling 49% over the year as auto shipments fell sharply.

The other economic data provided no significant support with retail sales falling 5.8% in the year to February while core consumer prices were unchanged. Bank of Japan Governor Shirakawa stated that the economy did not face a deflation spiral risk now, but that he could not rule out a move to zero interest rates or quantitative easing.

ADVFN financial Bookshop has exclusive offers on financial books including 7 Chart Patterns that consistently make Money Click here

Overall confidence in the UK economy will remain generally weak in the short term especially if there is further evidence of deteriorating consumer spending. The budget trends will remain an important focus and there will be fears that capital inflows will not be sufficient to cover the very high debt issuance programme.  These fears will tend to be an unsettling influence on Sterling. The UK currency will still gain some support when risk appetite is firmer while Euro-zone fears will also provide some relative protection.

After pushing to a high above 1.47 against the dollar, Sterling weakened back to below 1.45. The UK currency also weakened against the Euro with lows close to 0.94.

The UK consumer inflation rate was sharply higher than expected at 3.2% in March from 3.0% previously and compared with expectations of a drop to 2.6%. The RPI did not fall to below zero as had been expected due to higher food and transport prices. There was increased speculation that the Bank of England would be more cautious over promoting an even more aggressive monetary policy and Sterling weakness.

The Bank of England warned that the government should not boost fiscal policy further given the debt stresses and the warning undermined currency support given that fiscal fears were already an important factor.

Bank of England MPC members also took a generally pessimistic stance over the economy and warned that forecasts may still be over-optimistic. There was, however, an improvement in the latest MORI consumer confidence survey.

UK retail sales fell 1.9% in February after a revised 0.8% increase the previous month and cut annual growth to 0.4%.  The data undermined sentiment to some extent, although the impact was measured due to potential distortion by bad weather at the beginning of the month. The UK CBI retail sales survey was weaker than expected at -44 from -25 previously and the April expectations component was also weak

The latest gilt auction reported a bid/cover ratio below 1.00 compared with 2.03 the previous month with potential buyers unsettled by the higher than expected inflation rate reported on Tuesday. There were increased fears that the UK would not be able to attract sufficient overseas buyers for the very heavy bond issuance schedule. The current account deficit was little changed at GBP7.6bn for the fourth quarter.

Swiss franc:

The National Bank policies will remain very important in the short term and there is likely to be aggressive resistance to currency gains which will certainly limit the scope for a franc advance. There will also be fears that the economy will contract very sharply during 2009 which will also limit support. The franc could still gain some defensive support when there is a renewed deterioration in risk appetite, but it unlikely to make much headway.   

The franc resisted further selling pressure over the week as a lack of confidence in the major alternatives provided some significant relief. The dollar found support below 1.12 while the franc was unable to strengthen through 1.52 against the Euro.

The KOF institute was generally downbeat over economic prospects with a warning that Swiss GDP could contract at least 2.4% in 2009 with the risk that activity will contract again in 2010 while the risks were for an even weaker outcome.

There was further speculation that the National Bank will protest against franc strength and intervene. Bank Chairman Roth stated that intervention in the bond market requires caution and that the policy is currently in the opening phase.

If you’re new to Spread Betting, we provide a comprehensive introduction to this trading practice to get you up to speed. Click here

The Australian dollar challenged 12-week highs above 0.70 against the US currency as last week’s rally continued, but it then hit significant resistance and consolidated close to this level. Risk appetite was still generally stronger over the week which helped underpin the currency while the rally in metals prices also provided support.

There was increased speculation that the Reserve Bank of Australia will limit an interest rate cut to 0.25% at the April policy meeting which provided net support.

Overall, the Australian dollar will find it more difficult to extend gains, although selling pressure should still be contained in the short term. 

Canadian dollar:

The Canadian dollar was confined to narrower ranges over the week following the sharp volatility seen the previous week. There was tough resistance close to the 1.22 level against the US currency with a move back towards 1.23.

The Canadian currency moves were dominated by trends in risk appetite, especially as there were no significant data releases. Improvement in confidence, allied with a firmer trend in oil and metals prices, was still a positive currency influence.

The Canadian dollar should maintain a slightly firmer tone in the near term, although it will be difficult for the currency to secure strong gains.

Indian rupee:

The rupee maintained a firm tone and pushed towards 50.50 against the dollar as the US currency failed to hold its best levels. The currency was hampered to some extent by an increase in month-end dollar demand while markets were closed on Friday.

The degree of confidence in the local bourse was still a key factor and the index pushed to the highest level since the first week of January as overseas capital returned. These flows continued to have an important rupee impact and allowed net gains.

The rupee will continue to gain short-term support if risk appetite remains stronger. Confidence is still liable to prove brittle and appreciation could still reverse sharply given the underlying international growth stresses.

Click here for an A to Z of Forex-related key words and phrases.

The Hong Kong dollar maintained a firm tone over the week and continued to challenge the 7.75 band limit. There was some speculation that the forthcoming HSBC rights issue triggered increased demand for the currency.

The HKMA intervened frequently to keep the currency within the target band
The currency was supported by the overall improvement in risk appetite.

The Hong Kong dollar moves will remain correlated strongly with risk appetite with the potential for a solid near-term tone to be retained and further intervention

Chinese yuan:

The yuan remained confined to narrow ranges over the week near 6.83 against the dollar as the central bank continued to exercise tight control of the spot market

The issue of reserve management policies remained important for the market as Chinese officials promoted the idea of increasing the use of SDRs as a reserve currency and lessening the dollar’s role. The rhetoric increased speculation that the yuan would eventually strengthen and NDF markets priced in medium-term gains.

There were mixed official comments on the currency with the net tone remaining slightly more confident with the central bank stating that the policy measures were starting to have an impact.

There is still a greater risk of underlying stability in the Chinese currency market due to shifts in capital flows and uncertainty over economic trends. Doubts over the dollar should provide some significant near-term degree of yuan protection.