Weekly Forex Currency Review 18-09-2009

Save money on all your international money transfers with HiFX. Click here

Underlying confidence in the US dollar is likely to remain generally weak, especially with further speculation that the currency will be used as a global funding currency. Nevertheless, risk appetite is still liable to deteriorate over the next few weeks and this should provide some degree of US protection, especially with the currency at attractive valuation levels against the Euro.  

Key events for the forthcoming week

Dollar:

The dollar will continue to be unsettled by the familiar fears over underlying global central bank reserve diversification. There will also be fears over investment outflows while the currency is also more vulnerable to being used as a global funding currency.  There are still major vulnerabilities in the global economy which should stem selling pressure while the domestic credit contraction should also provide some degree of dollar protection. The US currency will still tend to remain on the defensive in the near term, although losses should be contained from current levels.     

The US dollar attempted to rally at times, but generally remained on the defensive with 12-month lows on a trade-weighted index while the US currency also weakened to 2009 lows against the Euro before a limited recovery.

The US data was generally stronger than expected with a 2.7% surge in retail sales for August. Although driven to a large extent by rising auto sales, there was also a 1.1% underlying increase. The New York manufacturing index also rose further to 18.9 in September from 12.1 the previous month

There was also a 0.8% production increase for August following an upwardly-revised 1.0% increase the previous month while capacity use rose to 69.6% from 68.5% as output in the auto sector strengthened. US housing starts rose to an nine-month high of 0.60mn for August  from a revised 0.59mn the previous month while permits also edged higher over the month.

The Philadelphia Fed index also rose to 14.1 from 4.1 the previous month which was the highest reading since June 2007, although the underlying components were less reassuring and suggested that the recovery may prove brittle. Initial jobless claims fell to 545,000 in the latest week from 557,000 previously. The data continues to suggest an underlying US recovery, but that there are still important vulnerabilities.

Headline consumer prices rose 0.4% which was slightly higher than expected while there was a core increase of 0.1% for the month. Fed Chairman Bernanke stated that the recession had probably ended. Following recent comments from Fed officials, there was still only limited speculation that the central bank will push for higher interest rates in the short-term with expectations of a tightening later in 2010.

The headline US capital account data recorded net long-term inflows of US$15.3bn from a revised US$90.2bn the previous month. There was a significant increase in Chinese and Japanese US Treasury holdings for the month which will provide some degree of relief.

In contrast, there were net private-sector outflows of over US$130bn for the month. The private-sector outflows will pose important underlying risks to the dollar as it suggests an important increase in capital outflows from the US which have historically been important in undermining the currency. The second-quarter current account deficit edged lower to US$98.8bn from US$104.5bn previously.

Get our Daily Trade Signals and Grain Newsletter along with a copy of the CBOT Introduction to Agricultural Futures and Options Book for Free! The grain trading professionals at MF Global can guide you in the right direction with your trading. Click here to Get your Free Grain Trading Kit Today

The most recent data releases still suggest a gradual recovery in conditions which will provide some degree of Euro support, especially if global risk appetite remains stronger. There are still very important structural vulnerabilities with the risk of credit deterioration while tensions in Eastern Europe are also liable to intensify again.  In this environment, the Euro will find it difficult to sustain strong gains from current levels.     

The Euro maintained a generally firm tone over the week, notably against the dollar and Sterling with the highest level against the UK currency since late May.

The German ZEW index was slightly weaker than expected at 57.7 for September which dented the Euro slightly, although this was still an improvement from the 56.1 the previous month and represented a three-year high for the index.

Euro-zone inflation data confirmed a headline rate of -0.2% for August while the core rate was slightly higher than expected at 1.3%. The data did not have a significant impact with expectations that the ECB will hold policy steady in the short-term.

There was a significant trade surplus for July which provided some degree of market support. Euro-group head Juncker suggested that the Euro did not significant risks to the recovery at current levels which dampened any expectations of protests against the Euro’s level. Support was stifled to some extent by unease over the banking sector

Yen:  

The yen will tend to gain some protection from a reduced role as a global funding currency. The new government also appears less sensitive to the issue of yen strength and has voiced opposition in principal to market intervention which could allow a further yen advance. There will still be unease over the implications of further yen gains and institutional dollar support is also liable to increase at levels below the 90 region. Overall, the yen should retain a firm tone, but will find it difficult to sustain further gains.  

The Japanese currency strengthened to 7-month highs against the dollar during the week with a test of key dollar support close to 90 and was firm on the crosses.

Finance Minister Fujii stated that he was opposed in principle to currency intervention which initially pushed the yen stronger towards the 90 level.

Japanese government officials did not make any attempts to reverse these comments which maintained expectations that the new government will tolerate a firmer currency. Indeed, Finance Minster Fujii repeated comments against market intervention in remarks during Thursday.

As expected, the Bank of Japan held interest rates at 0.1% following the latest policy meeting while its view of the economy was upgraded. There was no commentary on whether special measures would be extended beyond the end of 2009.

Bank Governor Shirakawa, also commented that a firm yen could  help the economy and the overall thrust of these comments increased speculation that there has been a change in tone by the Japanese authorities.

Track the performance of your favoured currency against the top 20 global currencies. Click here.

The Bank of England commentary and suggestion of lower deposit rates will tend to unsettle Sterling, especially as there will be expectations that monetary policy will need to stay very loose to offset the impact of any fiscal tightening to curb government debt levels. Overall confidence in the economy is also likely to remain weak in the short-term as debt fears persist while it will be vulnerable as a potential funding currency. The Sterling risks will be more acute if there is any sustained deterioration in global risk appetite. 

Sterling was able to avoid heavy losses against the dollar during the week, primarily due to independent US vulnerability, although there was a softer tone with lows near 1.63. The UK currency also dipped to four-month lows against the Euro near 0.90.

The headline UK consumer inflation rate edged lower to 1.6% in August from 1.8%, but this was again slightly higher than expected which provided some immediate Sterling support as there will be less pressure for an aggressive Bank of England response, but gains were erased quickly.
 
Bank of England Governor King stated that a cut in deposit rates on commercial bank reserves is being considered. King was also generally downbeat over economic prospects with a warning of a long haul out of recession which undermined confidence. Overall confidence in the bank’s policies also remained very fragile.

The UK unemployment claimant count rose 24,400 in August which was marginally below market expectations while the ILO unemployment rate rose to 7.9% from 7.8% which was a 14-year high for the series.

UK retail sales were unchanged in August to give a 2.0% annual increase which was marginally below expectations and will have a small negative impact on sentiment. The latest CBI industrial survey edged stronger to -48  from -54 the previous month, but sentiment is still very weak in historic terms.

Overall confidence in the economy remained very fragile and the political tensions surrounding potential reductions in government spending had some negative impact on the currency. There will be fears over the debt outlook and expectations of an extended period of low interest rates.

Swiss franc:

The National Bank will continue to resist any significant franc appreciation against the Euro, although its overall tone suggest that it may be slightly less aggressive in its opposition to franc strength over the next few months.  The Swiss currency will tend to lose some support if there is a sustained improvement in risk appetite. With several alternative global funding currencies, the Swiss franc could still prove to be broadly resilient in the short-term.      
 
The dollar was unable to gain any momentum against the Swiss currency and dipped to fresh 2009 lows below 1.03 during the week. The Euro hit tough resistance above 1.52 against the Swiss franc.

The latest Swiss industrial production data recorded a 2.7% rise for the second quarter after a 13.1% decline previously which did not have a substantial market impact. 

The National Bank held interest rates at 0.25% following the latest quarterly meeting. The bank repeated that it would not tolerate franc appreciation against the Euro and would maintain unconventional measures to support the economy.

There was an upgrade to growth and inflation forecasts for the next two years which suggested that the bank could be less aggressive on policy moving forward, although bank chairman Roth commented that the deflation threat had not disappeared. The net impact was for expectations of a slightly firmer policy than had been expected

Click Here

The Australian dollar continued to take advantage of generally benign risk conditions during the week while the generally weaker US dollar tone was also a supportive factor.  The Australian currency pushed to a high above 0.8750 against the US dollar before a corrective retreat towards 0.8650.

The Reserve Bank was slightly more cautious in the latest set of minutes with comments on the need to balance inflation and growth requirements. The minutes continued to dampen expectations of a more aggressive bank policy which restrained currency sentiment. Disappointing data from New Zealand also had some negative impact on Australian sentiment.

Overall, the Australian dollar will be increasingly vulnerable to a sharper correction weaker as risk confidence deteriorates despite robust buying support on retreats.

Canadian dollar:

The Canadian maintained a firm tone during the week and strengthened to near 1.06 against the US dollar before a partial retreat which was close to a six-month high. The Canadian currency continued to gain support from firm risk appetite and optimism towards the global economy, although confidence edged weaker later in the weak.

The domestic inflation data was slightly weaker than expected, but this did not have a substantial impact with markets looking at firm data for wholesale sales.

The Canadian dollar should maintain a firm tone in the short-term even though it will be difficult for the currency to make strong headway from current levels.

Indian rupee:

The rupee maintained a generally firm tone against the US currency and strengthened to highs around 47.90 before correcting slightly weaker. The Indian currency was underpinned by a generally weaker US currency trend while risk appetite was generally firmer with the local bourse reaching a 16-month high.

There was evidence of importer dollar buying when the rupee strengthened through the 48 level which curbed gains while there were also reports of central bank dollar buying to stem rupee appreciation.

The rupee will continue to gain support when global risk appetite improves, especially if the US dollar remains under pressure. Nevertheless, it will still be difficult for the currency to make much further headway. 

You can now manage your positions directly from your web browser, whether you use PC or Mac.  Test-drive VT Trader™ Web with your free practice account! Click Here

The Hong Kong dollar maintained a firm tone close to the 7.75 band limit against the US dollar during the week. Trends in international risk appetite were generally favourable which helped underpin confidence and sustain capital inflows.

Local money-market rates were also still generally elevated during the week due to IPO offerings and this helped sustain support for the Hong Kong dollar..

The Hong Kong currency should maintain a broadly firm tone unless there is a serious deterioration in risk appetite with further intervention to preserve the band limits.

Chinese yuan:

The yuan moves were still very limited during the week, but the currency did edge stronger to a 4-month spot-rate high around 6.827 against the US dollar.

The domestic data was limited, but continued to offer some reassurance. Officials remained generally cautious over the economy during the week and there were also some reservations over the yuan having a more powerful international role

There will be persistent expectations of medium-term Chinese currency appreciation, especially if the US dollar retains a softer tone against the major currencies.