This is the last Weekly Forex Bulletin for 2009. Normal services will resume 4th January 2010.
The Week Ahead
The dollar has gained support from a small shift in yield expectations and a significant deterioration in confidence surrounding the Euro-zone. The US fundamentals are still broadly weak and it remains the case that there will be a lack of confidence surrounding all the major currencies. Year-end positioning will tend to limit the scope for renewed gains in high-yield instruments.
Key events for the forthcoming week
Date
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Time (GMT)
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Data release/event
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Wednesday December 23rd
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09.30
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UK Bank of England MPC minutes
|
Dollar:
The US economic releases have continued to suggest some improvement in conditions with consumer spending firm. There are still very important areas of vulnerability with fears that the rebound will stall quickly once fiscal support lessens. The Fed has adopted a slightly more positive tone and will look to end quantitative easing, but short-term interest rates are likely to remain at very low levels. There will also still be fears over medium-term reserve diversification. There will be some potential dollar support from a lack of confidence in the other major currencies, especially if wider risk appetite deteriorates further.
The dollar secured strong net gains for the week as US sentiment was slightly firmer while confidence in Europe deteriorated significantly. The dollar strengthened to a three-month high close to 1.43 against the Euro before a limited correction.
The US capital flows data was weaker than expected with net long-term inflows of US$20.7bn for October after inflows of US$40.7bn previously while there were small total net outflows. The data overall had a slight negative underlying dollar impact.
Growth indicators were mixed. There was a stronger than expected reading for industrial production with a 0.8% monthly increase for November. In contrast, the NAHB index weakened to 16 for the month from a figure of 17 the previous month. Jobless claims rose to 480,000 in the latest week from a revised 473,000 the previous week which was slightly worse than expected.
There was a sharp decline in the New York manufacturing index to 2.6 for December from 23.5 which maintained some fears over the sector even though the series is volatile on a monthly basis. In contrast, the Philadelphia Fed index was stronger than expected with a rise to 20.4 from 16.7 the previous month. The index components were mixed with a deterioration in orders offset by a firmer employment reading. There was a sharper increase in producer prices of 1.8% for November after a 0.3% the previous month while there was a 0.6% core increase. Consumer prices rose 0.4% for November while core prices were unchanged which provided some degree of optimism that inflation trends are still contained. The low point for inflation has, however, certainly been passed and the Fed will need to be on alert with the annual rate rising to 1.8% from -0.2% previously.
There were no surprises from the Federal Reserve on interest rates with the benchmark Fed funds rate left in the 0.0 – 0.25% range while there was also no change in the discount rate after some speculation over a possible move.
The Fed also maintained its references to interest rates remaining at low levels for an extended period. The statement was, however, slightly more optimistic on the economic outlook and also referred to capacity use being higher while the quantitative easing programme would be wound down from February 2010.
For now, markets will tend to give the US economy the benefit of the doubt following the slightly more optimistic comments from the Federal Reserve on Wednesday even though there will still be scepticism over the potential for an early increase in interest rates. |