Central bank policies will remain a very important focus in the short-term, especially after the Federal Reserve move to start buying US Treasury bonds. In countries where non-conventional policies are resisted, then the short-term implication is likely to be for a firmer currency. In this context, ECB policies will be critical for direction over the next few weeks.
Key events for the forthcoming week
Date |
Time (GMT) |
Data release/event |
Wednesday March 25th |
09.00 |
Germany IFO index |
Wednesday March 25th |
14.00 |
US existing homw sales |
Thursday March 26th |
09.30 |
UK retail sales |
Dollar:
The Federal Reserve move to sanction direct credit easing through purchases of bonds will be an important negative influence on the US currency. Fears over a further rapid increase in dollar supply will combine with fears over currency debasement to undermine confidence. The dollar may gain some support from hopes that aggressive policy action will help underpin the economy and it will also gain defensive support at times if risk appetite deteriorates again. Aggressive policies elsewhere will also provide some protection. Nevertheless, the dollar will find it difficult to make more than a limited short-term recovery.
After drifting weaker, the US currency then weakened very sharply after the Fed meeting with the largest recorded daily decline against the Euro and the US currency was on track for the sharpest overall weekly decline for 20 years.
The US manufacturing data was generally depressed as production declined by a further 1.4% while the New York Empire index also weakened further to a record low of -38.2 in March from -34.7 previously. The Philadelphia Fed index improved slightly to -35.0 for March from -41.3 the previous month, although the employment and prices components weakened to fresh record lows.
Elsewhere, initial jobless claims fell to 646,000 in the latest week from 658,000 previously which was slightly lower than expected while the number of continuing claims rose to a fresh record high at close to 5.5mn.
The housing data was stronger than expected with starts rising sharply to an annual rate of 0.58mn for February from a revised 0.48mn the previous month as apartment starts were notably firm. There was also a rise in building permits to 0.55mn.
As expected, the Federal Reserve left the Fed funds target interest rate at 0.00 – 0.25%. The Fed stated that the economy was continuing to contract and that inflation could remain at very low levels for a prolonged period given the economic weakness.
The main focus was also on the statement given the importance of quantitative easing. The Fed was much more aggressive than expected as it announced that it would step-up the pace of credit expansion. The Fed announced that it would buy up to US$300bn in long-term Treasury bonds over the next six months. In addition, it will also increase its purchase of mortgage bonds by US$750bn to a potential US$1.25trn.
The decision to expand direct credit supply substantially undermined confidence in the US currency directly due to fears over medium-term debasement while it also increased risk appetite which tended to lessen defensive support for the dollar.
The fourth-quarter current account deficit fell to US$133bn from a revised US$181bn previously which will lessen the US financing requirement. The latest capital account data recorded net long-term outflows of US$43bn for January following inflows of US$34.7bn previously. The overall account recorded net outflows of US$148.9bn.
Official Chinese holdings rose over the month and much of the outflows appears to reflect hedge-fund activities, but there was unease over the capital account situation given reports that China was concerned over the risk of capital losses. |