International considerations will tend to dominate in the short-term. The Swiss currency will remain the ultimate safe-haven, especially with all major alternatives tarnished and this will trigger underlying flows into the Swiss currency. The franc’s movements will also tend to remain correlated strongly with trends in risk appetite and there will be some franc selling of confidence in the global economy improves. Nevertheless, sustained weakness looks unlikely for now given the vulnerabilities elsewhere.
The dollar was unable to sustain buying support against the franc during the week and weakened to fresh record los near 0.8850 later in the week as the franc was able to resist heavy selling pressure on the crosses.
The Euro advanced against the franc in European trade on Wednesday with some speculation over corporate buying, although it was unable to break above the 1.30 level. A subdued franc tone on the crosses was not sufficient to support the dollar and it retreated to fresh record lows near 0.8850 before stabilising later in the Asian session.
There will be some reduction in defensive franc demand if there is a sustained improvement in risk appetite, especially if there is a move into high-yield currencies. There will still be reservations over selling the franc aggressively and using it as a funding currency for carry trades, especially given persistent vulnerabilities surrounding the Euro-zone.
Australian dollar:
The Australian dollar dipped at times, but buying pressure generally accelerated during the week and the currency recorded a succession of fresh 29-year highs with a peak above 1.07 against the US dollar.
There was strong momentum buying support for the currency and it also gained ground when global stock markets strengthened and risk appetite improved. The Finance Ministry suggested that it would not intervene to weaken the currency.
The latest Reserve Bank minutes suggested that the central bank was satisfied with the current level of interest rates and it also expressed some reservations over the growth outlook.
There will be momentum for further near-term Australian dollar, but it is increasingly vulnerable to a very sharp correction given the pace of recent gains.
Canadian dollar:
The Canadian dollar weakened briefly to beyond 0.97 against the US dollar early in the week, but then gained fresh support and pushed to fresh 3-year highs beyond 0.95.
The latest inflation data was sharply higher than expected with a 1.1% monthly increase for March which put the headline annual rate to over 3% and renewed speculation that the Bank of Canada would need to increase interest rates again.
The trends in commodity prices and risk appetite remained extremely important and a recovery in global confidence provided solid support for the currency.
The Canadian dollar will continue to draw support from the high level of oil prices and speculation over higher interest rates, but is vulnerable to a sharp retreat. |