Weekly Forex Currency Review 23-12-2009

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This is the Last Forex publication for year 2009. Normal service will resume 4th January 2010, best wishes for the holidays and New Year.

The Week Ahead

The dollar has continued to gain support from a small shift in yield expectations and a significant deterioration in confidence surrounding the Euro-zone. Credit availability will still be an important underlying issue for the US economy and the dollar is still not in a strong position to gain strong support on yield grounds. Longer-term fears over currency stability will also continue.

Key events for the forthcoming week

Dollar:

The US consumer and housing data releases have continued to suggest some improvement in conditions and the dollar has looked to take advantage of higher bond yields. There will also be some further speculation that the Fed will tighten monetary policy ahead of the ECB, although these expectations could reverse rapidly given the important underlying US vulnerabilities. Medium-term fears over diversification away from the dollar will also tend to stifle gains for the US currency.

The dollar maintained a firm tone during the week and moved to a three-month high against the Euro with solid gains on a trade-weighted basis as well. There was a further reduction in short speculative positions while the US currency also looked to gain some further measured support on yield grounds.

The US existing home sales data was stronger than expected with a rise in the annualised selling rate to 6.54mn for November from 6.09mn the previous month and this was the fastest selling rate since February 2007.

Third-quarter GDP was revised down to an annual rate of 2.2% from 2.8% previously while the latest Richmond Fed index returned to negative territory which reinforced the mixed picture surrounding the economy.

Nevertheless, there was still some additional dollar support on yield grounds which helped maintain a firm tone for the US currency.

There were again comments from Central bank of China officials that the dollar is likely to depreciate in the medium term. These comments did not have a significant impact today, but could still be an important negative factor for the currency over the longer term.

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There will be persistent unease over Euro-zone structural weaknesses, especially with fears over further credit-rating downgrades. At the extreme, there will be speculation over member countries leaving the Euro area. There will also be some pressure on the ECB to delay any monetary tightening in order to help protect the weaker Euro-zone members. In this environment, the Euro will find it difficult to regain firm buying support.

Euro recoveries soon attracted selling interest during the week with Moody's downgrade of Greece's credit rating contributing to the negative mood even though the downgrading was less severe than feared by the markets. The Euro weakened to three-month lows against the dollar and was subdued on the crosses.

There was a decline in German consumer confidence for the third consecutive month. The IFO institute warned that credit availability for German companies had tightened in December compared with the previous month which will maintain fears over current recovery’s durability.

There was some further speculation that the ECB will be forced to delay monetary tightening during 2010 in order to protect the weaker Euro-zone economies from further stresses and help protect the banking sector.

Yen:  

The yen will tend to lose support if there is a sustained increase in US bond yields, especially as there could be increased use of the Japanese currency as a global funding currency in carry trades. Unease over the government debt situation and deflation fears will also tend to undermine the yen. There is still likely to be a reluctance to sell the currency aggressively given doubts over the fundamental outlook in other major economies.

The yen lost ground during the week with the US currency gaining some support on yield grounds and the US currency strengthened to a 7-week high close to the 92 level. The yen was still broadly resilient against the European currencies.

The latest Japanese trade data recorded a 4.9% monthly increase in exports for November which cut the annual decline to below 7%. The stronger than expected data tended to ease pressure for a weaker currency on competitiveness grounds.

There was still major unease over the underlying threat of deflation with business confidence still very weak.

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Fears over the debt situation will remain a clear threat to Sterling, especially as the deficit will not be addressed over the next few months. There will also be further speculation that the UK economy will under-perform other major economies during 2010 given the structural vulnerabilities. There remains a significant possibility of heavy selling pressure on the currency if international confidence deteriorates further.

Sterling tended to drift weaker over the past few days with the currency still unsettled by an underlying lack of confidence. Sterling weakened to a two-month low against the US dollar with lows near 1.59 and also lost some degree of ground against the Euro, although it remained stronger than the 0.90m level.
Third-quarter GDP was revised higher to a figure of -0.2% from the -0.3% estimate previously, but this was weaker than expected with some speculation that there could be a figure of zero or better and the data had a small negative Sterling impact.

The Bank of England minutes recorded a 9-0 vote to leave interest rates on hold and to maintain the level of quantitative easing at GBP200bn.

There will be further unease over the UK government debt position as markets will speculate over trends during 2010 and attempt to differentiate between national risks. There will be continuing fears that there will be no policy adjustment during the first half of the year which will maintain the serious threat that there will be a loss of international confidence in the UK currency.

Swiss franc:

Developments within Europe will continue to be watched closely and the Swiss currency is likely to gain some further defensive support from fears over the Euro-zone economy and banking sector. The National Bank will remain an important focus and the bank is still liable to block significant franc gains, especially against the Euro. There will also be fears over the Swiss banking sector which will limit franc support.

The US currency found support below 1.04 and initially strengthened to a high of 1.0460 with reports that the BIS was buying dollars against the franc. There was Swiss currency buying support on dips as the National Bank, as usual, declined to comment on the rumours.

The US currency was unable to sustain a brief move above 1.05 while the Euro dipped back towards the 1.49 region. A lack of confidence in the Euro-zone financial sector contributed to a firmer Swiss currency during the week.

Markets will remain on high alert over the risk of further intervention, especially with the Euro at current levels against the Swiss currency.

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The Australian dollar was unable to sustain rallies during the week and dipped to test support levels below 0.8750 against the US dollar, the lowest level since early October

There was a further reduction in long positions ahead of the year-end while a generally firmer US currency remained a negative influence even though the pace of selling was measured.

The Australian dollar should be able to resist further substantial near-term losses, especially as underlying confidence in the economy should remain firm.

Canadian dollar:

The Canadian dollar found support weaker than the 1.07 level against the US currency during the week and strengthened to around 1.0550 with a significant advance on the crosses.

The currency was able to gain some degree of support from increased optimism over the North American economy while equity markets also looked to recover ground.

The Canadian dollar fundamentals will remain firm, but a lack of yield support will make it difficult to achieve further significant gains.

Indian rupee:

The rupee found support close to the 47 level against the US currency, but was unable to secure a significant recovery, especially with the US dollar generally firmer.

The local stock market recovered from a six-week low later in the week which provided some degree of support for the currency, and there was some optimism over regional growth prospects.

The fundamental outlook should still offer some reassurance and protect the rupee from heavy selling pressure in the short-term.

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The Hong Kong dollar maintained a softer tone during the week and dipped to lows around 7.7585 against the US currency before regaining some ground.

There was further evidence of year-end corporate US dollar demand which undermined the Hong Kong dollar and there were some further outflows following recent IPO offerings.

There was a recovery in the stock market late in the week which provided some degree of support for the Hong Kong dollar.

The Hong Kong dollar should be able to resist further significant near-term losses with confidence over the 2010 domestic and regional outlook.

Chinese yuan:

The Chinese central bank maintained tight control of the spot market during the week, maintaining stability against the dollar, although the yuan did strengthen on the crosses.

There was speculation over a near-term increase in interest rates which also provided some degree of support for the currency in the NDF markets.

Chinese officials remained generally cautious over the prospect for exports which suggested that there would still be a reluctance to allow yuan appreciation in the near term. Officials did recognize the international pressure for currency appreciation

The central bank will want to maintain a stable policy in the short-term with little desire for a policy shift ahead of the Chinese New-Year period.