Weekly Forex Currency Review 30-10-2009

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The pattern seen over the past few weeks has been for any setback in risk appetite and high-yield currencies to be met quickly with fresh buying support. This could again be the pattern seen this time, although there are much increased risks this time of a more sustained bout of weakness and reassessment given the very important structural vulnerabilities in the global economy.

Dollar:

The latest US economic data will tend to maintain fears that the current rebound in activity will be fragile and short-lived, especially with the consumer sector still in considerable difficulties. Confidence in the global economy is also liable to falter to some extent which should deter dollar selling as investors become more cautious over carry trades. Underlying confidence in the dollar will continue to be very fragile amid expectations of a medium-term diversification away from the currency. In this environment, it is still the case that dollar rallies will quickly run into significant selling pressure.

The dollar found support weaker than 1.5050 against the Euro and staged a cautious rally, but gains quickly encountered significant selling pressure as underlying confidence remained weak.

New home sales declining to an annual rate of 402,00 from a downwardly-revised 417,000 the previous month. There was a drop in inventories for the month with the number of un-sold homes at the lowest level sine August 1982 while the house-price index also rose for the fourth successive month. Nevertheless, there were further fears over the housing outlook, especially with tax credits for first-time purchases due to expire during November.

The consumer confidence data was significantly weaker than expected with a decline to 47.7 for October from a revised 53.4 the previous month. There was a deterioration in confidence surrounding current conditions and expectations with the current index at a record low as confidence in the labour market deteriorated. This development was slightly surprising given that the weekly jobless claims data has generally improved and suggested that hiring patterns are particularly weak.

Risk appetite deteriorated again following the housing data as Wall Street dipped significantly with particular pressure on the Nasdaq index. In response, the Euro weakened to lows near 1.47.

The GDP report was slightly stronger than expected with a reading of 3.5% for the third quarter following a 0.7% contraction for the previous 3 months. The breakdown was broadly in line with expectations as strong-buying for autos boosted the economy.

There was also a positive reading for housing investment, but there was a further contraction in business investment which will maintain unease over underlying trends. There will also still be important doubts whether the return to growth will be sustainable, especially with credit supply still contracting. 

The net impact was still an improvement in risk appetite which curbed defensive demand for the US currency. There was some further speculation that the Federal Reserve will tighten its policy rhetoric at next week’s FOMC meeting, but the dollar struggled to derive much support.

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The current economic data has continued to suggest that the economy is recovering. There will, however, be fears over the medium-term outlook given the contraction in credit supply. There are also still very important structural vulnerabilities which will continue to stifle optimism towards the Euro. These fears will tend to intensify if there is any renewed increased in tensions surrounding Eastern Europe. Given these uncertainties and vulnerabilities, the Euro will find it difficult to secure strong backing from current levels.     

The Euro was mixed over the week as a whole and certainly failed to hold its best levels with particular weakness against Sterling.

Annual Euro-zone money supply growth slowed to 1.8% in September from 2.6% previously while there was a 0.3% contraction in bank lending. The persistent slowdown in monetary growth over the past few months increased fears over a credit crunch within the banking sector and maintained pressure for a loose ECB monetary policy to be maintained to help support the economy. 

The latest German consumer confidence data recorded a decline for the first time in 14 months. In contrast, there was a further recovery in Euro-zone business confidence for October while the German unemployment data was also stronger than expected with a seasonally-adjusted decline for the month which helped stem immediate fears surrounding the Euro-zone economy.

ECB member Weber stated that the bank would probably start to withdraw some of the emergency measures during 2010, although he was still generally cautious over the economic outlook.

Yen:

Confidence in Japan’s economy is likely to remain weaker in the short-term with fears that the underlying demand will remain weak which will also tend to heighten fears surrounding the government debt position. Markets will also keep a close look on any tensions between the Bank of Japan and Finance Ministry. Any serious policy tensions would tend to undermine confidence in the economy and yen.  The Japanese currency will still tend to gain some support if there is a sustained deterioration in risk appetite.
The yen did secure some important support when risk appetite deteriorated, but found it difficult to sustain gains as confidence rebounded following the US GDP report. In general, it was trapped within a 90 - 92 range against the dollar.
Finance Minister Fujii expressed concerns that the bank is being over-optimistic surrounding the economic trends while the Minister also pledged to limit bond issuance. Fujii also repeated his warning that any international policy of competitive devaluations would tend to damage the global economy.
The government and Bank of Japan then announced that they will hold bilateral talks every month from November and this eased fears over open policy splits.
The Japanese unemployment data was stronger than expected with a decline to 5.3% from 5.5% the previous month. The Bank of Japan forecast that there would be three years of deflation in its latest monetary report and it also held interest rates at 0.1%.
The corporate funding scheme will be extended for the next three months. There was, however, a significant Bank of Japan policy move with an announcement that the commercial-paper buying programme would end from December.

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There will continue to be a high degree of uncertainty over the Bank of England’s monetary policy and there will be further speculation over an increase in the quantitative easing programme. Any expansion would tend to undermine Sterling on domestic grounds. The UK currency will continue to gain some important protection from the vulnerabilities in other key economies. Nevertheless, the underlying fundamental weaknesses still suggests that the currency is likely to depreciate in the medium term.

Sterling was able to resist selling pressure during the week and secured a significant net advance as a whole. There was a particularly robust performance against the Euro with gains through the 0.90 level while there were gains above 1.65 against the dollar.
The latest CBI retail sales survey was slightly stronger than expected with a reading of 8 for October from 3 the previous month while retailers were also confident over the outlook for November with the strongest reading for two years. The data helped underpin confidence to some extent, although the main feature was uncertainty, especially as survey evidence has been contradicted by the actual data releases.
The data on UK mortgage approvals was slightly stronger than expected with an increase to 56, 200 for September from a revised 53,000 the previous month which maintained some degree of cautious optimism towards the housing sector and the Nationwide reported a further increase in house prices.
In contrast, there was another weak outcome for consumer credit with the third successive monthly contraction. There was also a weak figure for M4 lending with the Bank of England’s preferred measures recording an annual decline. The lack of credit demand and supply will remain a key barrier to sustainable growth in the economy.
There were dovish comments from former Bank of England member Blanchflower who stated that the central bank should increase the amount of quantitative easing. There was further speculation that the Bank of England will increase its quantitative target next week, although uncertainty remained a key feature.

Swiss franc:

The Swiss franc is likely to gain some degree of support if there is a sustained deterioration in international risk appetite. The franc also appears much less vulnerable to being used as a global funding currency and has remained generally resilient. There will still be the important threat of National Bank intervention to curb excessive franc gains. The net risks suggest that there is scope for a limited dollar rally from current levels.
 
The dollar found support near 1.0050 against the franc and rebounded to a high near 1.03, but was unable to sustain the best levels. The franc also resisted losses against the Euro and consolidated near 1.51.

The franc remained broadly resilient even when global risk appetite improved. There was no sign of National Bank intervention during the week even with the Euro testing important technical levels against the Swiss currency.

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The Australian dollar hit selling pressure above 0.92 against the US dollar and dipped sharply to lows below the 0.90 level when risk aversion spiked higher, but there was strong-buying support on dips.

The headline Australian consumer inflation data was marginally higher than expected with a 1.0% increase in prices for the third quarter, but the data was not strong enough to trigger increased expectations of a 0.50% interest rate increase at next week's Reserve Bank meeting with expectations focussed on a further 0.25% increase.

Australian dollar sentiment will remain strong in the short-term and buying on dips will remain a key feature. Resistance levels are still likely to be tougher to break.

Canadian dollar:

The Canadian dollar had a weaker tone during the week and hit lows beyond 1.08 against the US currency before finding some degree of support. The currency stabilised following the US GDP report as equity markets rallied.

There was selling pressure when risk appetite deteriorated and commodity prices fell. The currency was also hampered by fears of currency intervention, although the Bank of Canada stated that there was little merit in intervening unless the action was supported by other policy action.

Trading conditions are liable to remain choppy in the short-term as global risk appetite and commodity prices also continues to fluctuate. Short-term Canadian dollar losses should be limited from current levels.

Indian rupee:

The rupee maintained a generally weaker tone during the week with a string of four successive daily losses and lows around 47.75 against the US currency. The rupee was unsettled by a weaker trend in the stock market and a firmer US currency which curbed expectations of strong capital inflows.

There was also notable month-end demand for the US currency, but the rupee staged a recovery late in the week as the dollar failed to hold gains.

The Reserve Bank help interest rates steady at the latest policy meeting, but did end a special repo facility which signalled that it was moving towards a tighter policy.

The rupee will still gain support when there are wider US dollar losses, but the evidence continues to suggest that the currency could be close to a peak.

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The Hong Kong dollar maintained a position close to the 7.75 limit against the US dollar during the week, although there was a slightly weaker tone.

There was a more defensive tone in global stock markets which curbed Hong Kong support while there was a slightly firmer US currency.

A sharp deterioration in risk appetite would trigger some limited Hong Kong dollar weakness, although the overall risks suggest that any selling pressure will be limited.

Chinese yuan:

The Bank of China continued to maintain tight control of the spot market during the week. There was further pressure for the yuan to strengthen in the medium term with the US and Canada in particular calling for a stronger Chinese currency.

There was further caution by Chinese officials with the Commerce Department, for example, stating that there would be no big move in the yuan until there was a recovery in exports.

The central bank is likely to resist pressure for substantial yuan appreciation in the short-term, especially with doubts over the economy persisting. The underlying pressure for appreciation will continue.