| | ADVFN III | Weekly FOREX Currency REVIEW | | | Global Forex News from ADVFN | Supplied by advfn.com |
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| | Weekly Market analysis | | Monetary policies will continue to be watched very closely in the short-term with the Federal Reserve meeting next week. The decision on tapering and forward guidance will have important implications for policy in major and emerging-market economies and have a significant currency impact even though the Fed will look to play-down the decision’s impact and curb rising bond yields if tapering is sanctioned.
Key events for the forthcoming week | Date | Time (GMT) | Data release/event | | Monday December 16th | 09.00 | Euro-zone flash PMI index | | Wednesday December 18th | 09.30 | UK labour-market data | | Wednesday December 18th | 09.30 | Bank of England MPC minutes | | Wednesday December 18th | 19.00 | US Federal Reserve interest rate decision | Market analysis
Dollar:
The stronger than expected employment report, together with a stronger reading for retail sales, has increased speculation that the Federal Reserve will begin to taper bond purchases this month. The Fed is certainly uneasy surrounding the quantitative easing programme, but is also determined to keep a loose monetary policy. In this context, any bond tapering is likely to be limited and could be accompanied by more aggressive forward guidance on unemployment. This combination would tend to limit dollar gains. The US currency should still gain important underlying support from the improving competitive advantage and should secure a firm overall tone over the next few weeks.
The dollar was able to recover from lows during the week with further advance against the yen. There was stronger than expected payrolls data on Friday with a monthly employment gain of 203,000 while unemployment fell to 7.0%. Markets were looking for any Fed remarks on the possibility of a December bond tapering.
Regional Fed President Bullard stated that recent job gains will bolster the case for a central bank tapering of bond purchases and he was optimistic that the improvement would continue. In this context, one possibility was that a small move could be made at the December meeting. Fellow President Fisher maintained his call for an early reduction in bond purchases.
Bullard was anxious to reinforce the potential for a small opening move in tapering. This suggests an increased potential for a move next week, but also that the Fed will take any initial steps very slowly in an attempt to prevent any surge in bond yields.
There was an improvement in confidence surrounding the economy. Congressional negotiators reached a deal on a two-year budget deal which, assuming it is passed by both houses of Congress, would avert the threat of a fresh government shutdown. Assuming a budget deal is ratified in Congress, the threat of a January government shutdown has been averted. Resolution to this conflict would make the Fed more willing to taper bond purchases, especially as the rate of fiscal contraction will ease.
The US retail sales data was stronger than expected with a headline 0.7% increase for November following an upwardly-revised 0.6% gain the previous month. Although led by strong auto sales, there was still a 0.4% gain for underlying sales which helped bolster optimism surrounding US spending trends which also helped underpin wider confidence in the economy.
There was a much higher than expected reading for jobless claims with initial filings rising to 368,000 from 300,000 the previous week, although there the data had seasonal adjustment problems following the Thanksgiving break.
US Treasury bond yields moved higher with benchmark yields pushing to highs just below the 2.90% level during the US session with further speculation that there would be a tapering of bond purchases at next week’s FOMC meeting. The dollar held firm without making any major gains
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| | Euro | | The ECB is very reluctant at this stage to engage in more aggressive monetary policies and there has been a gradual uptick in short-term money-market rates which will provide initial Euro support. Deflation fears will persist and the equation will become potentially much more damaging if peripheral economies retreat back into recession, especially as this would intensify political tensions. In this environment, there is a high risk that the ECB would be forced to take more radical action and overall confidence in the Euro would also deteriorate sharply.
The Euro held strong during the week with a six-week high against the dollar just above 1.38 as the currency remained strong on a trade-weighted basis.
There was some optimism that Euro-zone officials would move closer to banking union and could reach a deal before year-end, although there has been continued disappointment surrounding this issue over the past year and there will inevitably be further scepticism. There will be increased pressure on the ECB to intervene verbally to restrain the Euro while concerns within France are likely to increase following another decline in industrial production for November.
The latest industrial production data was weaker than expected which was hardly surprising given weak releases from Germany and France and the overall impact was limited. The barrage of rhetoric from ECB officials continued unabated. President Draghi stated that he expected protracted inflation weakness and the general tone from officials was that the central bank is not out of ammunition.
Yen:
The yen can gain some degree of support at times when global risk appetite deteriorates. Confidence in the fundamentals will remain very weak, especially given the debt burden and there will be fears that measures to combat deflation will be counter-productive as they undermine consumer purchasing power. There will be further expectations of an aggressive Bank of Japan monetary policy with the potential for further easing next year to offset a higher sales tax. Overall, the yen is likely to remain generally on the defensive.
The latest Japanese data releases were generally weaker than expected with a decline in the manufacturing index and a significant decline in the latest services-sector index which will increase concerns over the Japanese outlook, maintaining pressure on the Bank of Japan to maintain a highly expansionary policy. There was also a slightly weaker than expected reading for machinery orders, maintaining growth concerns.
The US currency was able to generate fresh momentum on Thursday following latest data releases with a definite break above the 103 level later in the New York session. The Euro also regained ground with a move to the 142 area. Underlying yen sentiment remained weak with further underlying interest in carry trades and the dollar gained fresh support from an increase in US yields.
Liquidity conditions started to fade during the Asian session on Friday and monetary policy expectations continued to have a crucial impact with the dollar gaining fresh support. Expectations of a potential Fed tapering and very expansionary Bank of Japan policy at next week’s meeting pushed the dollar to fresh five-year highs around 103.90 on Friday as the Euro also reached 5-year highs above 142.50.
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| | Sterling | | Consumer spending should remain firm in the short-term and the economy as a whole should expand at a moderate pace with a robust housing sector. There is an important risk that consumer demand growth will slow, especially as much of the improvement has been financed through a cut in the savings rate. In this environment, the Bank of England will remain determined to keep an expansionary monetary policy and resist rate increases. Real interest rates will remain negative, maintaining the risk of sharp Sterling losses in the medium term, especially given the current account deficit.
Sterling was unable to hold its best levels during the week and edged back from two-year highs just above 1.6450 against the dollar.
Bank of England Governor Carney was generally optimistic surrounding the UK economy with signs that it can reach self-sustaining momentum. He was optimistic that the equilibrium rate of real interest rates to secure sustained growth without triggering higher inflation would gradually move towards zero, but still negative.
Carney’s speech was taken generally positively by the currency markets. There was a slightly more restrained tone in the fixed-income markets and gilt yields edged lower on expectations that the bank would still resist early tightening.
There was further optimism surrounding the UK economic outlook with a NIESR estimate of 0.8% growth in the three months to October. The manufacturing data was in line with market expectations with a small monthly increase for October. The trade balance was again weaker than expected for the month with only a small improvement from a GBP10.1bn goods deficit the previous month as the export performance remained disappointing. The combination of a significant current account deficit and negative real interest rates are unlikely to provide longer-term Sterling support
Bank of England MPC member Weale downplayed the importance of forward guidance stating that the impact had been very small. There will still be strong determination within the MPC to avoid any early increase in interest rates.
Swiss franc:
Evidence of firm domestic growth will continue to provide some support to the franc. The Swiss currency will also gain fresh capital inflows if the ECB is forced to take a more aggressive policy tone next year. The National Bank will maintain the Euro minimum level for now, but will be increasingly uneasy if housing-sector inflation continues to accelerate. If there is fresh safe-haven demand for the Swiss franc, there will be a risk that the central bank will decide currency appreciation is the less damaging policy option.
The franc held firm during the week and strengthened to two-year highs near 0.8850 against the dollar while the Euro tested key support at the 1.22 area.
The seasonally-adjusted unemployment rate held steady at 3.2% for November while there was a 1.2% annual increase in retail sales. There were no surprises from the Swiss National Bank with benchmark interest rates left on hold below 0.25% at the quarterly meeting while the Euro 1.20 minimum level remained in place.
There has been a significant shift in market sentiment with expectations that the franc will be subjected to upward pressure next year. The bank did hold the line at 1.22 against the Euro, but was able to secure only a limited correction and fell short of the 1.2250 area while the dollar struggled to break above 0.89. |
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| | Australian dollar | | The Australian dollar attempted a recovery at times, but the overall tone was still negative and there was a slide to fresh 3-month lows below 0.90 against the US dollar with a seventh successive weekly decline. Labour-market data was stronger than expected with a 21,000 employment increase, but there was a small decline in business confidence and sharper drop in consumer confidence.
Solid Chinese data was able to provide only limited support and the currency dipped sharply following comments from Reserve Bank Governor Stephens who stated that the Australian currency should decline to the 0.85 area against the US dollar.
The Reserve Bank push for a weaker currency will continue to have an important impact with the Australian dollar struggling to gain any sustained support.
Canadian dollar:
The Canadian dollar found support near the 1.07 level against the US dollar during the week and rallied to the 1.0550 area before being subjected to renewed selling.
The local currency was undermined by a decline in gold prices during the week. There were further concerns surrounding the over-valuation in the housing sector which could lead to a very sharp correction if interest rates were forced higher.
The Canadian dollar will come under pressure if commodity prices are subjected to further selling pressure, especially with concerns surrounding the housing sector.
Indian rupee:
The rupee maintained a firmer tone during the first half of the week with a move beyond the 62.00 level against the US currency. There was a fresh retreat over the second half of the week with the rupee unsettled by general weakness in emerging markets due to fresh concerns surrounding a Fed tapering.
There was fresh evidence of dollar demand from oil importers. The economic data also provided no support for the currency with a higher than expected reading for inflation with a consumer-inflation rate of 11.2% from 10.1% while the latest production data was also slightly worse than expected.
Federal Reserve policy will remain an important short-term influence and tapering would tend to undermine the rupee, especially with important fundamental concerns.
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| | Hong Kong dollar | | The Hong Kong dollar dipped towards the 7.7550 area against the US currency during the week before edging back towards the 7.7535 level later in the week. There were further expectations that any longer-term yuan appreciation against the dollar would create additional pressure for a break in Hong Kong’s peg against the US dollar.
China’s exchange rate policies will be watched closely and a move to widen the currency band would tend to increase underlying pressure on the Hong Kong peg.
Chinese yuan:
The yuan maintained a firm tone during the week with the spot rate strengthening to a fresh high beyond 6.0750 against the US currency. There was a stronger than expected trade-surplus reading which provided some currency support, although there were further doubts over potential fake invoicing. There was also evidence that the PBOC would look to curb speculative capital flows over the next few months.
There were further expectations that the yuan trading band would be widened early in 2014. There was still an important sense of unease surrounding credit flows.
Underlying concerns surrounding credit expansion are liable to weaken the capital account and any yuan gains on a wider trading band could reverse quickly.
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