Forex Market Weekly Report
The Week Ahead
The US trends will be watched very closely in the short-term as the economy hovers between a limited recovery and a renewed downturn triggered in part by rising energy costs. Given inflation fears, the G8 stance towards the major currencies will be very important ahead of the meetings which are due next week, especially given the recent linkage between dollar moves and the level of oil prices.
Key events for the forthcoming week
Date Time (GMT) Data release/event
Thursday July 10th 11.00 UK Bank of England interest rate decision
Dollar:
There will be further unease over the US economy with fears that increases in energy prices will trigger a renewed decline in activity as consumer spending and industrial activity are damaged. In this environment, markets will be sceptical as to whether the Fed will be able to sanction interest rate increases to help curb inflation. There will, however, still be major uncertainty over economic conditions which will trigger sharp fluctuations in sentiment. The US dollar will continue to gain some defensive support given increasing unease over the global economy with particular concern over Europe. There will also be some speculation that G8 officials will push for a stronger US currency and the dollar should be able to avoid heavy selling pressure.
The dollar weakened for much of the week as yields moved against the US currency, but it was able to regain some ground late in the week as aggressive positions were scaled back following the ECB council meeting with a move to 1.57 against the Euro.
The US ISM index for the manufacturing sector edged higher to 50.2 in June from 49.6 the previous month, contrary to expectations of a decline. The underlying components were weak with the employment index at the lowest level for five years while there was a rise in inventories. The non-manufacturing index weakened to 48.2 in June from 51.7 with confidence undermined in part by the inflation outlook
The latest construction output data was slightly stronger than expected, but the ADP employment data was weak with a reported 79,000 decline in jobs for June.
The pivotal monthly payroll report was close to expectations with a decline of 62,000 while the May data was revised to show a 62,000 drop. The unemployment rate held at 5.5% following the sharp increase seen the previous month. The latest jobless claims data also recorded an increase to 40,000 in the latest week.
There was little overall change in Fed futures over the month with markets still edging away from expecting an interest rate increase within the next two months. Bond yields also fell slightly over the week which limited the dollar’s support.
US officials made no significant comments on the dollar over the week, but there was speculation that currencies would be an important area of discussion at the G8 meetings which are due to begin on July 7th.
Euro:
The ECB interest rate increase will reinforce yield support for the currency and the central bank will maintain a tough stance on inflation in the short-term. The bank suggested that it will not look for a series of rate increases at this stage which will limit Euro support while there will also be increased fears over the growth situation, especially in Southern Europe. In this environment, the Euro is liable to be brittle with the threat of substantial capital outflows.
The Euro strengthened steadily in the run up to Thursday’s ECB interest rate decision, but was then subjected to sharp profit taking against all major currencies.
There was some relief for German retail sales with a 1.3% increase for the month. German unemployment also declined for June following the surprise increase seen the previous month. There was also a rise in Euro-zone retail sales for the latest month.
Producer prices rose strongly while the flash headline consumer inflation rate increased to 4.0% in June from 3.7% which is twice the ECB inflation target.
ECB officials took a tough stance ahead of the bank’s interest rate decision and the bank increased rates to 4.25% from 4.00%, in line with market expectations. This was the first increase in rates for over 12 months.
In the press conference following the interest rate decision, ECB Chairman Trichet maintained a tough approach on inflation with comments that the rate increase was designed to head off secondary inflation effects.
Trichet also, however, effectively stated that bank was now in a neutral stance to await further developments while there were important downside risks to growth. These comments increased expectations that the bank will not look to tighten policy further in the near term. The comments triggered some scaling back of interest rate expectations over the remainder of 2008.
Yen:
Confidence in the domestic economy will remain fragile in with expectations of a further deterioration in conditions. Given a lack of yield support, there will be continued pressure for capital outflows in search of higher yields, especially as there has been increased investor interest in pushing funds overseas. The yen will still gain some support from unease over global economic trends and any further sharp decline in asset prices would discourage carry trades. G7 countries may also push for Asian currency appreciation which would help underpin the yen.
The Japanese currency strengthened to highs around 105.0 against the dollar during the week, but there was substantial selling interest on rallies and it weakened back towards the 107.0 level following the US data.
The headline Japanese Tankan index fell to +5 in the June quarter from +11 the previous month while there was also a decline in capital spending plans which maintained the generally gloomy outlook over the economy.
There were reports of an increase in capital outflows out of Japan on yield grounds with evidence of a flow of funds into investment trusts, which allocate funds into overseas bonds, at the highest level since last August.
Sterling:
The latest economic data has suggested a further deterioration in conditions with both the major PMI surveys substantially below the 50.0 level while there have been warnings over consumer spending. In this environment, the Bank of England will be very reluctant to sanction any interest rate increase to help stem inflationary pressure. Overall confidence in the economy and currency will also remain weak, but there is still scope for underlying capital inflows on valuation grounds which should limit losses from current levels.
Sterling proved to be generally resilient over the week and strengthened to a two-month high of 2.00 against the US dollar before correcting weaker. The UK currency also found support near 0.80 against the Euro.
The UK data remained generally depressed over the week with evidence of a sharp downturn. The PMI index for manufacturing declined to 45.8 in June from 49.5 the previous month. This was significantly below the 50.0 threshold and was the lowest reading since late 2001. The construction PMI index also fell sharply for the third successive month to 38.8 and there was no relief from the services sector with the PMI index weakening to a fresh 5-year low of 47.1 for June.
The housing data remained weak with mortgage applications falling by over 50% in the year to May, the lowest level for over 10 years, while the latest evidence continued to suggest that house prices are falling. There were further corporate warnings from the housing sector while there were also warnings over the retail spending outlook which tended to undermine sentiment.
Sterling gained some support from reduced capital outflows as valuations remained attractive from a medium-term perspective.
Swiss franc:коли под наем
There will be further concerns over the growth outlook with the domestic indicators continuing to suggest an underlying slowdown. There will also be concerns over the Swiss financial sector given the banking-sector vulnerability. The franc will gain support from global growth fears with defensive inflows while there will also be some speculation over capital inflows from global central banks on reserve diversification grounds. Nevertheless, the Swiss currency will struggle to secure strong gains from current levels.
The dollar weakened to lows near 1.01 against the franc before pushing back to 1.0270 following the monthly payroll data. The Swiss currency fluctuated around the 1.61 level against the Euro.
The Swiss PMI index for June weakened to 54.8 in June from 55.2 which was a three-year low for the index. Consumer prices rose by 0.2% in June following the 0.8% increase previously and the annual rate dipped back to below the 3.0% level at 2.9%.
National Bank Chairman Roth was optimistic that the inflation rate would decline later in 2008, but he warned that significant franc depreciation would not be welcome.
The franc gained some support from a decline in risk appetite over the week, although the impact was measured with underlying confidence still subdued.
Australian dollar:
The Australian dollar pushed close to 25-year highs against the US dollar during the week and retained a firm tone despite intermittent corrective periods.
The Reserve Bank left interest rates on hold at 7.25% following the latest council meeting. In the statement accompanying the decision, the bank was more confident that policy had been tightened enough to curb inflationary pressures and this dampened expectations of further interest rate increases.
There were declines for housing and car sales over the month, but there was a stronger than expected retail sales report with a 0.7% monthly increase.
The Australian dollar continued to move in line with degrees of risk appetite with the currency edging weaker when equity prices came under heavy selling pressure.
Overall sentiment should remain firm in the short-term, but the Australian dollar will struggle to make much headway from current levels.
Canadian dollar:
There were no significant domestic data releases during the week with the currency buffeted by shifts in sentiment and technical considerations as ranges were relatively narrow. The Canadian dollar was unable to sustain a move towards parity and weakened to lows near 1.0220 before stabilising.
The Canadian currency struggled to gain any support when commodity prices increased. The potential beneficial impact to the currency was offset by increased fears over the domestic economy and lower risk appetite.
The Canadian dollar may continue to struggle for direction in the very short-term, but the net risk suggest a slightly weaker trend is realistic.
Indian rupee:
The rupee came under renewed pressure during the past week with the currency dipping to lows beyond 43.30 against the US dollar on Thursday before a marginal recovery on Friday as global markets stabilised.
The currency was unsettled by the same factors which have damaged the currency over the past few months. Oil prices pushed to fresh record highs over the week which undermined the rupee directly and increased fears over the trade account.
There were also further fears over capital outflows as stock markets generally remained under pressure. There was evidence of central bank intervention to support the local currency, although no specific levels were defended.
Overall, the Indian currency will remain vulnerable to further selling pressure unless there is a reversal in oil prices as there will be the threat of further capital outflows.
online casinoHong Kong dollar:
The Hong Kong currency secured a firmer tone over the week, strengthening back through the central rate of 7.80 against the dollar with consolidation around 7.7980.
US yields remained generally lower which unsettled the US currency, especially as local inter-bank rates strengthened slightly.
The Hong Kong dollar was still unsettled by weakness in the Hang Seng index during the week with the index at a 15-week low before a tentative recovery.
The interest rate trends suggests that the Hong Kong dollar should continue to resist significant losses against the US currency even if any further advance is limited.
Chinese yuan:
The yuan continued to strengthen during the week with another post-float high against the US currency at near 6.85 as the dollar remained generally weak. There was a partial retreat to 6.8610 on Friday as the US currency recovered ground.
The authorities announced tighter controls on capital and the use of fake export invoices in an attempt to curb speculative capital inflows.
There was also further evidence that the authorities were looking to promote periods of yuan weakness to discourage aggressive speculative inflows.
The Non Deliverable Forwards (NDF) spreads narrowed over the week with markets expecting the yuan to rise less rapidly over the next 12 months.
The net trend is still likely to be for a firmer yuan, although there will be further bouts of weakness as the authorities continue to combat speculative capital inflows.
Resource: ADVFN