Weekly FX Commentary

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Weekly FX Commentary: (Morning Report)

Weekly Market analysis

The Federal Reserve quantitative easing will tend to keep the US dollar on the defensive and also help underpin global risk appetite. There will be the increasing threat of stresses between all major economies as they look to resist currency gains and there will be also be continuing concerns surrounding the global economy, especially with the potential for Euro-zone stresses to intensify again over the next few weeks. Key events for the forthcoming week Date Time (GMT) Data release/event Tuesday October 2nd 04.30 Australia interest rate decision Thursday October 4th 11.00 Bank of England interest rate decision Thursday October 4th 11.45 ECB interest rate decision Friday October 5th 12.30 US employment data Dollar: There will be further uncertainties surrounding the US economic outlook, especially after weaker than expected data this week. The Federal Reserve will maintain a very expansionary monetary policy which will have an important impact in curbing underlying dollar demand. There will also be important fiscal uncertainty given that without any congressional action, there will be sharp tax increases next year.  There is still the potential for the US economy to out-perform much of Europe which should provide some degree of dollar support. There will also still be protection from underlying fears surrounding the global growth outlook as fear is liable to increase again. The dollar strengthened during the first half of the week before retreating as the Fed’s quantitative easing programme was important in sapping underlying currency support. The latest US consumer confidence index was stronger than expected with an increase to above the 70 level for only the fourth time since early 2008 with a reading of 70.3 from a revised 61.3 previously.  There was a gain for the Richmond Fed index and there was also a 1.2% annual increase in the Case-Shiller house-price index.  The data will maintain a generally stronger tone surrounding the consumer sector and expectations that the US economy will be able to out-perform Europe. There were, however, concerns surrounding the US fiscal situation as Congress faces US$600bn in tax increases and spending cuts in 2013 unless there is a political deal. There were a series of significant US economic release during the session. The headline durable goods orders was much weaker than expected with a decline of 13.2% for August following a revised 3.3% gain the previous month and there was an underlying fall of 1.6%.  Second-quarter GDP was revised down to 1.3% from a provisional 1.7%, but the labour-market data was more favourable as jobless claims fell to 359,000 from a revised 385,000 the previous week. The data overall maintained unease surrounding the growth outlook and underpinned the dovish Fed case

Euro

There will be expectations that Spain will apply for a bailout package in an attempt to stabilise the economy and these expectations will provide some initial Euro support, especially as it would help the ECB launch its bond-buying programme. The short-term economic outlook remains extremely weak which will maintain fears over underlying stability and there will be aggressive political pressures for the a change of policy. There will also be major fears that the austerity measures will push the economy deeper into recession. There will also be major doubts surrounding the Greece situation. There is a high risk that the Euro will face another period of high turbulence and potential losses. The Euro retreated to the lowest point since early September before recovering as key technical support levels near 1.2825 held firm. There was further uncertainty surrounding the Spanish economy and potential request for an request package.  The Catalan Premier also stated that it would call early elections for November 25 which fuelled underlying political uncertainty as Andalucia warned that it might seek a EUR4.9bn central-government loan. In addition, there was a wider than expected budget deficit for the first eight months of the year as revenue fell 4.5% to give a deficit of 4.8% of GDP. The violent protests in Spain against austerity also had an important impact in undermining confidence. There were also expectations that the ECB bond-buying plans could face a legal challenge which could disrupt the central bank plans. The joint statement from Germany, Finland and the Netherlands that ESM funds should be used for difficulties that occur under new supervision, but that legacy assets were the responsibility of national governments also had an important impact in undermining confidence. There was also further uncertainty surrounding the Greek economy and political conditions with reports that the government would formally apply for a two-year extension for loan programme. There were further concerns surrounding the Greek outlook as a 24-hour general strike took place. Economic fears also remained a key focus, especially with the Bank of Spain’s monthly report warning that there was a further significant economic contraction during the third quarter. Market confidence quickly deteriorated as Spanish bond yields rose to around the 6.0% level. There was a weaker than expected reading for Euro-zone money supply growth and bank lending which maintained unease surrounding a deepening recession. Spain remained a very important market focus as the government presented its 2013 budget proposals. The administration is aiming to cut the deficit to 4.5% of GDP next year from a projected 6.3% this year with EUR40bn of spending cuts. The government also announced that the social security fund would be tapped for around EUR3bn to underpin current spending. There was an initial negative market reaction to the proposals with a lack of confidence in both the budget and economic outlook with the Euro retreating to test key support in the 1.2825 region. The Euro recovered rapidly with speculation that the government was putting in place the necessary structural framework for a sovereign aid package. There was still uncertainty surrounding the banking sector with stress-test results due to be presented on Friday.  Political tensions also remained high as the government pledged to block and independence referendum in Catalonia Yen: There are likely to be important concerns surrounding the growth outlook, especially with the industrial sector facing renewed pressure. The Bank of Japan will remain under strong pressure to enact even more quantitative easing, especially with demands for the yen to be weakened.  There will be fears surrounding the global growth outlook and there will also be potential capital inflows into Japan given a lack of confidence surrounding the Euro-zone and US fundamentals. Given these pressures, the yen can remain broadly resilient. The yen proved broadly resilient during the week as a lack of confidence in major alternatives helped provide underlying support as the dollar dipped below the 78 level. The yen dipped weaker following a statement from Bank of Japan member Sato that it won’t hesitate to ease monetary policy further if necessary. There was also still underlying caution over the potential for Bank of Japan intervention. The latest industrial production data was weaker than expected with a 1.3% decline for August and the PMI manufacturing index remained below the 50 level, although  the latest retail sales data was stronger than expected. The data overall maintained pressure for further monetary action from the Bank of Japan. The dollar remained on the defensive and dipped to test support below 77.50. Sterling There will be expectations of an improved third-quarter economic performance, but there will also be unease that the economy will falter again during the fourth quarter, especially with weak Euro-zone conditions. There will be speculation that the Bank of England will sanction further quantitative easing in November. For now, in relative terms, Sterling should be able to gain some protection from the aggressive monetary action elsewhere. The latest balance of payments data is likely to unsettle medium-term confidence and Sterling will still find it difficult to gain strong support, especially with risk appetite liable to fade. Sterling held a firm tone during the week as it challenged 5-month highs around 1.63 against the US currency. There were reports that the UK could receive around GBP3bn in farming-related subsidy payments this week which provided some underlying Sterling support. There were still concerns surrounding the underlying UK fundamentals, especially after the weaker than expected government borrowing data. The latest Bank of England credit conditions survey reported an improvement in consumer conditions, but there was also evidence of further deterioration in the business sector. The CBI retail sales survey was marginally stronger than expected at +6 for September from -3 previously and there was an element of optimism surrounding October, although the underlying impact was limited. UK GDP for the second quarter was revised to -0.4% from -0.5% previously which provided some net support for Sterling.  In contrast, the latest current account data was substantially weaker than expected with a shortfall of GBP20.8bn from a revised GBP15.4bn the previous quarter. Although the immediate impact was limited, there will be unease surrounding the medium-term currency implications. Swiss franc: The expansionary monetary policies in the G7 area will maintain the potential for defensive capital inflows into the Swiss franc and the currency will also gain important support from fears surrounding the medium-term Euro-zone outlook. Although the National Bank has managed to push the Swiss currency away from the 1.20 minimum level, there will be speculation that the minimum level could be subjected to renewed pressure. There is, therefore, still the potential for capital controls over the next few months. The Euro managed to find support in the 1.2080 area against the franc and rallied back to the 1.21 area as wider selling pressure on the crosses eased. Erratic trading was again a feature against the US dollar with the franc eventually advancing towards the 0.9360 area. The Spanish budget will reinforce speculation over a bailout for the country, but is also liable to reinforce longer-term fears surrounding the outlook which will maintain the threat of defensive capital inflows into the Swiss franc. Australian dollar The Australian dollar retreated to lows near 1.03 against the US dollar during the middle of the week before rallying again as TH US currency was unable to hold gains. There were continuing fears surrounding the global growth outlook which sapped demand for the Australian currency. These fears were offset by monetary action already taken and by expectations that there will be further measures to support global demand, especially from China. The domestic influences were relatively limited, although there were expectations that the Reserve Bank of Australia would cut interest rates during the fourth quarter. Continuing vulnerability in the Chinese economy is likely to undermine commodity prices is curb any significant Australian dollar gains given domestic vulnerability. Canadian dollar: The Canadian dollar weakened during the week as a whole, although there was support in the 0.9850 region against the US currency. The Bank of Canada near-term monetary stance continued to provide underlying support for the Canadian currency, but there were underlying concerns over the housing sector. The Canadian currency was also hampered by general concerns surrounding the global growth outlook and potential downward pressure on commodity prices. It will be difficult for the Canadian dollar to make significant gains given persistent global growth doubts even with the Bank of Canada holding policy steady.

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