Weekly Forex Commentary

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Weekly Forex Commentary:

Weekly Market Analysis

The Federal Reserve move to provide additional quantitative easing will
tend to keep the US dollar on the defensive and also help underpin risk
appetite. There will also be 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 further concerns surrounding
the Chinese outlook.

Key events for the forthcoming week

Date
Time (GMT)
Data release/event
Monday September 24th
08.00
Germany IFO index
Thursday September 27th
12.30
US durable goods orders


Dollar:

The Federal Reserve’s third round of quantitative easing will continue to
have an important over the next few weeks and will be important in curbing
underlying dollar support, especially with unease over the longer-term
consequences. There will also be fears surrounding fiscal policies next year
which will unsettle sentiment. Although growth conditions may remain
generally fragile,  the US economy should still be able to out-perform
Europe which will provide some degree of protection. An overall lack of
confidence in the global growth outlook will also help protect the US
currency. Dollar weakness is also likely to be resisted by other major
economies which could lead to a period of stalemate.

The dollar was able to secure some degree of recovery during the week as
there were still important reservations surrounding the global economy with
the Euro advancing to a peak near the 1.29 area before dipping lower again.

The US NAHB housing index strengthened further to a six-year high of 40 for
September from 37 the previous month, maintaining the strong improvement
from lows below 15 seen last year. The current account deficit narrowed to
US$117bn for the second quarter from a revised US$134bn the previous quarter
while there was an improvement in net long-term capital inflows to US$67bn
for July which did not have a significant impact. Regional Fed President
Lacker reinforced his opposition to the latest Fed move given the potential
inflation impact.

The latest US jobless claims were slightly higher than expected with a
figure of 382,000 in the latest week from  a revised 385,000 previously
while the latest PMI manufacturing index was unchanged at 51.5. There was an
improvement in the latest Philadelphia Fed index to -1.9 from -7.1
previously with gains in new orders.

There were further comments from regional Federal Reserve officials during
the day with Kansas City President George adding to the criticism of the
additional Federal Reserve quantitative easing from Lacker. Rosenberg and
Fisher. Divisions within Fed officials will tend to increase unease
surrounding the long-term policy implications of the Fed actions even if the
near-term implications are limited.

Euro:

There will still be an important sense of relief surrounding the ECB
actions to promise peripheral bond buying. There are, however, important
uncertainties surrounding the plan and political tensions will increase
rapidly if there is no move by Spain to accept a bailout package.  There
will be strong pressure on the Spanish government from Euro-zone officials,
but there will also be domestic resistance. Even if Spain does apply for
support, there will be fears that the Spanish and Italian economies will
remain in recession which will reinforce negative medium-term confidence.
The ECB will be under pressure to deliver further monetary support which
will limit the scope for Euro gains.

The Euro corrected weaker with markets fretting over uncertainties
surrounding the Spanish outlook compounding pressure for a correction after
strong gains.

The German ZEW index improved to -18.2 from -25.5 the previous month
although the institute was still generally cautious over the outlook despite
some improvement in optimism surrounding the outlook. Markets were slightly
disappointed that sentiment has not improved further following the ECB
bond-buying plans.

The French PMI indices were substantially lower than expected and, although
there was a recovery in the German releases, the net tone was negative. The
composite PMI index weakened to a fresh 39-month low as the services sector
deteriorated. The data also increased unease over a widening disparity
between Germany and peripheral economies which further eroded sentiment.
Italy also downgraded its official 2012 growth forecast to -2.4% from -1.2%,
maintaining fears surrounding the outlook.

There was solid demand in the latest Spanish bond auction as yields fell
and there was firm bidder support.  Although the result did provide initial
Euro relief, there were fears that any reduction in yields would encourage
further delays in Spain seeking a sovereign bailout. The EU Commission also
expressed major doubts that Spain would be able to divert any surplus funds
from the EUR100bn banking-sector support package to provide support
elsewhere. There were further tensions surrounding Catalonia with fractious
negotiations with the central government over budget targets.

Yen:

The Bank of Japan action to boost quantitative easing will have some
negative impact on the yen. The yen will still gain important protection
from the aggressive monetary policies elsewhere as most central banks look
to resist currency appreciation.  The yen will gain protection if global
growth fears fail to ease significantly and there will be the potential for
Bank of Japan intervention if the yen strengthens significantly. In this
context, volatility is liable to increase further in the short-term.

The yen weakened sharply following the Bank of Japan policy decision to
lows around 79.20 before regaining ground equally rapidly as the dollar
retreated back towards the 78 area with the Euro also retreating sharply.

Following the latest policy meeting, the central bank announced a further
increase in its main asset-purchase programme of JPY10trn to JPY55trn with
the total programme of JPY80trn which was a bigger boost than expected.  As
expected, there was a downgrading of the economic assessment with comments
that Japanese growth had come to a pause. There were further concerns
surrounding tensions with China and the net impact was to weaken the yen
sharply as it retreated to the 79.20 area against the dollar.

There were doubts whether the Bank of Japan actions would be effective in
weakening the Japanese currency, especially with the Fed quantitative easing
and expectations of further ECB action.  Concerns over the Asian economy
continued following another sub-50 reading for the China HSBC manufacturing
PMI release and the dollar retreated to near 78 as equity markets declined.

Sterling:

Overall confidence in the economy will remain fragile in the short-term with markets demanding a run of more favourable data before concluding that there is a significant domestic recovery.  There will be expectations that the Bank of England will sanction further quantitative easing within the next few months. International considerations will continue to have an important impact and there will be Sterling protection from expectations that there will be further quantitative easing elsewhere.  The UK currency will still find it very difficult to make much headway. Sterling held firm against the US currency as it tested four-month highs and was also able to test resistance beyond 0.80 against the Euro. Sterling continued to gain some residual support from expectations that central banks elsewhere would continue to take aggressive action to boost monetary policy The headline consumer inflation rate edged slightly lower to 2.5% for August from 2.6% the previous month while the core rate declined to 2.1% from 2.3%. The data helped ease fourth-quarter inflation concerns to some extent when the headline rate is liable to be inflated by higher energy and fuel costs. There were no major surprises within the latest Bank of England MPC minutes with unanimous votes for interest rates and quantitative easing to be left on hold at the latest meeting. The MPC remained very uneasy over the growth outlook, especially with continuing fears surrounding the Euro-zone, although these fears may have been eased slightly following the ECB meeting. There were also concerns surrounding the inflation outlook, but the evidence suggests that further quantitative easing will be considered over the next few months. The latest retail sales data was broadly in line with expectations with a 0.2% headline decline for August and a small downward revision to the annual data. The latest CBI industrial orders survey recorded an improvement to -8 from -21 previously. Bank of England Governor King expressed some optimism that the economy was starting to recover. Principal attention focussed on the debt comments with remarks that weaker global growth would make it acceptable to miss budget deficit targets and this will increase speculation that there would be a policy shift. Swiss Franc: The decision by the Federal Reserve and Bank of Japan to embark on further quantitative easing will tend to underpin the Swiss franc in the short-term.  Although underlying Euro-zone fears have eased slightly, there are still major uncertainties over the outlook and only a small deterioration in sentiment could trigger a renewed surge of funds into the Swiss currency. The National Bank will continue to intervene aggressively if required.  On a medium-term perspective, there is still the potential threat of capital controls. The dollar pushed to a high just above 0.9350 against the franc before edging back. The Euro hit resistance above 1.2150 against the Swiss currency and weakened back to below 1.21 as Euro optimism faded. National Bank member Danthine welcomed the franc’s weaker tone against the Euro, although he also stated that markets needed to be convinced over the ECB bond-purchasing plans and that further weakening would depend on Euro-zone trends. He reiterated that the bank would maintain the 1.20 minimum level with the utmost determination. The latest ZEW index was little changed for the month at -34.9 which maintained unease over the growth outlook as economic conditions still challenging. Aus Dollar: The Australian dollar was subjected to renewed selling pressure during the middle of the week with a retreat to lows below 1.04 against the US currency. There were further concerns surrounding the global growth outlook which curbed demand for the currency and the Reserve Bank was also generally cautious over the outlook as it stood prepared to cut interest rates if necessary. The global trend of further monetary stimulus curbed selling as the Bank of Japan also expanded quantitative easing following the Federal Reserve move and the Australian currency was able to edge higher later in the week. Despite Fed action, unease surrounding the regional economy and weakness in key commodity prices is likely to curb any significant Australian dollar recovery. Canadian Dollar: The Canadian dollar was unable to extend gains beyond the 0.97 level against the US currency during the week and retreated to lows beyond 0.98 as oil prices were subjected to heavy selling pressure.  The Canadian dollar proved broadly resilient and moved higher later in the session. There were no major domestic developments with the Canadian currency still gaining some underlying support from expectations that the Bank of Canada would not sanction additional monetary stimulus. It will be difficult for the Canadian dollar to make much further headway given persistent global growth doubts even with the Bank of Canada not relaxing policy.