Weekly Forex News January 20th 2013

Weekly Forex News January 20th 2013


There are some important points to note about
last week’s market developments. First off it’s a surprise that the dollar
ended the week as the strongest currency, making gains against all other major currencies. The news that the Republican Party agreed
to lift the debt limit for three months gave the greenback a late boost before the week
ended. Secondly, risk appetite continued to drive
stock markets last week and sent the S&P 500 and FTSE 100 to five year highs. But the risk sentiments were not seen in commodity
currencies. Instead, steep selloff was seen in the Canadian
dollar against the U-S dollar before weekend on the above news. Thirdly, the Euro remained strong against
other European majors and in particular against the Swiss Franc. Key medium term resistance levels in Euro
Swiss Franc were taken out as funds continued to flow back to the Eurozone. However, against the dollar, the Euro struggled
to extend recent gains. Fourthly while the yen’s downtrend continued
last week, it has lost some momentum ahead of this week’s Bank of Japan meeting. Fifthly, the Sterling was the second weakest
currency, just slightly better off than the swiss franc and closed lower against the yen. Looking ahead, japanese yen’s weakness is
still expected but there could be some notable rebound if the bank of japan disappoints markets
this week. By disappointing, we mean the bank not delivering
what had been priced in, that is a modest expansion of stimulus and doubling of the
inflation target to 2%. European majors are mixed as the sterling
was rather weak while the Euro has been resilient. A short term top looks formed in Euro Swissy
already and we’d probably see some sideway trading this week. Euro Sterling though, has accelerated it’s
recent rally. However, note that Sterling Dollar will face
near term support at 1.5827 this week and we might see a rebound. Meanwhile, news on the debt ceiling would
likely give the dollar an extended boost in the early part of the week. While the Canadian dollar was relatively weaker,
the Aussie could catch up any time should the dollar continue to pick up strength. Overall, we think it’s a bit risky to add
to yen shorts in the early part of the week. Even though the Euro could be softer against
the dollar, we’d tend not to short them. Our preference would be on long U-S Dollar
Canadian Dollar and to a lesser extend short Aussie Dollar U-S Dollar this week. And another choice would be going long Euro
Sterling. In the U-S it’s reported that after a close
door negotiation, House Republicans agreed to raise the so called debt ceiling for three
months. The deal was under a condition that both House
and Senate will pass a budget within the the time to clear the way for long-term deficit
reduction negotiations. Nonetheless, that’s a move that would significantly
reduce the threat of a U-S government default in the coming weeks. The Fed’s Beige Book covering the period from
November 14th to January 4th indicated that economic activity in all 12 districts showed
‘either modest or modest’ expansion. The tone of this report was more positive
than previous ones. More importantly, it suggested that recovery
in the housing market is underway and this would in turns lift the prospect of other
sectors in the economy. News out of Europe was mixed: a Successful
Spanish bond auction addes further confidence to stability in the Eurozone. And such confidence is a main driver in the
reverse safe haven flow from the Swiss Franc back to the Euro, which was clearly reflected
in recent strength in Euro Swissy, as well as Euro Sterling. However, the Euro hit some resistance towards
the end of the week as the I-M-F said that Greece: the center of the Eurozone debt crisis,
would face a financing gap of 5.5 to 9.5 billion euros for 2015 and 2016. Also, there were concerns ove the Eurozone’s
economy itself, in particular after Germany reported overall annual growth was pushed
further down to a mere point 7%, compared to 3% in 2011 and 4.2% in 2010. The European Central Bank said in it’s monthly
bulletin that “more recently several conjunctural indicators have broadly stabilized, albeit
at low levels, and financial market confidence has improved significantly.” And, “later in 2013 a gradual recovery should
start.” It also noted that the “accommodative monetary
policy stance, together with significantly improved financial market confidence and reduced
fragmentation, should work its way through to the economy, and global demand should strengthen.” Also the E-C-B urged: “further structural
reforms should be rapidly implemented to make the euro area a more flexible, dynamic and
competitive economy.” Taking about Euro Swissy, it should be noted
that the current weakness in the Swiss Franc might prompt the Swiss National Bank to reverse
some of it’s Euro purchases for protecting the 1.2 floor to lock in profits. Or at least, they might make use of the opportunity
to diversify its reserves. We don’t expect that to reverse the Euro Swissy
near term up trend. But if that happens, the upside momentum might
be dampened a bit and there could even be some brief retreat. In the U-K, Bank of England governor King
said to a parliament committee that “it is at a point where the economy is operating
well below full capacity, the banking system is in a stretched position and we are clearly
struggling to find instruments to ensure an economic recovery.” King also noted that “the main problem of
the euro crisis is the ability to find a way of financing current account and trade deficits”. And, the so called banking union could just
enable “countries which have banking systems that need to be recapitalized to have that
recapitalization financed by other members of the euro area”. Meanwhile, King also said while the E-C-B
calmed markets, it can’t “resolve the underlying real challenges of either moving to a transfer
union or finding a way to take sufficiently effective measures to change the competitiveness
of the member countries of the euro area” and a banking union isn’t the answer neither. A prepared speech by Prime Minister Cameron
raised the “danger” that the E-U will fail and the U-K would “drift towards the exit”. Cameron intended to set out a “positive” vision
for the E-U’s future where the -UK would play a “committed and active part”. But he also warned that the E-U were undergoing
“fundamental change” and there is ” a lack of democratic accountability and consent”
that is “felt particularly acutely in Britain.” The Bank of Japan meeting will be the major
focus this week. There were a lot of official comments about
the Japanese yen last week. But what matters most is what the bank will
actually do. Markets are expecting additional stimulus
and a doubling of the inflation target to Abe’s 2% level. Also, the government and Bank will issue a
joint statement after the meeting. It should be noted again that markets should
have priced in these expectations already. And, the bank would need to do something strong
to impress the markets for giving additional fuel for a rally in yen crosses. That means moves like open-ended asset purchases
or removal of the point 1% deposit rate. Otherwise, we might see a pull back in yen
crosses after the news this week. Aussie dollar was weighed down by weaker than
expected job data. The job market contracted by 5,500 in December
compared to expectations of 4,500 growth. The data series has been rather volatile with
a pattern to oscillate from month to month between upbeat and downbeat. But even though November’s upbeat data was
revised further up from 13,900 to 17,100, the two month combined total was disappointing
due to December’s contract. The Unemployment rate also rose to 5.4% as
expected. Recently released forward-looking Australia
and New Zealand job advertisements dropped for a tenth straight month in December, raising
the concern that job markets will remain weak down under. And, unemployment could actually surpass the
Reserve Bank of Australia’s projection of around 5.5% by mid year and prompt further
rate cut from the central bank. Chinese Q4 G-D-P rose 7.9% quarter on quarter
versus expectation of 7.8% quarter on quarter. Also, that’s an improvement over Q3’s 7.4%
and was the first pickup in two years. The data is seen as a sign of strength that
would carry on into Q1 and Q2 this year. The World Bank sharply lowered its 2013 global
growth forecast to 2.4%, compared to prior projections of 3%. That’s just a slight improvement from 2.4%
in 2012. The World bank noted that a global recovery
is expected to be “closer to the end of the first quarter and into the second quarter
of 2013, rather than beginning a little earlier.” It warned that the “global economic environment
remains fragile and prone to further disappointment” even though risks are less skewed to the downside
now. And, it noted that policy uncertainty in US
has already dampened growth and warned that Should policymakers fail to agree such measures,
a loss of confidence in the currency and an overall increase in market tensions could
reduce U-S and global growth by 2.3 and 1.4 percent respectively.” For advanced economies, growth is expected
to be very weak at 1.3% in 2013 as weighed down by austerity, high unemployment and sentiments. That’s a sharp downward revision from June’s
forecast of 1.9%. Growth is then expected to recover slightly
to 2% in 2014 and 2.3% in 2015. The U-S is expected to grow 1.9% in 2013,
the4 Eurozone to contract point 1% and Japan to grow by 1.5%. For developing countries, growth is expected
to be the slowest in a decade at 5.5% in 2013, also revised down from June’s projection of
5.9%. Growth is then expected to pick up to 5.7%
in 2014 and 5.8% in 2015. China’s growth is expected to rise to 8.4%
in 2013 then slow to 7.9% by 2015.

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