Sunday, January 25, 2009

4.1 The Europeans are up against the wall: Forex Focus 26-30 January

The yen continued to strengthen as traders ran for cover. Sterling fell to record lows and some pondered if this could be the beginning of the end of the world’s oldest currency. The euro falls against the US dollar for the fourth consecutive week.

Last week’s action

The Euro opened to a double-whammy of bad news. On Monday, S&P downgraded Spain’s credit rating from AAA to AA+ and the European Commission revised its forecast for euro-zone GDP for 2009 from +0.1% (forecast in November 2008) to -1.9%. ECB President Jean-Claude Trichet confirmed the accelerating downturn and said the euro-zone’s economic outlook was “substantially” worse than what the bank had predicted only a month ago. The doom and gloom sent EUR/USD south and Tuesday morning saw it crash below 1.30 for the first time in 2009. It continued to fall as President Obama stepped up to swear in and any hopes of an Obama rally on Wall Street proved premature as the S&P 500 fell 5.3%, the largest decline on a Presidential inauguration day. Wednesday saw the pair trading within 1.28 and 1.30 as news that Portugal was the next in line to have its credit rating cut was counter-balanced by a recovery of sorts on the equities markets. US Treasury Secretary nominee Timothy Geithner gave the greenback a boost on Thursday when he opined that a strong dollar is in US interests. Thursday’s US data surveyed rising unemployment and a weakening housing sector and the dollar faltered. The euro fell further early Friday as euro-zone PMIs came in a tad less weak than expected but still at the lowest levels since records began in 1998. The pair fell to its week low of 1.2764, to recover to test 1.30 once more before closing the week at 1.2985.

Sterling had a dismal week falling to record lows against the yen and 24-year lows against the US dollar. The Royal Bank of Scotland set the tone for the week when it admitted that its 2008 losses could be as much as £28B: the biggest loss in British corporate history. This announcement came on the same day that the UK government’s latest financial sector rescue package was released to criticisms that it would not be effective. Cable dropped like a stone on this negative sentiment through Monday and the pair broke down key support at 1.4370 early Tuesday. Influential investor and financial commentator Jim Rogers added to downside pressure on the pound by urging the world to “sell any sterling that you might have” because “it’s finished”. Concern had also been growing that the UK ‘s credit rating could go the same way as Spain’s and this had brought further pressure to bear on the beleaguered currency. However, these fears might prove to be groundless according to Thursday’s report from influential credit agency Moody’s, who said that it did not think it would be revising its credit rating downwards. The UK finished the week with more bad news. Friday’s Q4 GDP saw the economy contract by 1.5% and the pound fell to 24-year lows of $1.3550, until recovering a little to close at 1.3804.

The yen strengthened against all the majors as another week of heightened risk aversion prompts more flight to the safety of the yen. After a spectacular fall as the US session opened on Wednesday, the dollar clawed back some ground due (perhaps) to the widely-held belief that the Bank of Japan will act to prevent the yen from strengthening too much. On Thursday, the Bank of Japan held interest rates at 0.1% and warned that Asia’s largest economy faces two years of recession and deflation. The bank stressed the need to get credit moving once more and announced plans to spend up to ¥3 trillion on commercial paper to achieve this. It also said it was considering buying corporate bonds with the same aim in mind. USD/JPY closed the week at 88.82

This week’s calendar notes

All eyes will be on the FOMC’s interest rate statement on Thursday. Interest rates are currently at 0-0.25% which makes a further cut unlikely. The statement should give us more of an idea of how far the Fed is ready to go to get the US economy moving. Other key US releases include news from the housing front with existing home sales on Monday and new home sales on Thursday. Thursday also sees durable goods orders numbers and the weekly unemployment claims. On Friday, we’ve got US advance GDP lined up, with the consensus forecasting a significant fall. The week also sees consumer confidence surveys from the Conference Board on Tuesday and the University of Michigan on Friday.
I’m watching German data this week as my guide to EZ action. Tuesday sees the release of the influential German IFO business surveys, Wednesday showcases German CPI and Thursday brings German unemployment change.
The UK ‘s Confederation of British Industry provides insight into UK consumer spending with their Realized Sales Index on Tuesday. On Thursday Nationwide publishes its House Price Index. I’ll also be looking out for MPC member and arch-dove David Blanchflower, who is speaking in Nottingham on Thursday. He voted for a full 1% cut at the MPC’s last outing and this speech may well prove of interest.

EUR/USD: support at 1.2500; resistance at 1.3280
GBP/USD: support at 1.3300; resistance at 1.4000
USD/JPY: support at 87.10; resistance at 90.00

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