Focus goes on policy decisions and growth
Major policy announcements and growth readings last week continued to dominate the moves behind major currencies on the Forex market. Investors continue to discern data and policy announcements for clues on future direction – yet new releases do not always make a future outcome much clearer.
Throughout last week the eurozone nations’ ability to tap the liquidity markets remained in the limelight and market stress continued to reflect into high yields, particularly for Spain and Italy. The benchmark Spanish 10-yr debt, just off recent six per cent levels, was unable to break below 5.70 per cent throughout last week. A series of Italian and Spanish debt auctions, by and large, reflected a relatively stable demand but higher costs for the issuing nations.
On the data front eurozone sentiment continued to slip lower; a range of sentiment indicators reported for the month of April showed that actual figures continued to worsen compared to previous and also when compared to consensus figures. A series of downgrades from Standard & Poor’s also continued to bleak investor sentiment. Last Friday S&P downgraded Spain by two notches down to BBB+ on the last rung of Investment grade. On Monday of this week S&P also announced it would be downgrading 16 Spanish banks citing heavy exposure to real estate loans. Reports issued earlier this week also showed that the Spanish economy entered its second recession since 2009.
The euro continued to attempt new highs against the USD despite these events, and a repetitive cycle of corrections each time new highs were reached. The EUR/USD embraced a new one-month high of 1.3278 by the time of writing. An unclear comprehensive assessment on where the Fed’s policy stands and a scaling back of the expectations for US economic data helped the euro hold the lead against the US dollar.
Last week the Fed’s FOMC decided to leave rates unchanged; well in line with expectations but the real interest was with regards to growth and inflation forecast and hints on upcoming accommodative policy if any.
The Fed upwardly revised its GDP growth and inflation forecasts and was more optimistic on the outlook for unemployment. Seven less dovish committee members of the FOMC envisaged a rate hike by 2014; yet it was finally Ben Bernanke who had the last word – and he managed to neutralise the dollar bulls that started to line up ahead of his press conference. Bernanke’s comments led investors to understand that the Fed remained prepared to use any of its tools to provide support to the economy should the need arise. Suggesting that while QE3 is not round the corner it remains very much on the table.
US economic data last week was softer than expected; weekly jobless claims dropped by much less than had been expected and claims from the previous week were revised higher. A better test for the labour market however will tomorrow when US payrolls data for the month of April is expected to hit the wires.
Last Friday US annualised GDP (Q/Q) reading for the first quarter of 2012 came out at 2.2 per cent slipping lower from the previous three per cent and disappointing expectations for 2.5 per cent. The softer GDP data also coincided with a higher reading for personal consumption; that raised concerns of softer growth twinned with untamed inflationary pressures – which, if had to become a reality, would only complicate matters for the central bank.
Last Friday the Bank of Japan also opted for keeping the status quo on its policy rate but decided to expand their asset purchase program by 10 trillion yen which was in the analysts’ expected range. Despite the BoJ’s move towards further easing the JPY gained support as growth concerns continued to linger. At the time of writing the USD/JPY is marking fresh nine and a half week lows as it dips below 80.0 levels.
GDP figures from the UK late last week also disappointed investors that were hoping that the UK would manage to avert a recession. The UK economy shrank by 0.2 per cent in the first quarter of 2012 a second negative consecutive reading after a 0.3 per cent contraction in the fourth quarter of 2011 – putting the UK back into a technical recession.
Despite this data at the time of writing the GBP/USD has reclaimed 1.6300 levels; levels last seen back in August 2011. Throughout the current week we expect the currency pair to find resistance, to the upside, at 1.6331/1.6407; while to the downside 1.6128/1.6001 should cap downward moves in price.
Upcoming FX key events:
Today: EZ ECB Interest Rate Decision & News Conference, EZ PPI & US ISM Non-Manufacturing PMI.
Tomorrow: US Change In Non-Farm Payrolls, US Unemployment Rate & EZ Retail Sales.
Technical key points:
EUR/USD is bearish, target 1.2500, key reversal point 1.3750.
EUR/GBP is bearish, target 0.80, key reversal point 0.8550.
USD/JPY is bullish, target 85.00, key reversal point 78.00.
GBP/USD is bullish, target 1.6300, key reversal point 1.5900.
USD/CHF is neutral.
AUD/USD is bearish, target 1.015, key reversal point 1.07.
NZD/USD is bearish, target 0.80, key reversal point 0.8350.
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Mr Muscat is a senior trader at RTFX Ltd.