The US dollar extended its gains at the end of last week against its major rivals in what was an exceptionally volatile week for currency markets. The dollar index hit its highest level since early August of last year, as the greenback rose to a fresh three-month high against the euro and to its highest since August 2009 versus the yen, at the start of this week.
The Bank of England will likely extend its asset purchases programme
The greenback, which is currently on one of its longest winning streaks on record, since early February, is up more than three per cent against the euro over the last month, more than 2.5 per cent against the yen and above five per cent against the British pound.
Last week, following the European Central Bank Governing Council decision and president Mario Draghi’s news conference, the single currency rallied as the latter eased some concerns over the European economy saying that it will stabilise through this year. Draghi reiterated his belief that the euro area should “gradually recover” in 2013 and EUR/USD bounced more than a 100 pips to hit 1.3135 the following day. Its recovery was short-lived however after a surprisingly strong jobs report was released from the United States.
A report on Friday showed non-farm payrolls surged with US employers adding 236,000 jobs in February, with the jobless rate falling to a four-year low at 7.7 per cent from 7.9 per cent. Global equity markets rallied on the back of the data and the Dow Jones industrial average posted its fourth consecutive intraday and closing record highs.
European shares also rose and reached their highest levels in more than four and a half years. Despite the surge in risk appetite, EUR/USD plummeted to a three-month low following the jobs data, and fell to 1.2955 as forex investors perceived this news as further indications which may lead to the Federal Reserve ending its quantitative easing programme earlier than expected.
The single currency was also hurt by a credit rating downgrade of Italy on Friday. Fitch Ratings slashed Italy’s debt rating to BBB+ with a negative outlook from A-. At the start of the week, slumping economic data from China released over the weekend and political uncertainty from Italy looked certain to push the single currency to lower levels.
The common currency has so far shown resilience until the time of writing, and managed to keep its head above water. EUR/USD rose to a session high by 1.3074 on Tuesday. It received some life on optimism that Italy’s new government will maintain austerity measures and on Draghi’s re-affirmation that his untapped bond-buying programme, known as Outright Monetary Transactions, was still in place as an “effective” backstop.
The yen rose for the first time after a sharp five-day decline on Tuesday, lifted by remarks from an opposition lawmaker, who said he will oppose the new Bank of Japan deputy governor whom markets see as endorsing more monetary stimulus. The Nipponese currency was also buoyed by profit taking by long-term investors and hedge funds who took large bets against it. USD/JPY eased from a three and a half year high of 96.71 to 95.64 on Tuesday, but forex traders said speculation of more BOJ easing could keep any rebounds by the yen in check. USD/JPY rose sharply from 92.92 to 96.71 over a week as incoming BOJ Governor Haruhiko Kuroda hinted he is to launch new monetary easing measures as soon as he assumes office next week, rather than waiting for his first monetary policy meeting in the first week of April.
EUR/JPY also rallied sharply over the last days, and managed to reverse a sharp drop on February 25. The pair had dropped almost 700 pips as the political deadlock in Italy started, from 125.22 to 118.78 but recovered to an intraday high of 126.04 on Tuesday of this week.
The British pound extended its relentless decline at the start of this week. The cable continues to be weighed by expectations that the Bank of England will likely expand its asset purchases programme, as Britain struggles to revive its economy from a triple-dip recession.
The third recession since the financial crisis was well on the cards on Tuesday after slumping manufacturing and industrial output data, which fell 1.5 and 1.2 per cent respectively in January. GBP/USD fell to 1.4832, its lowest level since June 2010 while EUR/GBP rose to 0.8794, just shy of a 17-month high hit on February 25 by 0.8815.
Upcoming FX key events
Today: Swiss National Bank Interest rate decision, EZ Employment & US PPI.
Tomorrow: EZ CPI & US CPI.
Technical key points
EUR/USD is neutral.
EUR/GBP is bullish target 0.90, key reversal point 0.8579.
USD/JPY is bullish, target 99.0, key reversal point 83.90.
GBP/USD is bearish target 1.45, key reversal point 1.5300.
USD/CHF is neutral.
UD/USD is neutral.
NZD/USD is neutral.
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Emman Xuereb is a trader at RTFX Ltd.