Wednesday, January 19, 2011

Currency Roundup | FX Market Fundamental Analysis | 19 January 2011

Currency Roundup | FX Market Fundamental Analysis | 19 January 2011

USD : The dollar fell initially as risk appetite trends gained a boost from a successful Portuguese debt auction where the 12-month note sold for lower costs then those in December, showing increasing confidence in the euro-zone periphery and pushing up the value of the euro and the pound. Later in the day the dollar did post a recovery of sorts, however, following the release of data showing possible green shoots in the property market with Building Permits increasing 16.7% which was a spike well above the 1.8% expected and the -1.4% posted last month. Although excessive optimism was tempered by another housing market metric which showed contraction, which was Housing Starts, which fell to 529k whilst they had been 553k last month and expected to fall to 550k this month. The outlook for the dollar remains unclear with contradictory data and uncertainty. At midday GMT the dollar traded at $1.3457 to the euro and $1.5992 to the pound.

EUR : The euro continued to rally after a successful Portuguese bond auction unexpectedly saw yields fall compared to last month, showing some confidence had been restored in the nation which came closest to needing a bailout recently. A total of €750bn in 12-month bills were auctioned, yielding 4.029%, which compares with the 5.281% offered back in December. The drop in borrowing costs helped reduce Europe’s risk profile and contagion fears although earlier this morning the Portuguese 10-year note had exceeded 6.95% highs after the news from the euro-zone finance minister’s conference in Brussels that the European Finance Stabilization Fund (EFSF) would not be increased. It is feared the fund is too meagre to cope with a bailout of both Portugal and Spain but Germany and France, two of the largest members in the bloc vetoed an enlargement. There is not the political will in these countries to risk more security to bailout indebted fellow member states. Despite the temporary effect on the bond market the news, however, failed to curb the euro’s rise as it was more-or-less what had been expected prior to the conference when Germany had already made it clear it would fight an increase in the EFSF. On the economic docket, the data came out worse than expected with a widening EU Current Account deficit and a further drop in Construction Output. At midday GMT the euro traded at $1.3457 to the dollar and £0.8415 to the pound.

GBP : The pound faltered, falling in some pairs whilst against the dollar it maintained its rise. Employment figures out today painted a less than perfect picture of economic wellbeing in the UK but neither were they bad enough to undermine the steadily increasing belief that the BOE will increase rates to combat inflation sooner rather than later. Jobless Claims actually fell by 4.1k compared to 3.2k last month and better than the 0.0k consensus change. The Claimant Count Rate, however, stayed the same at 4.5% whilst the ILO unemployment rate held at 7.9%. Average Weekly Earnings also stayed the same at 2.1% when a 2.2% rise had been expected. The figures may suggest that the inflationary CPI reading yesterday was less as a result of economic overheating as this would have shown in increased earnings and employment, but more due to the recent volatile rise in commodity prices being passed on to the consumer. This may have actually had the effect of reducing the probabilities of the BOE introducing a rate hike in the short term a little, although judging from sterling’s continued strength the overriding belief is still that the increase will come. Look out for a short term reversal on the pound. At midday GMT the pound traded at $1.5992 to the dollar and ¥131.49 to the yen.

JPY : The yen traded mixed overall as haven demand diminished but economic data showed signs of growth. Tokyo Condominium Sales YoY December rose by a massive 40.3% (compared to 0.8% last month) whilst earlier the Tertiary Industry Index data also showed an above expectation rise to 0.6% when 0.5% had been forecasted. A better than expected performance by the Portuguese 12-month note at auction, however, reduced Europe’s risk profile and led to an increase in general risk appetite, but the yen faired better than the dollar which took most of the punishment, falling heavily in most of its pairs. At midday GMT the yen traded at ¥82.23 to the dollar and ¥110.66 to the euro.

by Joaquin Monfort, Analytical expert , Forex4You © 2011

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