Tuesday, February 1, 2011

Currency Roundup | FX Market | Fundamental Analysis | 1 February 2011

Currency Roundup | FX Market | Fundamental Analysis | 1 February 2011

USD : The dollar weakened as risk appetite remained strong and continued to sell off even in spite of a better than expected increase in Manufacturing ISM to 60.8 in January from 58.5 in the previous month. Other scheduled event risk this afternoon included Construction Spending which fell more than expected by -2.5% and Consumer Confidence and Vehicle Sales which are released latter at 22:00 GMT. Overall the dollar is under pressure at the moment. At midday GMT the dollar traded at $1.3759 to the euro and $1.6109 to the pound.

EUR : The euro rallied following positive data showing a rise in manufacturing, increasing inflation and lower unemployment. German Manufacturing PMI increased from 60.2 to 60.5 in January whilst unemployment there fell by 13k. Euro-zone PPI increased by 5.4% YoY and 1.0% in December compared to only a 0.4% rise in the month before and well above estimates of a 0.4% rise. The common currency was further bolstered by the news that the European Financial Stability Fund will be given increased powers to directly purchase government debt so as to aid struggling members to secure better terms for their debt, in what could mark the first of several initiatives to enhance the EFSF’s remit. At midday GMT the euro traded at $1.3759 to the dollar and £0.8540 to the pound.

GBP : The pound strengthened today, breaching the 1.60 mark, despite mixed data as investors concentrated on positive manufacturing figures and speculation heightened that the BOE will normalize monetary policy going forward as the economic docket supports a growth and recovery perspective. Manufacturing PMI reported an above 60 reading of 62.0 in January compared to only a 58.7 reading in the previous month and given the expectations of a fall to 58.0 this was viewed as particularly impressive. Credit, lending and Money Supply data painted an ambivalent picture: Consumer Credit increased from -0.1bn to 2.0bn whilst Money Supply only increased by 0.3%, which was less than the 0.4% last month and decreased further YoY from -1.2% to -1.5%. Nevertheless coupled with the recent voting patterns at the MPC and the technical breach of 1.60 sterling is in a very strong position to consolidate a gain. At midday GMT the pound traded at $1.6109 to the dollar and ¥131.40 to the yen.

JPY : The yen traded mixed as risk appetite trends favoured less safety linked currencies such and deflationary fears persisted after data showed yet more indications of a slowing down in the economy. Labour Cash Earnings fell from 0.2% to -0.4% YoY with expectations of a 1.0% increase, showing that take home pay for the average Japanese citizen is falling not rising and this will have a knock-on effect on the amount they purchase, which will directly affect prices in shops and inflation. A report released today by the IMF further weighed on the yen after it asserted that Japan’s national debt could reach the astronomical amount of 250% of GDP by 2020 unless the government took drastic measures such as increasing the sales tax by 5%. However such a move has always proved politically disastrous in the past and the government is remaining vague about its intentions. The downgrade by S&P last week was partly due to a lack of faith in the ruling party’s ability to manage the nation’s finances – the latest report piles on further pressure in this respect so further downgrades may not come as a surprise. At midday GMT the yen traded at ¥81.58 to the dollar and ¥112.24 to the euro.

by Joaquin Monfort, Analytical expert , Forex4You © 2011