Weekly Review ….Currency Markets Continue to Churn

 
Last week saw currency markets dominated by events in Libya and in particular the effect that this had on Oil prices.The Swiss Franc Japanese Yen and Canadian dollar all benefited from these events while the Euro tested higher levels against the US Dollar on continued belief that the ECB will signal concern on inflation next week.
The US Dollar could not really muster any strength whatsoever from risk aversion as equity markets sold off, although these recovered ground at the end of the week.All in all though there is still no clear picture on the US Currency and technically it offers no clear indications in the short term.Strong resistance in EUR/USD at 1.3860 was not tested and it may be that markets will await the ECB meeting for an assault on that level or maybe lower levels if the rhetoric is not seen hawkish enough.
Sterling seems to typify markets at the moment. One minute lifted by the prospect of Bank of England tightening and PSBR data the next sold off on GDP figures revised down a smidge for 4th QTR at -0.6. Data around the globe is certainly not conclusive either way unless you live in Germany.
I continue to believe that baring some huge development in the Middle East i.e. problems in Saudi Arabia which would  have massive global consequences, the next major event will be the EU summit in March. The key will be whether Germany assisted by France can come up with something that looks to be a permanent fix for the EURO block.Peripheral bond markets show no signs at the moment of believing in such a fix. Germany while keen to see the EURO block move to the next stage of economic and political union is concerned that this does not water down their own economic rules. Angela Merkal has not enjoyed the best of times losing support domestically in regional elections and seeing her ECB candidate Axel Weber stand down from the Bundesbank.She will not want to be seen as the Chancellor who dilutes the German way. In any event it is going to be a very very interesting month. If we are still lingering around these levels at the end of the month I will eat my hat.

Weekly Review- Dollar fails to push on

Forex Update

The surprise of the week was the Federal Reserves decision to raise the discount rate by 25 basis points to .75 %. This was of not a signal of Fed tightening but merely targeting the supply of reserves.
After an initial Knee Jerk stronger the dollar ended the week close to where it began. However, it may reinforce the growing view that the US is further advanced on the recovery road and thus the Fed will be the first to exit from stimulus measures.Markets are predicting some tightening by the Fed in the Autumn but some commentators are now predicting this may be earlier. The yen suffered particularly losing ground not only against the commodity currencies but also the Euro.

The long dollar and short Euro positions held by the currency markets seem to be stalling any further moves at the moment. A more corrective phase may ensue and perhaps some dollar bulls and euro bears will have to be squeezed out of positions before we see an assault on the lower 1.30s. It is quite possible we will see the Euro back at 1.40 against the dollar and nearer 130 against Yen before any further weakness.

The situation in Greece seems to have slipped to the back burner and may add to that corrective phase. However, this problem together with the other PIGS will run and run. Greece has major problems persuading its public to accept the budget cuts required. Although 70 % of the public appear to back the government many different factions appear not to want to bear their share. Ireland which is now held up as some example of facing up to its responsibilities, has a long long way to go.In general the Euro area growth will remain very sluggish merely exacerbating the deficit problems.If governments are forced to turn off the stimulus taps then we could see some real anxiety and likely the beginnings of even greater social unrest in some countries.

The UK statistics were all very disappointing. A first January deficit for PSBR (-GBP 4.3 Billion as apposed to expected -2.4 billion). Retail sales dropped 1.2 % in January and the CPI hit a whopping 3.5 %.
Sterling has not benefited from any of the recent Euro weakness. While the rating agencies are engaging in a wait and see what the election brings approach,the outlook for the pound remains vulnerable.
Indeed it is not difficult to envisage a scenario further ahead of another crisis for the pound.
Talk of tough action on the deficit is not good Electioneering and Gordon Brown in particular seems convinced that he can go on spending until the UK grows out of its problems.As I mentioned last week the mumblings of a possible hung parliament are growing. That leads to uncertainty as the UK has never faced that before and that could well add to the pounds woes.

The key for the coming weeks may well be the performance of the stock markets. A little spooked by the Fed the US markets are still hanging on to some big physiological levels. If we were to see further weakness in the Dow and S&P under the 10,000 and 1000 levels then things could get nasty and the dollar and yen could swing back into favour.However , as I mentioned in the short term it maybe these 2 currencies which suffer from a Euro pullback in the foreign exchange markets.