Weekly Forex News February 24th 2013

Weekly Forex News February 24th
2013
FCTO: Financial markets were rocked by the Federal Open Market Committee
minutes overnight as that triggered speculation that the Fed could tune or
stop the open-ended third round of quantitative easing sooner than
expected. The Dow Jones dropped 108 points to close below the 14000 level
at 13927. Gold was shot hard and dropped to as low as 1554 today as it
finally decisively took out the 1600 psychological level. The Dollar index
soared through the 81 level and is now heading to the 81.46 resistance and
above. In the currency markets the dollar was broadly higher overnight and
the strength carried on into the Asian session today. The Sterling is
particularly weak as weighed down by the Bank of England minutes released
yesterday and braking through an important medium term support level. The
Japanese Yen also rebounded strongly against most major currencies but
USD/JPY is still stuck in range.

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2013
The Dollar was boosted by the Federal Open Market Committee meeting
minutes last week. The minutes for the January meeting indicated that
policymakers were more upbeat on the US economic outlook as driven by
improved business confidence and household consumption. Discussions on
continuation of the asset purchase program remained hot. 'Several
participants' suggested that the central bank should be prepared to 'vary the
pace of asset purchases, either in response to changes in the economic
outlook or as its evaluation of the efficacy and costs of such purchases
evolved'. 'A number of participants' stated that the program should be
tapered or ended before occurrence of a substantial improvement in the
outlook for the labor market in accordance with cost-benefit assessment. Yet
'several' members warned of the potential costs of terminating and
decreasing asset purchases too soon while 'a few' participants cited past
experience of negative impacts on economic growth, employment, and price
stability of the premature ending of accommodative measures.

2013
Besides this there were opinions that the Fed might provide monetary
accommodation by 'holding securities for a longer period than envisioned in
the Committee's exit principles, either as a supplement to, or a replacement
for, asset purchases'.
The Euro was weighed down by a couple of factors. Italy's parliamentary
election on February 24th-26th was a major factor: Democratic Party's Bersani
is still the front runner but polls have been showing that former prime
minister Berlusconi's People of Freedom Party continues to close the gap.
Markets are expecting to see Bersani winning a majority in the lower house
and form a coalition with outgoing prime minister Monti in the upper house.
However markets are also complacent on the risk that scandal-mired
Berlusconi might return to power. The European Central Bank said that 356
banks will pay back 61.1 billion Euros on February 27th as early repayment of
the second three year long-term refinancing operation.


2013
That's way short of market expectations of 122.5 billion. Analysts said that
would be a sign that banks are not finding enough demand for credit inside
the Eurozone which indirectly indicates weak growth momentum.
While German ZEW and IFO were solid, Eurozone Purchasing Managers'
Indexes triggered much concern of a deepened recession in Q1.
Manufacturing PMI dropped slightly to 47.8 versus expectation of a rise to
48.4. Services PMI unexpectedly dropped to 47.3 versus expectation of a rise
to 49, hitting a three month low. The composite PMI dropped to a two
month low of 47.3. Germany's data was mixed with Manufacturing PMI rising
slightly more than expected to 50.1 but Services PMI dropped more than
expected to 54.1. However France's data was worrying: While Manufacturing
PMI rose to 43.6, it missed expectation of 43.9. Services PMI even dropped to
42.7 unexpectedly versus expectation of a rise to 44.5.


2013
Markit chief economist Chris Williamson noted that "a steepening rate of
decline in February is a disappointment, and suggests that the Eurozone is on
course to contract for a fourth consecutive quarter." And, "if it wasn't for
Germany, these would be really dire readings." Also, he said that the latest
survey suggested that the Eurozone economy would shrink 0.2% to 0.3% in
Q1.
European Commission revised GDP forecast to a 0.3% contraction in 2013
down from a prior projection of a 0.1% growth. Unemployment is expected
to jump further up to 12.2%, revised up from prior projection of 11.8%. The
European Commission warned that the job market is a serious concern and
the social consequences will also weigh on growth perspectives. Domestic
demand is not expected to improve until 2013. Seven states are expected to
contract this year including: the Netherlands, Italy, Spain, Portugal, Greece,
Cyprus and Slovenia.


2013
The Bank of England minutes unveiled that Governor Mervyn King, Paul
Fisher and David Miles favored adding more stimuli to boost the economy
but their proposal was rejected by 6 other members. The pound weakened
further while UK stocks and gilts rebounded after the report amid
expectations of more easing measures later in the year. Meanwhile, the
central bank indicated the possibility of using measures other than asset
purchases to boost the fragile economy in the future.


2013
Moody's downgraded the UK's debt rating from AAA to AA1 and changed the
outlook to stable. Moody's said that economic growth in the UK will be
"subdued" because of weak global activities, as well as a drag "from the
ongoing domestic public and private-sector Deleveraging process." It noted
that the period of sluggish growth "poses challenges to the government's
fiscal consolidation program, which we now assume will extend well into the
next parliament." Also the "rising debt burden" meant "a deterioration in the
shock-absorption capacity of the government's balance sheet, which is
unlikely to reverse before 2016." Chancellor of the Exchequer Osborne
responded in a statement that "we have a stark reminder of the debt
problems facing our country and the clearest possible warning to anyone
who thinks we can run away from dealing with those problems."


2013
The Yen recovered on news that Japan would not buy foreign bonds. Also
traders took profits on their short positions as they are waiting the
nomination of the next Bank of Japan governor. So far, prime minister Abe
has kept his mouth shut on whether former deputy Bank of Japan governor
Muto or Iwata would be nominated as the next Central Bank governor and
markets are still keenly awaiting the decision. It's believed that Muto is seen
by many as a less aggressive option and would be more accepted by the
opposition Democratic Party of Japan. Indeed the Democratic Party's shadow
finance minister Maehara said that they will not automatically reject Muto.
The Bank of Japan's minutes for the January meeting indicated that a few
members were reserved about the upgrades of the Japanese economic
outlook. Meanwhile two Bank of Japan members expressed that extending
the maturity of bank bond buys was an option.


2013
The Canadian dollar extended the recent decline against dollar after another
round of weak economic data. Retail sales dropped sharply by 2.1% in
December much weaker than expectation of 0.3%. Ex auto sales were also
weak and dropped point 9% versus expectation of a 0.1% rise. Consumer
price index moderated more than expected to 0.5% year on year in January
while core CPI also moderated to 1% year on year.


2013
The New Zealand dollar was weighed down by the Reserve Bank of New
Zealand governor Wheeler's comments today and recovery in Australian
Dollar New Zealand Dollar helped lift the Aussie mildly elsewhere. Wheeler
warned that "when the New Zealand dollar is coming under upward
pressure, we want investors to know that the kiwi is not a one- way bet."
And he noted that the Reserve Bank of New Zealand is "prepared to
intervene to influence the kiwi" even though "given the strength of recent
capital flows, we can only attempt to smooth the peaks." He said that the
G3's ultra loose monetary policies "are aimed at stimulating growth but also
have significant spillover effects," and many other countries are affected as
investors sought higher yields. Nonetheless, Wheeler noted that limitation of
intervention and a swiss-style cap isn't practical for the Kiwi. Finance
minister English also said last week that weakening the Kiwi through
intervention against large scale speculation is like being "out in the war zone
with a peashooter."

2013
The Reserve Bank Of Australia minutes released in the Asian session unveiled
that recent rate cuts have shown effective in boosting the economy while
benign inflation might trigger further rate easing. Regarding developments in
China and Japan, the minutes stated that "a wide range of indicators showed
that growth in the Chinese economy had stabilized, underpinned by public
spending and somewhat stimulatory financial policies. There had also been
indicators of stronger growth of domestic demand" in East Asia with the
exception of Japan. After brief weakness the Aussie was limited by
comments from the Reserve Bank governor Stevens that the central bank has
likely paused the rate cut cycle. Stevens said in his testimony to a
parliamentary committee that last year's cuts were already "substantial" and
rates are at an "appropriate level right now". He emphasized that there is
already a "good deal of interest-rate stimulus in the pipeline" and the board
judged that it was "sensible" to allow time for the rate cut to "do its work".


2013
Meanwhile Stevens noted that the Australian dollar exchange rate is
"somewhat" overvalued. But he warned that "you need to be pretty
confident that it is seriously over-valued, or the market is behaving in some
quite irrational way, before you would launch large-scale intervention."
Separately, Treasurer Swan said he's "beginning to see some of the signs of
stimulus flowing from monetary policy into some of the non-mining sectors
of the economy."


2013
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Weekly Forex News February 24th 2013

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