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• Weekly Outlook

Last week in review

Main theme driving the market.

The dearth of economic data at the beginning of the week left currency traders unable to derive inspiration from anything other then the ongoing European debt crisis, equity and commodity market movements as well as political uncertainties in the UK and its weak public finances. Comments from rating agencies fanned fears of downgrades not only in Europe, but also in the UK, placing sterling and the euro under selling pressure at the beginning of the week. As the week came to a close, both currencies managed to take back some of their losses, while adhering to relatively tight ranges. Markets ended the week looking forward to next week’s FOMC meeting. More robust currency fluctuations were seen in the Aussie and Kiwi dollar as well as the yen. Chinese economic data stoked fears of tighter policy, which could crimp the global economic outlook and prompted safe haven flows into the yen, while weak economic data in Australia halted the dollar’s appreciation. Further, the New Zealand dollar’s rally was cut short when its central bank offered a more dovish outlook on monetary policy

Sterling (GBP):

The only upbeat economic data seen this week in the UK was BRC retail sales figures, which were not strong enough to offset political uncertainties, weak public finance concerns or other downbeat data. Industrial and manufacturing output figures were released below forecast and saw the fastest monthly decline in 5-months. Sterling’s downside was limited as investors viewed the figures negatively skewed because of poor weather during the month of January. A RICS house price survey dropped to levels not seen since August of last year, while the trade deficit in the UK swelled to levels not seen in 17-months. Speculation that Barclays could be interested in buying a US retail bank kept M&A related flows up and weighed on the local currency. Additionally, Moody’s suggested that UK banks could face rating downgrades as the government starts to withdraw support from the industry.

US Dollar (USD):

Investors had to wait until the end of the week before any economic data was revealed. The dollar therefore was forced to trade largely on sentiment that was swayed by developments in equity and commodity markets. Speculation increased over the week that the FOMC could remove its ‘extended period’ catchphrase for its outlook on interest rates at next week’s meeting, but even this had little impact on the currency which traded largely in tight ranges.

Euro (EUR):

Investors had to wait until the end of the week before any economic data was revealed. The dollar therefore was forced to trade largely on sentiment that was swayed by developments in equity and commodity markets. Speculation increased over the week that the FOMC could remove its ‘extended period’ catchphrase for its outlook on interest rates at next week’s meeting, but even this had little impact on the currency which traded largely in tight ranges.

Japanese Yen (JPY):

Weak Japanese key machinery orders, strong Chinese growth and inflation data and fiscal year end repatriation flows all helped lift the safe haven yen this week. Offsetting the yen’s gains was speculation that the BoJ would kowtow to government pressure to step up its fight against deflation.

Recent key releases:

Highlights for this week

Sterling (GBP):

• The Bank of England will release its Quarterly Bulletin and the minutes from its last MPC meeting this week. Weather related effects have negatively skewed growth data in the UK recently. The BoE is likely to continue to be seen taking a wait and see approach over deciding whether or not to expand its quantitative easing program, which will likely keep sterling traders nervous and weigh on the home currency. The claimant count is scheduled to be released earlier in the week. The data will be for the month of February, which will be important coming after January’s rise. The claimant count saw its biggest rise in 6-months and was the highest since 1997. The data contradicted previously released figures that had shown an improving labour market. The data will be released just prior to PSNCR figures, which provides a perfect opportunity for investors to reflect once again on the weak state of UK public finances. Figures released last month revealed a first ever deficit for the month of January.

US Dollar (USD):

• The highlight this week is clearly the FOMC rate setting meeting. If the committee indicates that it is going to take a less dovish stance then the US dollar could benefit as investors continue unwinding carry trade positions and begin trading the US dollar higher on improving rate differentials. Economic data will play second fiddle to the comments coming from the Fed, although a recent decline in housing figures has some speculators wondering whether or not this sector of the economy will experience a double dip, thus perhaps increasing the significance of this week’s housing numbers.

Euro (EUR):

• Next week’s line up of economic data is not all that inspiring and focus will likely be placed on the US FOMC meeting. Nevertheless, Germany’s ZEW investor sentiment figures will be watched as a leading economic indicator. The sentiment figures have fallen for 5 consecutive months. Final euro zone HICP and trade figures are likely to have less of an impact on euro trade. Direction for the euro is likely to continue coming from sentiment based on developments in the Greek debt crisis. The government is expected to report to the EU Commission mid-March on implementation of its austerity measures. A negative report would hit the euro as fears of contagion would spread.

Japanese Yen (JPY):

• The BoJ will hold a policy meeting. There is increased speculation that the central bank could increase their quantitative easing program, which would weigh on the yen.

Upcoming key releases