Currency Briefing - what you need to know for Thurs March 15, 2012

There was a shift in sentiment away from Asian currencies while the US dollar strengthened against the G10.

IG Markets Singapore said:

The US dollar continues to edge up this week against the Singapore dollar and has broken through an important resistance level of $1.27.

The Greenback has been rising off the back of renewed optimism in the US economy and the fading hopes of QE3, which would flood the US system with cheap dollars.

But yesterday there was a big shift in sentiment away from Asian currencies as China delivered another thunderbolt that its property market is still over-priced and buying curbs will remain. This sent its local stock market down 2.6% and put the lid on further rises across Wall Street. The eurozone is also affecting risk-on sentiment as concerns now shift from Greece to Spain.

Meanwhile, the Monetary Authority of Singapore says it will create a lending facility for corporate bonds and provide swap liquidity to encourage more global companies to issue local currency bonds.

Singapore government bond yields have moved higher as stronger regional equities markets drove investors away from safe-haven assets. Retail sales figures are being released this lunchtime which should give further credibility to the island state’s solid economic position.

RBS meanwhile reported (for 14 March 2012 trading):

US interest rates were the primary drivers of the FX market today and the USD strengthened vs. the G10 after another sharp increase in UST yields across the maturity spectrum provided rate support for the USD.

Norges Bank cut the policy rate 25bp to 1.5%, against expectations but in line with our view that Norges Bank was likely to be much more dovish than the market expected and is supportive of our short NOK/JPY trade recommendation.

GFT, on the other hand, noted (for 14 March 2012 trading):

The U.S. dollar is back! With stocks continuing to rally and the U.S. 10 year yield rising to its highest level in four months, investors are snapping up dollars left and right. The attractiveness of U.S. assets helped the greenback shed its safe haven status and as long as we do not have a “blow-off” top like some analysts are predicting, we can look forward to further gains in the dollar.

Yet with the greenback experiencing strong gains over such a short period of time, a pullback would be natural. There may be nothing more attractive than the U.S. dollar and U.S. investments right now but with JPMorgan reporting that the front end of the curve is pricing in a 50 percent rate hike over the next year, it can be easily argued that the rally is getting overdone.

There is a fundamental reason for why the dollar has performed so well which is that traders have had to adjust their U.S. monetary policy expectations. The Fed’s tone has changed dramatically since their late January monetary policy meeting. At the same time, the credit quality of Europe has deteriorated while the countries down under are beginning to suffer from slower Chinese growth.