Currency Briefing - what you need to know for Wed March 21, 2012

The local currency is currently trading at $1.2616, the level it is expected to trade at by the end of 2012.

IG Markets Singapore said:

The US dollar has strengthened against the Singapore dollar as China’s slowdown and fuel price hike dampens risk sentiment across the region.

Yesterday the Chinese government announced rises of up to 7% which could cause pain to its energy-hungry sectors, at a time when many are questioning how hard its landing will be. Mining executives have also talked about iron ore demand flattening out which has increased concerns about the slowdown in the economy. Other Asian currencies were hit harder, notably the Australian dollar, while the local currency faced limited downward pressure.

The Singapore dollar is currently trading at $1.2616. This is the level it is expected to trade at by the year end. The pair are expected to trade within a tight band going forward while the Monetary Authority of Singapore (MAS) is likely to stick to its long-term plan of slowly appreciating the currency to keep a lid on inflation.

There seems to be a lack of a catalyst to drive markets on right now. Central bank easing has been put on the backburner as policymakers monitor the global economic recovery looking for more positive signs. None have been apparent so far this week, only continued China fears and threats from rising oil prices.

GFT, on the other hand, reported (for 20 March 2012 trading):

Over the past few weeks, we have seen the dollar rise whenever stocks and Treasury yields moved higher. The growing attractiveness of U.S. assets made foreign investors want to buy dollars and recycle them back into U.S. markets.

Today the dollar appreciated even though equities weakened and Treasury yields edged lower. For this round of dollar strength, the argument has been that safe haven flows is behind the rally in the greenback.

To many investors, it now appears that the dollar can't lose because it is strengthening in periods of pessimism and optimism. To understand why this is happening, we have to take a step back and realize that at this specific point in time, there are very few places more attractive to investors than the U.S.

RBS meanwhile noted (for 20 March 2012 trading):

The minor sell-off in the USD even as rates rose is similar to a trend that took place in 1994, but in Global Currency Weekly this week we highlight that the 1994 event is unlikely to repeat itself on a longer-term basis.

Rising US interest rates may be breaking the correlations between Risk and the USD. In this context, the catalyst for a move in risk sentiment becomes crucial, as improving US data may produce gains in both broader risk appetite and US rate support.

In particular, the 30-day correlation between EUR/USD and S&P 500 returns has fallen sharply this week – likely due to both the 3-year LTRO and rising US rates.

In the UK, the slightly smaller-than-expected decline in February inflation is unlikely to be a significant mover for GBP, as weakness in the domestic economy presents more of an immediate concern for the BoE.

Near-term, we are watching for the BoE's March minutes and the February budget report released tomorrow. Over the medium term, rising real interest rates should be a positive for GBP and 0.80 remains our long-term target for EUR/GBP.