Singapore dollar gains from US outflows

Traders sold the greenback as they headed for risk currencies.

IG Markets Singapore said:

Comments by the Fed last night that QE3 was still part of its game plan saw a strong sell-off of the USD as it slipped against major currencies.

Another round of asset purchases would weaken the dollar and so saw traders selling the greenback as they headed for risk currencies.

The Singapore dollar gained from these US outflows as it the greenback fell below $1.25 last night. This morning the pair trade at $1.2466.

Some of the QE3 action has been priced into markets but there was still plenty of movement in Asian forex markets after Ben Bernanke announced that policy easing could happen fairly soon.

Traders may decide to take some profits from this surge, although with a key Fed meeting next week we could see more outflows out of the US as it approaches.

DBS Group Research meanwhile noted:

Until August 21, the upside of EUR/USD was capped at its 50-day moving average. Having punched through the 1.24 level that day, the currency pair surpassed the 1.25 level on the July 31-August 1 FOMC minutes signaling Fed’s bias towards more monetary stimulus.

It is hard to imagine that exactly a month ago that EUR/USD was threatening to break below its psychological 1.20 level. Back then, the single currency was rescued by the European Central Bank (ECB) President Mario Draghi pledging to do whatever it takes to preserve the euro.

Between now and the Fed’s retreat at Jackson Hole on August 31, there are only two scheduled speeches by Fed officials on August 27. They are Chicago Fed President Charles Evans and Cleveland Fed President Sandra Pianalto. Both are well known doves that supported more easing.

By the way, Draghi is also scheduled to speak at Jackson Hole on September 1. The Fed will also release its Beige Book economic survey on August 30.

Despite the “constructive” ECB/Fed developments over the past month, it is still premature to call an end to the euro’s decline. We have seen this story in the second half of 2011 when the Eurozone crisis started to hold global financial markets ransom.

The global sell-off in May 2012 was similar to the one in September 2011. Back then, EUR/USD threatened to break below 1.30; today it was the 1.20 level. The recoveries from these psychological levels were coincidentally brought about by hopes that European leaders would get their act together to stand behind the single currency.