Currency Briefing - what you need to know for Fri Feb 24, 2012

The US dollar weakened against the G10 amidst downward pressure on risk assets including many Asian currencies.

IG Markets Singapore said:

The US dollar as a safe-haven currency is holding up against the Singapore dollar as global uncertainty continues to plague the markets.

Investors have still not settled after the Greek debt agreement was signed off earlier this week with a dearth of positive data. This has put downward pressure on risk assets including many Asian currencies. In times of trouble, investors head for the US dollar, gold and other “safer” assets.

But while the greenback flirted with the $1.26 mark yesterday it has since slipped back overnight to $1.2527. While US job claims data points to a rosier outlook for the economy, there is still a strong feeling of caution among traders.

This could be caused by many factors, including weak manufacturing data and revisions of Chinese economic growth for 2012. China admits its GDP growth has been unstable and unsustainable. As the global economy’s main growth engine, this is not welcome news.

The long-term picture for the Singapore dollar strengthening against the US dollar looks better as the island state increases its status as a financial hub. Last week’s move to scrap tax on gold trading will increase its attractiveness for traders parking money here.

GFT, on the other hand, noted:

Although equities rose only slightly, investors are feeling a bit more optimistic today which explains why safe haven flows have eased out of the U.S. dollar.

The greenback traded lower against all of the major currencies including the Japanese Yen which had enjoyed a 5 day winning streak. A healthy jobless claims report contributed to the improvement in risk but failed to lend support to the dollar.

Jobless claims held steady at 351k which is unchanged from last week's upwardly revised report - the revision was small, from 348k to 351k. Although fewer claims do not translate directly into greater job growth, as long as claims hover around 350k, it is consistent with an improving labor market.

For the Federal Reserve, this means that there is no immediate need to increase stimulus which is good for the U.S. dollar, particularly USD/JPY. After rising for 5 consecutive trading days and enjoying a rally with virtually no correction since the beginning of the month, USD/JPY is finally meeting some resistance.

Despite a relatively good jobless claims report, USD/JPY failed to extend its gains. From a fundamental perspective, we could see USD/JPY rise further as low jobless claims boost interest rate expectations and U.S. yields but after such a strong rally, a correction, large or small is overdue.

New home sales are scheduled for release on Friday along with the final University of Michigan consumer confidence number. January was a better month for the housing market and we expect this rebound to be reflected in the new home sales report. According to the Federal Housing Finance Agency, house prices rose 0.7 percent in the month of December which is consistent with a slow and gradual recovery.

Meanwhile RBS reported:

The USD weakened against the G10 during NY hours, and there may be signs that the market is beginning to factor in higher oil prices as a prohibiting factor to future easing abroad. But the Fed may be more concerned about the risks to growth from higher fuel prices, increasing expectations for QE3.

In terms of easing expectations abroad, the ECB's second 3-year LTRO on 29 February is set to increase the size of the ECB's balance sheet regardless of the price of oil. This may be a factor in keeping the Euro-area 2-year swap rate from rising significantly: in fact, the 2-year swap rate (our preferred measure of rate support) has actually fallen 17.5bp during 2012 even as the price of Brent crude oil futures (in euro-terms) has tested their all-time highs.

We will likely be stopped out of our short EUR/JPY exposure today (with a close above 105.70), but we still expect EUR weakness to begin to take hold during the weeks ahead. Official MoF data released on 1 March in Japan may show that "stealth" intervention has been weakening the JPY.

However, if the MoF / BoJ reveals it has not intervened this month, that may open up an opportunity to re-enter this trade as we still see EUR/JPY as rich compared to short-term fair value.