Currency Briefing - what you need to know for Mon Feb 20, 2012

Amidst improvement in risk sentiment, the Singapore dollar has edged up against the US dollar.

Justin Harper, IG Markets Singapore head of research, said:

The Singapore dollar has edged up 0.5% against the US dollar as risk sentiment improves in the region. The local currency moved up to US$1.2526 as a renewed investor confidence hits Asia.

At the weekend the People’s Bank of China (PBOC) announced it is cutting the Reserve Requirement Ratio (RRR) by half a percentage point. This will flood about 400 billion Yuan into the Chinese economy and should increase liquidity within Asia.

This easing of monetary policy has been on the cards, but the PBOC surprised traders with the timing of the announcement.

The move has helped reverse the trend noted last week of investors reducing their Asian currency exposure over worries about Europe and the need to scale back risk assets.

But a weekend is a long time concerning the global economy. Today we wake up to Greek debt talks looking their most promising yet and the European Central Bank offering cheap loans to its banks.

Some of this money should find its way to Asia. Already there has been strong foreign buying interest in Indian, South Korean and Taiwanese markets.

Singapore will have strengthened its position as a strong and stable economy after Friday’s Budget. Its budget surplus increased by an extra S$2.3bn in 2011, much higher than the S$0.1 billion the government expected. This will also have helped boost the currency’s value.

GFT reported:

It was another mixed day (Friday) for the U.S. dollar which traded lower against the European currencies and higher against the Japanese Yen, Canadian and Australian dollars.

The big story out of the U.S. was the payroll tax cut extension. Congress approved the extension of the 2 percentage point tax cut for the rest of the year along the extension of jobless benefits.

This will be a major relief for millions of Americans who would have benefitted from a holiday in paying Social Security payroll taxes and those whose entire financially livelihood hinges upon jobless benefit payments.

If Congress did not extend the payroll tax holiday, growth in the U.S. would have certainly been negatively affected. This along with the hope for a Greek bailout has kept U.S. equities and risk appetite supported.

USD/JPY rose to its highest levels in 6 months on widening interest rate differentials. Ever since the Bank of Japan increased asset purchases, the currency has been on a tear.

RBS, on the other hand, noted:

With the significant improvement in risk appetite early in the new year, EUR/JPY has rebounded significantly from oversold and undervalued levels in mid-January.

Over recent days, the gradual weakening of the JPY and erratic improvement in the EUR has pushed EUR/JPY up to a level more than 1 ½ standard deviations above our estimate of short-term "fair value".

Accordingly, we recommend establishing short EUR/JPY exposure at 104.50, targeting 98 during the months ahead, with a stop on a 2-day close above the 2 December high of 105.70.