Currency Briefing - what you need to know for Thurs March 1, 2012

Singapore dollar showed resilience and avoided a steeper decline.

IG Markets Singapore said:

The Singapore dollar held its ground last night as money flooded back into the US dollar as expectations of QE3 eased. Quantitative easing in the US economy, while good news for equities, would dampen the value of the greenback.

But QE3 isn’t currently on the agenda as the US economy is slowly recovering on its own merits with no immediate need for cheap money. This has boosted the US dollar which edged up to 1.2515 breaking through the 1.25 level of resistance.

But the Singapore dollar has proven resilient and could have faced a steeper drop. It was helped by upbeat Korean factory output which increased confidence in Asian economies.

The European Central Bank’s second tranche of LTRO funding also saw a big take-up among European banks which has helped restore confidence in the eurozone, and the global economy in general.

A strengthening US economy, which saw GDP growth above expectations of 3% in Q4, is good news for risk assets like Asian currencies.

RBS, on the other hand, reported:

The 3-year LTRO came in line in line with our expectations, which we expect to be EUR-negative (the estimated net liquidity addition 314bn). Our fair value model implies that this take-up, holding other variables such as the 5-year swap spread and equity prices constant, would shave 1.5 cents of EUR/USD.

During US hours, the bigger driver of FX markets was the reaction to the Bernanke semi-annual testimony – expectations for Bernanke to signal additional QE appear to have been much larger than we expected.

The USD strengthened sharply and US rate support increased after Bernanke did not signal additional easing. We wrote about this scenario aiding USD strength, particularly vs. the EUR, in Global Currency Weekly on Tuesday.

We still narrowly favour additional Fed QE at mid-year, but the continued improvements in economic data likely complicate the decision to embark on more asset purchases. Finally, the MoF / BoJ announced that they did not intervene in the FX markets during February.

GFT meanwhile noted:

Thanks to Fed Chairman Ben Bernanke, the U.S. dollar soared against all of the major currencies outside of the Canadian dollar. Although the Fed Chairman believes that monetary policy needs to remain extremely accommodative, he made it clear that there is no immediate need for QE3.

Over the past few weeks we have seen consistently better U.S. economic reports and these improvements are finally resonating with the central bank. Bernanke acknowledged the positive developments in the labor market by saying that unemployment is falling at a more rapid pace than expected.

Combined with the rise in stocks and the acceleration in manufacturing activity, there is very little need for additional stimulus.