Currency Briefing - what you need to know for Tues March 6, 2012

The local currency holds up against the greenback amidst the US dollar’s weakening against the EUR, GBP and JPY.

IG Markets Singapore said:

The Singapore dollar is holding up against the US dollar despite differing sentiments from both economies. The US dollar is still trading above the $1.25 level and this is now acting a strengthening floor against the local currency.

The US has seen more signs of recovery from its economy, and last night posted some upbeat news that its services industry is expanding. The services sector represents 90% of the US economy so this is a massive boost for market sentiment. But often this works against the greenback as traders shift into riskier currencies with renewed confidence in the global economy.

Singapore released some positive economic news of its own last night with PMI manufacturing numbers showing the first expansion for seven months. This could be the slow start of the local economy’s recovery with many analysts predicting it has now bottomed out. But on the rebound curve, the US is months ahead of Singapore.

Asia was rocked yesterday by a downward revision by the Chinese for GDP growth this year. Asia looks to China as the catalyst for growth and this is a major setback, reflected in Asian bourses slipping into the red yesterday. However, it may mean monetary easing is pushed higher up the agenda by the Chinese government which will give a boost to risk assets and currencies.

GFT meanwhile noted (for 5 March 2012 trading):

It was a mixed day for the U.S. dollar which weakened against the EUR, GBP and JPY but strengthened against the CAD, AUD and NZD. The greenback’s rally against the commodity currencies was directly tied to concerns about the Chinese economy while its strength against other pairs reflects hesitation ahead of this week’s big event risks.

Last week was a great week to be long dollars. Better than expected economic data out of the U.S. and less dovish comments from Bernanke refreshed demand for the greenback. Monetary policy expectations were adjusted throughout the course of the week with a number of investors now looking for the Fed to raise interest rates in 2013 versus 2014.

This could be another good week for the dollar but for a very different reason. If the Greek bond swap fails and collective action clauses are triggered, we could see a wave of risk aversion that drives investors back into the greenback.

RBS, on the other hand, reported (for 5 March 2012 trading):

China lowered its 2012 growth target to 7.5% from 8.0% and the currencies most correlated with global growth prospects were among the worst performers to start the week.

The commodity bloc fell against the EUR partially reversing some of the steep EUR declines at the end of last week and most currencies traded in tight ranges during the NY day vs. the USD.

The RBA decision highlights today's Asia session and we again do not expect any change in the policy rate given a positive employment report for January and no material worsening in the situation in Europe.

The ECB also releases weekly balance sheet data tomorrow which may show that the balance sheet expanded above EUR 3tn EUR following the 3-year LTRO. Further balance sheet expansion by the ECB versus a relatively unchanged Federal Reserve balance sheet could weigh on EUR/USD.