Dukascopy Market and Economic Research

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Highlights of the latest Market Research on GBP:



For a considerable amount of time the British Pound has been avoiding the spotlight and was suspiciously quiet. The headlines were focused on completely different topics and the mass media was rarely mentioning the well-being of the U.K. economy, which seemed to be quite OK at the time. Last week the silence was broken on Thursday, when a large number of news was published, but the main event is considered to be a speech of Mark Carney, arrival of whom to the BOE will certainly bring some changes into the U.K. monetary policy as well, which the market interpreted as positive, being that the Sterling rose considerably.



The sentiment of traders, however, turned upside down over the weekend after some of the analysts expressed fears that the central bank would lower their GDP growth forecast in the report on Wednesday. Consequently, the investors immediately started reducing their exposure to the Pound. The sell-off was also fuelled by deteriorating business sentiment and confirmation in the actual report on inflation that expansion is likely to be subdued. At the same time the pace of price level increase is not abating, but on the contrary rising, this in turns aggravates the current situation of the country. As a result, the average debasement of the Sterling amounted to 1.9% and was stopped only on Feb 14 amid report that gave a reason to expect an improvement.

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Highlights of the latest Market Research on EUR:



Over the last days we were receiving mixed signals with respect to the single European currency, the value of which remained more or less stable amid the uncertainty surrounding the bloc and its ability to recover. At first the Euro was buoyed by the comments of the ECB council member, who predicated that concerns expressed by some of the Eurozone officials regarding the rally of the common currency were nothing but a ploy in order to redirect attention of people towards different problems from the real issues, so that they would not be blamed.



However, the data published last Thursday not only prevented extension of the surge, but overrode it. The GDP figure turned out to be worse-than-expected, substantially decreasing attractiveness of the Euro, which depreciated 0.6% on the news during the day. Nonetheless, the currency closed the week without any notable change in its worth (+0.01%), as Eurozone trade balance surprised on a positive side, allowing the Euro to pare the previously incurred losses.
In a monthly perspective the Euro has stabilised as well, posting merely a 0.8% gain within the last 20 days, while still being 9% above the levels recorded half a year ago.

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Highlights of the latest Market Research on USD:



The main events that were impacting the value of the U.S. Dollar were taking place last week. This Monday and Tuesday there were no particular news that directly affected the currency index of the greenback, but mostly related to the well-being of the European currency bloc, such as Eurozone current account and economic sentiment. Last Thursday and Friday the published data on the unemployment claims and consumer sentiment in the United States reinforced conviction of investors that recovery of the world’s largest economy is robust and thereby increased valuation of the buck in terms of other currencies.



Still, market participants did not appear to be overly optimistic, as the U.S. Dollar on average rallied merely 0.25%, losing in value only to the New Zealand Dollar and Swedish Krona, appetite of traders for which turned out to be considerably stronger. The demand for the kiwi was boosted by improvement in the manufacturing sector, while the Swedish Krona gained attractiveness amid unwillingness of Riksbank to accept the challenge to lower the exchange rate of the national currency to enhance competitiveness of the economy.
In the longer-term perspective the U.S. Dollar remains largely immovable, appreciating 0.85% for the last 20 days and losing 0.44% for the last 130 days.

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Highlights of the latest Market Research on JPY:



The sentiment of market participants towards the Japanese Yen has been completely changed over the weekend, as reflected by the direction of the respective currency index throughout the last five days. Previously the Yen had been cautiously, because of the anticipated criticism from the G20 meeting, but still depreciating, as no measures were applied by the world’s wealthiest nations with respect to Japan’s attempt to reignite activity in the economy and weaken the national currency, thereby invoking on average a 1.45% debasement of the JPY within six hours last Friday.



This week, on the other hand, was marked by different attitude to the Yen, as it became more attractive for the investors due to aversion of the Japanese finance ministry to purchases of foreign bonds that were presented as an option by Shinzo Abe earlier. This in turn has added 2.3% to the value of the currency during the last three days. Surprisingly, even the news on widening trade deficit did not manage to reverse the tendency—only to delay appreciation for a few hours.
Nonetheless, these gains are dwarfed by the degree of weakening of the Yen over a six-month period, which already amounts to 17%, meaning that the general trend of the Yen’s price remains distinctly descending.

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Highlights of the latest Market Research on JPY:



The single European currency did not follow a sole tendency throughout all of the last five trading days, being subject to fluctuations in the mood of market participants. At first their optimism with respect to the currency bloc emerged mainly amid improving economic expectations, as reported by ZEW. This has led to a 0.56% rally of the Euro across the board on Feb 19. However, the surge proved to be short-lived, as it was first halted and then overridden by growing anticipation of the Fed ending or at least slowing down the monthly purchases of assets. As a result, the U.S. Dollar started to gain value at the expense of its counterparts, primarily against the Euro.



This is why performance of EUR/USD was one of the worst among the crosses of the Euro, specifically the instrument’s yield for the last week was -1.12%. EUR/AUD has plunged slightly more (1.19%) within the observed period, as the chance of the Reserve Bank of Australia cutting the interest rate in the nearest future has lowered after the governor’s speech.
In a bigger picture, the Euro has added to the losses recorded during the last 20 days (-0.69%), but the six-month tendency remains strongly bullish, as confirmed by a 7.5% appreciation, the best performance among its major peers for the same period.

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Highlights of the latest Market Research on USD:



The momentum the U.S. Dollar has gained in anticipation of the publication of the FOCM meeting minutes last Wednesday was limited only to Feb 20. Later on the bulls did not reveal themselves, but also did not allow the bears to take control of the buck’s value, keeping the currency index 1-1.5% above the base value. Such buoyancy appeared because of evolving talks on the need to prolong the stimulus, currently provided by the Fed on a monthly basis. Moreover, there is growing uneasiness among officials and analysts with respect to the losses that the asset purchase programme would entail.



The only currency that has managed to outperform the greenback was the Japanese Yen, which is believed to have risen on Feb 25 due to extensive profit-taking, following a broad weakening of the Asian currency during the last five months. Accordingly, USD/JPY has fallen 1.7% since Feb 20, though the decline is largely attributed to the events on Monday, as closure of long positions was not gradual, but immediate, just after USD/JPY has opened this week with a large upside gap and touched the 30-month high.
All of the other major currencies underperformed by more than 1% relatively to the U.S. Dollar, demand for which remains strong against the background of the gaining popularity idea that arguments in favour of ultra easy monetary policy in the U.S. are getting exhausted and there is a growing amount of counter-arguments.

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Highlights of the latest Market Research on CHF:



The Swiss Franc has managed to preserve its neutrality, closing the period of the last five trading days with only a 0.1% loss. This could be explained by a dearth of news on the Swiss economy. Moreover, the data that were published lately have largely surprised to the upside, specifically it was the GDP figure. Instead of an estimated stagnation in the last quarter of 2012, the gross domestic product has expanded by 0.2%. However, the value of the Swissie was hardly impacted by the better-than-expected number, in fact the prior gains were pared that day.



Before that the demand for the Swiss Franc was boosted on two occasions. Firstly, last Friday, when against the negative background created by the economic forecast on the Eurozone’s growth, Moody’s credit rating agency lowered assessment of the United Kingdom’s credit worthiness. While the Japanese Yen and British Pound plunged by nearly 1% amid the news, the Franc strengthened along with the Euro and U.S. Dollar. Second time, tensions in Italy have benefitted the currency due to its safe haven status, though the rally turned out to be unsustainable, being erased by a ubiquitous appreciation of the Yen, which has thus proven to be a more attractive hedge against the increased risk in then current environment.

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Highlights of the latest Market Research on EUR:



Last week performance of the single European currency was to a great extent defined by the Italian elections, which have left the government incapable of operating effectively, as none has gained a decisive majority that would ensure smooth working process. Consequently, the market has reacted immediately by substantially reducing the exposure to the Euro, which has lost nearly 1.8% on the news, in anticipation of difficulties that Italian citizens will have to face due to inability of lawmakers to implement the urgently needed adjustments to the current legislation.



Later on the Euro has failed to pare the incurred losses, as the retail and manufacturing sectors continued to shrink, giving few reasons to increase optimism with respect to the state of the monetary bloc. Moreover, the unemployment rate is ceaselessly growing, uncovering still unresolved problems. Accordingly, the currency has underperformed comparatively to all of its major counterparts except for the New Zealand Dollar, with the biggest negative change of -1.9% in EUR/JPY. The most recent data on Aotearoa’s economy suggested that more stimulative measures are required for the successive updates to be more positive, hence the 1.1% depreciation of the kiwi during the last five trading days.

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Highlights of the latest Market Research on USD:



The U.S. Dollar continues to stay calm and appears to be unwilling to hold on to a specific direction, as its value is unchanged this week, only a 0.07% decline of the index. Moreover, Dollar’s deviation from the levels recorded six months ago is the lowest among its main peers—a 1.35% rally. Overall this means that not only the greenback is consistently returning to its ‘fair’ value, but also that fluctuations are limited by a rather narrow corridor that ensures stability of the currency, gains of which in most cases are offset by losses relatively to different currencies, keeping the total change near zero



This time the greenback has appreciated largely at the expense of the Japanese Yen (+1.17%), price for which is falling amid expectations of a more dovish stance from a new governor, and at the expense of the Swiss Franc (+0.93%), ubiquitous debasement of which demonstrates success of the monetary policy adopted by the Swiss National Bank.
Going forward we may expect wider swings of the buck’s currency index, accepting that political uncertainty and unresolved problems will exacerbate volatility. Nonetheless, the currency’s tendency to revert in the end is likely to remain a distinctive feature of the U.S. Dollar in the foreseeable future.

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Highlights of the latest Market Research on GBP:



The British Pound has experienced a precipitous drop last Friday (-1%), when the secondary sector was reported to contract instead of posting the anticipated expansion. However, the concerns over the ability of the U.K.’s economy to overcome the current difficulties have somewhat eased over the weekend and the currency started to recover even despite the falling construction PMI in the background. Improvement in the tertiary sector has even further increased the optimism, but these gains were quickly trimmed by the strengthening U.S. Dollar, which continues to appreciate at the expense of many of its peers, including the Sterling.



In the end the Pound was able to outperform only the Japanese Yen, which has been heavily sold off in anticipation of the next meeting of the BOJ, as the current governor of the central bank is to leave his office for a successor who is considered to have stronger commitment to veer the economy out of deflation by employing bolder actions. Accordingly, GBP/JPY has gone up 1.5% during the last five trading days, whereas GBP/SEK was the one to decline 3%, as Riksbank does not appear to be concerned at the moment with the pricing of the Swedish Krona, currency index of which has surged more than 8% during the last six months.

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Highlights of the latest Market Research on EUR:



Up until the decision of the European Central Bank on the key interest rate the Euro has been hesitant to move in any direction last week, exhibiting nearly perfect neutrality towards its major counterparts in aggregate. However, as it turned out, the market participants were anticipating somewhat more dovish comments from the ECB governor, as they became willing to acquire the single currency after the press conference. The monetary authority is yet to assess the risk that political instability in Italy poses to the economic well-being of the bloc, but is reluctant to cut the rate for now.



Still, Friday’s data veered investors away from the Euro, resulting in negation of the prior gains and return to the base value. While North American region demonstrated increasing vigour of the labour market and improving economy overall, Europe’s achievements look bleak in comparison, as many of the problems persist and seem to be far from being completely tamed. Moreover, the region’s flagman is suffering from the loss of economic activity, with the most recent indication being stagnation in the volume of German industrial production instead of the anticipated expansion. Accordingly, the main contribution to the Euro’s buoyancy was depreciation of the Japanese Yen, rather than real resilience of the bloc.

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Highlights of the latest Market Research on USD:



Last week market participants were inclined to expand their exposure towards the U.S. Dollar on a positive array of news. Recovery of the labour market is becoming more pronounced and stable, as the unemployment rate is consistently falling and the number of employed people is increasing. Previously this would have weighed upon the Dollar, as good U.S. data provided incentives for investors to focus on riskier currencies. However, the situation is rather different at the moment, as the determinant factor now is the proximity to achievement of the target unemployment rate of 6.5%.



Accordingly, the lower percentage of people out of work, the more is the likelihood of the Federal Reserve shunting the continuous easing programme and either limiting of completely stopping supply of new money into the economy.
The only difficulty the recent appreciation of the buck encountered was a hawkish stance of the European Central Bank, but the bulls have prevailed in the end, pushing USD currency index more than 1% above the base value late Friday. Nonetheless, there are already no signs of the upward momentum this week, on the contrary, the Dollar on average is sold off.

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Highlights of the latest Market Research on JPY:



Speaking about the Japanese Yen, it is evident that the bears remain in control of the situation. During the last five days they managed to lower currency’s index by 1%, while the maximum drawdown amounted to 1.4%. Negative sentiment towards the Yen feeds off easing expectations, since stronger monetary inducement behoves the current Japan’s conditions, being that the country continuously proves to be incapable of escaping the vicious circle of falling prices, i.e. chronic deflationary depression that has been hurting the economy for decades.



However, with a new government in place and a fierce proponent of aggressive steps as a head of the Bank of Japan, it is reasonable to assume that the level of intensity of the endeavour to prod consumer spending and business activity will be raised.
Accordingly, the fundamental factors induce us to believe that the question is ‘when’ rather ‘whether’ the Yen will depreciate due to expansion of the monetary base in the system. But still we must be wary of the dangers being short the Yen because of its volatile nature. The degree of an upside risk was demonstrated early Tuesday—a 0.86% rally in nine hours amid profit taking.

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Highlights of the latest Market Research on EUR:



Until the weekend, which was marked by the EU summit and discussions on Cyprus, the single European currency stayed quite stable despite sharp moves of its counterparts. Euro’s currency index did not deviate more than 0.5% from its base value, even though it was weighed upon by a string of negative news before the end of the previous week. The volume of Eurozone industrial production as well as employment rate were reported to contract, while inflation at the same time eased to 1.8%, setting negative towards the Euro sentiment in advance of the main event.



After prolonged debates on Saturday the Euro-area finance ministers drove a hard bargain, asking for a taxation of depositors of Cypriot banks. Accordingly, being that the outcome of the talks turned out to be considerably more stringent towards Cyprus then expected, the Euro experienced a sharp sell-off across the board. The worsened sentiment was mostly noticeable in the currency’s crosses with JPY, GBP, CHF and AUD, but was seen elsewhere as well.
However, this may be viewed as a needed bitter pill that must be swallowed, since in the end it is done with the aim to restore financial stability of the bloc. If this is true, then the dip should prove to be short-lived and the remedy will be quickly digested by the investors, leading to re-emergence of the up-trend in the Euro.

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Highlights of the latest Market Research on USD:



At first it appeared as if the U.S. Dollar is willing to follow an upward path, buoyed by the better-than-expected data on retail sales and current account, but subsequent performance of the currency was far less encouraging. Market participants started to view the recent rally of the greenback, which has appreciated 2% during the last 20 days and 4.5% during the last 130 days, as overextended, even though inflation was reported to accelerate and the global sentiment favoured safe haven assets.



Consequently, there is another variable that must be inserted in to the equation in order to create a complete picture of the present and explain why the market is so cautious. Previously the Fed has pledged to increase its transparency and employ its communication tool more intensively and frequently. Today the FOMC is scheduled to present a statement, in which the monetary authority is likely to end talks of premature ending of the stimulus programme that in turn did not yet reach its goal. Accordingly, we are inclined to believe that the U.S. Dollar is more likely to lose some value than to gain it due to an expected increase in the monetary base. This is what negated bullishness implied by the fundamental data.

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Highlights of the latest Market Research on CHF:



The past five trading days were somewhat unconventional with respect to Euro-Swiss Franc relationship and thus may provide an opportunity later on, as during the next weeks the foreign exchange market is likely to revert to normality. Lately the Swiss Franc has been outperforming the single European currency, gaining 0.9% against it. While the fundamentals support such tendency—the differentials between objective data on health of the economies is apparent—we know that the Swiss National Bank is not only far from relaxing the cap, but is weighing additional measures in order to protect the exporters and secure recovery of the economy.



Moreover, there is no criticism from the public regarding willingness of the Swiss central bank to curb the strength of its currency, even though several countries have already been accused of deliberately manipulating the exchange rates. Quite the opposite is happening with the SNB, the International Monetary Fund has proposed penalties on excess cash reserves of the banks within the SNB, which in turn is supposed to increase supply of the money in circulation. All in all this favours depreciation of the Swiss Franc, which in the long term should be at least as weak as the Euro due to an artificial cap at 1.20.

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Highlights of the latest Market Research on EUR:



The past five trading days were characterised by significant shifts in ebbs and flows in demand and supply for the Euro amid lack of certainty with respect to the fate of Cyprus. While on Mar 20 its currency index was 0.39% above the base value, on Mar 22 it plunged 0.37% below it, as tensions exacerbated the effect of lower-than-expected manufacturing and services PMIs in the bloc, data on which were published last Thursday. Nonetheless, the hopes of the eventual positive outcome persisted, underpinning the value of the Euro, which in the end remained unchanged (+0.02%).



The largest moves during the week among EUR crosses were observed in EUR/NZD and EUR/SEK, but a 1% dip in the former was fully offset by a 1.2% surge in the latter. With the start of the last week of March the Euro is gaining across the board, as a deal on the Cyprus bailout has been finally reached, even though not without painful concession, allowing many investors to respire and recommence satisfying their appetite for high-beta currencies. Accordingly, with this variable off the table, we should evaluate the likelihood of the ECB leaning towards an expansionary monetary policy, the necessity of which is shown by weak fundamental data, whereas the sentiment among consumers and producers stays quite optimistic.

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Highlights of the latest Market Research on USD:



Throughout the last five trading days the U.S. Dollar was gradually ceding ground and in the end lost 0.5% of its value against an equally-weighted basket of currencies. During this period the U.S. data looked softer in comparison to upside surprises we were already used to, proving that saying “there are no dangers to growth” would be an overstatement. This also justifies dovish stance of Bernanke, who had foreseen difficulties that still lie ahead and has recently denied claims of some of the economists that it is high time to start wrapping up the quantitative easing programme



As a result, the greenback became one of the most underperforming currencies, winning only against the Swedish Krona (+0.3%). Relatively to the common European currency and Swiss Franc the buck remained unchanged, as these two were strongly pressured by the issues that have arisen in Cyprus. At the same time the Dollar dropped precipitously in terms of commodity currencies (AUD, CAD, NZD), retreating more than 1%.
Going forward, there are currently few reasons for the U.S. Dollar to commence ascension. As we see, fundamentally there is a significant discrepancy between different sectors of the economy and not all of them exhibit robust recovery, giving a reason for the Fed not to hurry with termination of monthly asset purchases.

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Highlights of the latest Market Research on GBP:



Despite the fact that the British Pound has ended the week with a positive 0.13% change, the general sentiments towards the currency were largely negative, as it was more than a half of a percentage point below the starting value of 100 on Mar 27. Such bearish mood was perfectly justified by the fundamental factors: the current account deficit widened, GDP contracted, the number of mortgage approvals and the volume of sales declined; all of them weighed on the pricing of the Sterling. The only positive update was related to the services sector, but was merely a drop in the ocean.



Still, we must note that the Pound was fairly resilient, even despite the notable drawdown in the middle of the week. Depreciation could have been much larger, especially taking into account recent speech of George Osborne, in which he mentioned potential changes to the way the Bank of England operates. He was implying a need for more aggressive stance of the central bank, as achievement of currently set targets (2% inflation) is, to his mind, insufficient in order to return the economy on a path of stable recovery. Consequently, the BOE could follow in the footsteps of the Fed, i.e. set a particular GDP rate of growth or specific unemployment level.

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Highlights of the latest Market Research on EUR:



A result of the most recent deal that was meant to stabilise the current situation in the Eurozone and ensure intactness of Cyprus’s membership in the monetary bloc did not benefit the single European currency. Instead it has prompted significant reduction of long Euro exposure throughout the last week. The value of the currency has plunged 1.5% on average across the board, with the largest part of the dip recorded last Monday after the conditions of the bailout were finally agreed upon.



It seems that the markets did not interpret this news as positive or diminishing systemic risk, judging by the fact that the Euro has underperformed all of its major counterparts. The hardest fall was observed relatively to the Japanese Yen, which has been lately trimming losses amid profit-taking, and the Canadian Dollar, as North American economy’s prospects appear to be brighter than outlooks of its counterparts. On the other hand, the negative changes were minimal comparatively to the Swiss Franc and Swedish Krona due their strong long-lasting correlation with the Euro, even though the link has been weakening lately.