Forex broker Hantec Markets provides BullBearings with a weekly FX market overview and a selection of quarterly special reports.
In this week's forex report - including our tips on which ways we think the currencies will move - we look at the ongoing influence of national debt issues on the euro-dollar trading; the continued strength of the yen and the Swiss franc as safe havens against the dollar; an upswing in the Canadian dollar on the back of commodity prices; and the rebounding of gold and silver thanks to the persistent uncertainty clouding the world economy.
The movement of the euro-dollar was largely determined by the ongoing debt drama on both sides of the Atlantic.
A new bail-out agreement for Greece included an extra $109 billion, with private bond holders also expected to bear part of the burden.
The European Central Bank (ECB) tacitly accepted a selective default (when a sovereign state elects to delay repayment of some of its financial obligations while fully honouring others). The agreement implements measures to prevent further debt crisis as well.
The European Financial Stability Facility (EFSA) authority was expanded to support countries before they need a bailout. Under the new agreement Greece, Ireland and Portugal will be able to borrow at rates below 4 per cent for up to 30 years. This news supported the euro and the currency appreciated consistently.
The trend was further supported by the uncertainty related to the US debt ceiling increase, with the House of Congress rejecting a proposal and throwing negotiations between the main parties into deadlock. There is an increasing fear that failure to reach a resolution before 2 August will bring a US default and a series of downgrades of the US debt.
The short-term outlook is associated with continued weakness for the US dollar in the context of imminent debt default. A scenario of quick resolution of the crises would provide support for the US currency toward a long term adjustment to reflect the large scale and pervasive sovereign debt problems in Europe.
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The Japanese yen continued its appreciation trend based on its appeal as a safe asset when investors are looking for alternatives away from the Euro and the US Dollar.
On the other hand, the export-oriented Japanese economy suffers from the appreciating yen and the Bank of Japan may intervene, as it has in the past, to limit the appreciation of the currency. Furthermore, the Japanese economy shows signs of steady recovery from the March natural disasters, with growth and production exceeding forecasts.
The short term outlook is for sustained strength of the Japanese yen in an environment of uncertainty fuelled by the US debt crisis.
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The behaviour of the Swiss franc for the period was in line with its safe haven appeal. Investors have sought alternative safe assets with on-going sovereign debt crises in Europe and US.
The Swiss franc appreciated on the news that no agreement on the US debt ceiling has been reached over the weekend. At the current environment the effect of other macroeconomic data will likely be limited and the value of Swiss franc will be dominated by its alternative safe asset status.
The short-term outlook is related to a continued strength for the Swiss franc and likely breach of new resistance level of 0.80.
A fast and favourable resolution of the US debt ceiling deadlock has the potential to provide support for the US dollar. Even under such a scenario, awareness of the problems facing the US recovery and the possibility of a new round of expansionary monetary policy is likely to limit a rebound of the US dollar.
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The Canadian dollar was supported by the favourable market environment for commodities, especially the precious metals group and reached a 0.94 level.
The Bank of Canada kept its main interest rate at its current low level, while admitting that in the medium term it will have to address possible inflation concerns. Some favourable corporate reports and data on expanding new housing construction supported a limited rebound of the US dollar later in the week.
The short term outlook is for continued weakness for the US dollar in the context of the debt impasse in Washington DC and the favourable market environment for commodities including oil and precious metals, which are key to the economy and hence currency north of the border.
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Gold and Silver
The precious metals group was perhaps the main winner of the uncertainty associated with sovereign debt problems in Europe and the US. Gold traded in record territory most of the week, with downturns coinciding with the release of better than expected corporate reports in the US and the agreement on the Greek bailout.
The limited response to these events shows deeply rooted concerns about the global recovery and investors’ scepticism about quick return to stable economic environment. Silver closely traced the movement of gold to reach a local maximum since the correction in early May.
The short term outlook for the metals is of continued support in record territory, determined by the environment of economic uncertainty and continued capital flight to safety.
Svetoslav Georgiev is chief market analyst for Hantec Markets, a leading independent forex broker, authorised and regulated by the Financial Services Authority. Our company culture is centred on one simple philosophy “Trust Through Transparency” and is one of the many reasons why so many traders are switching to Hantec. Based in the UK, our mission is to provide foreign exchange traders with the best online forex trading experience on the market in a secure and regulated environment. Forex and other leveraged products involve significant risk of loss, so it is advisable to seek good advice and training prior to setting up a live account. To find out more go to HantecFX.com.
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Thu, 1st Jan - * As always at the start of each month, the key report of the week will be that covering the most recent US non-farm payrolls data, with investors looking for confirmation that January´s robust print was real, which could help cement expectations for a take-off in US interest rates towards mid-year.