Forex Major Currencies Outlook (February 18, 2013)

As it turns out, the G20 leaders didn’t have any strong criticism for Japan’s currency devaluation strategies, allowing USD/JPY to gap up and reach the 94.00 mark right after the official communiqué was released. Now that the G20 Summit is over and there have been no resulting restrictions on currency manipulation, the major currencies could resume trading on fundamentals or economic reports, as well as central banks’ willingness to intervene. With the Fed not explicitly stating any intention to keep the U.S. dollar down, traders could buy the U.S. dollar up as a counter currency for weaker currencies.

JPY: Bearish

Following the G20 Summit conclusion, it seems that there is nothing stopping the yen from selling off further as the leaders didn’t specifically mention any restrictions on currency devaluation. USD/JPY gapped higher over the weekend and traded until the 94.00 handle during today’s Asian session as Japan was also able to dodge strong criticism during the G20 Summit. In short, this means that traders have the go signal to keep selling the yen as the BOJ is still on track to implement further easing measures. Take note that BOJ Governor Shirakawa is set to step down soon and that Japan’s Prime Minister Shinzo Abe will appoint the next central bank leader, who is likely to favor yen weakness as Japan tries to combat deflation. Financial expert Toshiro Muto is being hailed as the top candidate for the BOJ Governor position.

EUR: Bearsh

The euro has somewhat held steady against the U.S. dollar so far as euro zone leaders seem to be on the fence when it comes to currency devaluation. While ECB head Mario Draghi has mentioned that the central bank is keeping a close eye on the euro’s movements, he has also stressed that currency manipulation is not in the ECB’s mandate. Other European leaders and countries have echoed this sentiment but the latest GDP reports seem to indicate that the euro zone’s top economies can no longer afford anything that could threaten overall economic growth. Euro zone has just entered another quarter in technical recession and European leaders might be keen to implement a fresh round of easing or engage in currency devaluation just to keep demand afloat. ECB head Draghi is set to deliver a speech today and talk about his outlook for the euro zone.

GBP: Bearish

It seems that there is no stopping the pound’s slide these days as the U.K. just released another weaker than expected report last Friday. The retail sales report for January posted a surprise 0.6% decline instead of the projected 0.5% rebound in consumer spending. This marks the fourth consecutive monthly decline in retail sales, which would definitely weigh on the U.K.’s GDP reading for the first quarter this year. Take note that the economy already posted a negative GDP report for Q4 2012 and another contraction could place them back in recession. The BOE just announced last week that they would not hesitate to implement further easing measures despite the risks posed by strong inflationary pressures, which means that the central bank is willing to face stagflation for the sake of spurring growth which might be a difficult feat.

CHF: Neutral

USD/CHF is currently stuck in consolidation despite the G20 Summit developments and the stronger than expected U.S. consumer sentiment reading released last Friday. This reveals that traders are still hesitant to take huge bets on the Swissy. Only the ZEW economic expectations figure is due from Switzerland this week so USD/CHF could see further consolidation until the report is released on Wednesday.

Commodity Currencies: Bearish

It seems that the Australian dollar, Canadian dollar, and New Zealand dollar have retreated from the rallies they made earlier during the week. The Kiwi was unable to sustain its gains resulting from the stronger than expected retail sales figure as the pair made a complete turnaround on Friday after reaching fresh highs. Meanwhile, gold prices have been weighing on the Aussie, which is also suffering from weak underlying fundamentals in Australia. The Canadian dollar is also having a tough time maintaining its lead against the U. S. dollar as Canada printed a weaker than expected manufacturing sales figure for December. The actual figure printed a whopping 3.1% slide instead of the estimated 0.4% downtick. The main events for the commodity currencies this week are the RBA monetary policy meeting minutes due tomorrow and Canada’s CPI and retail sales data due Friday.

By Kate Curtis