Weekly Summary: The dollar appreciated after busy week

The dollar (USD) and the loonie (CAD) were the most widely appreciated currencies last week in the group of the most traded. While there were many economic data considered “market movers” was an intense week marked by speeches, resignations and turmoil. The shares continued their upward rally with modest steps in the U.S. (low volume) and in Europe, although several important Asian markets were falling.

The dollar (USD) and the loonie (CAD) were the most widely appreciated currencies last week in the group of the most traded. While there were many economic data considered “market movers” was an intense week marked by speeches, resignations and turmoil. The shares continued their upward rally with modest steps in the U.S. (low volume) and in Europe, although several important Asian markets were falling.

One of the most important events were the protests in Egypt who became celebration after the departure of the president. The resignation of H. Mubarak can bring certainty in the short term but the success of the protests have turned the revolutionary flame in neighboring countries could continue to create instability in the region. The main effect of this, for now, it’s about oil prices. For now, any tension that is transferred to financial markets looks limited.

EURUSD: weakened, threatening to extend the fall in the short term

The cross between the euro and the dollar (EUR / USD) had started the week positively but over the days was losing strength, could not exceed 1.3750 and ended threatening 1.3500 support area. To extend the fall the couple needs to fall below that key level, failing which the euro could build the foundation for a recovery that will lead to high for the year.

The underlying situation in Europe has not changed much. The threat remains that more countries need funds to help (especially Portugal, whose bonds fell again strongly encouraging the involvement of the European Central Bank) and some fundamental problems still remain, what it takes strength to rise today the euro and is also the factor that has lost significant ground in the market in general. This is especially noticeable when comparing the performance of other currencies against the dollar and the euro: while several years traded at record highs against the dollar, the euro had to conform to rise above 1.40 (an area not finally could hold).

USDJPY: doing the expected

The yen was among the worst performing currencies, weakened by the rise in interest rates on government securities and the best mind in certain markets. The cross with the dollar (USDJPY) was testing the maximum of this year to overcome them, would enable a test of the 84.50 area. While the upward moment seems to have strength to continue, the current movement of the cross lateralization remains until it does not exceed 84.50; to do so, the higher prices could accelerate over the next months.

The policy of monetary easing undertaken by the Federal Reserve appears to be the reason why this couple has lost a relationship with the major indexes. While the latter are listed on top in almost three years, USD / JPY merely highs in months and is recovering well. The changes at this time are not clear and while the Fed continues to purchases of securities, the rises in the cross product of risk appetite may be limited compared with other yen crosses.

GBPUSD: Panorama unclear

The pair extended the slow downward path, testing levels below 1.60, 1.60 is confirmed in further declines expected. Downward force at this junction appears less strong than that of the EURUSD, but everything can change. 1.6150 over the upward trend could be accelerated and would be positioned to test 1.6260 and why not, even higher.

Establish a route for the medium term is very difficult, most likely seems to be a lateralization in a wide range, under current conditions.

The Bank of England kept interest rates unchanged in line with expectations, although there are several voices that speak of a possible rise in the short term to combat inflation. It is not clear that will happen. The publication of the minutes of the last meeting will be a key event to find out how close is the bank to raise rates (Wednesday, 23 February). Greater likelihood of rate hikes should push the pound, but we must not fail to take into account other variables, to assess the future performance of the euro. This week could hold clues to the publication of the bank’s inflation report and the speech of its president on Wednesday.

Loonie, with the dollar the best

Among the currencies linked to commodities, Canada’s was the best performance.The loonie continues to make specific movements and in many courses is what makes the dollar in general, resulting in long journeys in the rest of the crosses, especially against some European currencies and against the kiwi and aussie. The same thing is happening when the dollar falls, the USCAD not keep pace and the loonie weakens in the market.

The appreciation of this week you might have originated from various sources. The latest data from the Canadian economy has been strong and in turn the rate hike in China, is less impaired. Remember also that positive data from the U.S. economy (the last week included a significant decrease in requests for unemployment benefits), improve the positioning of the loonie in their crosses. On Friday they met the trade balance data from Canada in December, which showed the first monthly trade surplus in 10 months thanks to strong export growth (both in volume and price).

Authorities, but no changes in ECB rates

It seems that Axel Weber, who will replace Jean-Claude Trichet at the head of the European Central Bank, after resigning from his position at the German central bank.Weber’s resignation is bad news, however qualified it has been, his statements to the press used to be strong. This does not play for someone who should lead the central bank of a union. The search will probably go to someone more favorable to achieve consensus and try to avoid conflicts. History also shows that this can be learned along the way, as did Trichet, that when I leave the bank will be very different from the one that started it (the crisis of 2008 must have helped a lot).

Interest rates at the ECB are assumed to be maintained for a time at their current level. The threat of inflation is now abandoned. It seems that the bank does not want history to repeat 2008, when two months before the breakdown of Lehman Brothers raised its benchmark interest rate by 25 basis points to combat inflation, which was being led by a rise in prices energy and commodities.

Who himself was raised rates China: the fact was not surprising but the date as it did during the New Year celebration. Even more hikes expected, thus the effect on markets is limited. Hikes to hit harder, are expected to be overcome.

Nothing changes and everything stays the same in the U.S. fiscal outlook

Data from U.S. tax bills still in red and have already accumulated more than 2 ½ years without a surplus. The January data showed a deficit slightly less than what had accumulated in the last year, which considering the high deficit is not encouraging news. The only positive aspect of the report is that the revenue is rising every month.

The main deficits are a friend of American politicians, both the ruling party (Democrats) and Republicans (opposition). Neither party is doing something to reduce the deficit. Only hear the words and when it comes to action, all give a view on the side.

Facundo Molina is founder and director of MolFX - Management, a company fully specialized in Foreign Exchange Markets, with an important client portfolio through Capital Markets Services LLC (CMS). He has a BA Business Management at the Universidad Nacional del Sur (Argentina), where he has a doctorate degree based on the application of Fibonacci theory into financial markets. He also acts as professor of new and experiments traders.