Guest post by ForexTraders.com
The U.S. Dollar turned in a dismal performance last week against the most of the major currencies. Nevertheless, the Greenback managed to rise slightly against the New Zealand Dollar in the wake of the RBNZ’s decision to leave their benchmark Official Cash Rate unchanged at 3.00% and more so against the Japanese Yen which appreciated thanks to the first round of official forex intervention by the Bank of Japan seen in years.
The most significant price action was seen last week against the Euro which gained considerably versus the Greenback after the previous weekend’s Basel III agreement was tentatively finalized, although it awaits ratification by the G-20 in November.
Along with the Euro, the Japanese Yen was also in the spotlight, dropping significantly against the Greenback after the Bank of Japan stepped in as the Yen reached new 15 year lows in the wake of the Japanese presidential election results that confirmed Prime Minister Kan.
The Euro and Pound Sterling were the best overall performers against the Greenback last week. The Euro gained 2.5%, Sterling was up by 1.7%, the Australian Dollar was 1% higher and the Canadian Dollar managed to eek out a more modest 0.3% gain.
The two major currencies to decline against the U.S. Dollar were the New Zealand Dollar, which declined by a mere 0.3% and the Japanese Yen which fell by 1.9%.
U.S. Dollar’s Performance Was Weak at Best
The largest fall in the Greenback last week against the other majors was seen against the Euro and Sterling, where the U.S. Dollar lost -2.5% and -1.7% respectively.
Furthermore, the price of gold making a new all time high of 1,282.75 on Friday also buoyed the Aussie and the Loonie, in addition to preventing the Kiwi from declining further.
The New Zealand Dollar — the only loser besides the Yen among the majors against the U.S. Dollar last week — was severely hampered by the dovish comments made by RBNZ Governor Bollard in a statement accompanying the RBNZ’s Rate Decision announced last Wednesday to keep rates stable.
Bank of Japan Intervenes for the First Time Since 2004
The BOJ’s first official currency intervention since 2004 was also instrumental in weakening the Japanese Yen, with the Greenback rising almost 3.00% against the Yen on Wednesday and then holding on to most of it gains. The rate went from a 15 year low of 82.87 on Wednesday to 85.73, where it closed on Friday.
USDJPY has since held above the 85.50 level after the intervention last Wednesday and now appears to have stabilized around the 85.70 level. The BOJ has apparently now drawn their line in the sand at the 82.00 level on the Yen.
The BOJ intervention last week came without the concerted effort of either the European Union’s or the United States’ central banks, so that had a dampening effect on its efforts.
Euro Stronger on New Basel III Bank Requirements and Spanish Debt Auction
For its part, the Euro gained considerably against the Greenback, rising by +2.5% largely on the back of news out last Monday that the new Basel III agreements would give banks ample time to come up with additional reserves.
The new international bank requirements will obligate banks to maintain 4.5% of their assets in reserve in the event of additional economic stress. In addition, a 2.5% buffer amount will also be maintained.
Nevertheless, the regulations will only partially go into effect starting January 1st, 2011, and they will be gradually phased in with the full force of its requirements not scheduled for final implementation until 2019.
Also contributing to the rally in the Euro were the results of a Spanish debt auction on Thursday which showed the country had raised a total of 4B Euros of 10 and 30 year bonds, meeting the auction’s maximum subscription target.
The average yield on the 10-year bond was 4.144%, which was lower than the 4.864% paid on Spanish bonds auctioned in June. In addition, the 30 year Spanish bond sold at an average yield of 5.077%, which was also considerably lower than the previous yield of 5.908% paid in the previous auction.
Forex Market Implications
The forex market is beginning to let reality sink in. With mixed economic numbers out of the United States and Europe which continue signaling weakness in both economies, the commodity currencies continue to be favored over both the Greenback and the Euro.
Basically, with the price of gold reaching new all time highs along with other commodities such as silver and oil continuing to appreciate, being long either the Euro or the U.S. Dollar will eventually catch up to investors and bite them hard.
The day of reckoning will arrive maybe sooner than later for both EUR and USD.
With respect to the Yen, BOJ intervention has been notoriously ineffective in stemming the Yen’s rise in the past. Although the forex market has reacted significantly to this bout of intervention, until the underlying bearish sentiment for USDJPY reverses, this could merely be a smoothing event that could provide traders with better levels to buy Yen at.
Weekly Recap and Outlook for the U.S. Financial Markets and Dollar – 9/20/2010 The U.S. Dollar weakened considerably against almost all the major currencies last week, with the exception of the Yen and the Kiwi against which it gained 1.9% and 0.3% respectively.
The Yen was supported by unsterilized BOJ intervention in the forex market, while the Kiwi fell against the Greenback on news indicating that the RBNZ would likely not hike interest rates further in the near term. Read full report
Weekly Recap and Outlook for EURUSD – 9/20/2010 EURUSD recovered considerably in last week’s trading, initially rallying from its weekly low point at 1.2703 seen on Monday. The Euro gained support from the announcement by the Basel Committee of Banking Supervision (BCBS) that it would be introducing a fresh set of regulations for international financial institutions to be known as Basel III. Basically, these new BCBS banking rules will require banks who wish to comply with them to maintain three times more capital than was previously necessary under the earlier Basel II rules. The time frame for implementation of these regulations — within which global banks will need to meet the higher minimum capital requirements — is five years. Nevertheless, banks will not have to meet the full capital requirements until 2019, when they will have to commence holding high quality capital to cover a minimum of seven percent of their risky assets. They will also need to keep a 2.5% buffer to help protect against possible financial stress. Although this extended implementation time frame will have only a minor impact on international banks in the short term, it will eventually improve their risk profile over the longer term. Read full report
Weekly Recap and Outlook for GBPUSD – 9/20/2010 GBPUSD pushed higher last week, initially trading with a positive tone on Monday after U.K. Nationwide Consumer Confidence moved up to the 61 level that compared favorably with its former 56 level. This result also beat out the market’s call for a 59 print. In spite of this improvement, the U.K. housing market lagged as shown by a large decline in the RICS House Price Balance of -32% compared with its previous fall of only -8%. The outcome was far worse than the market’s consensus for an -11% drop. Read full report
Weekly Recap and Outlook for AUDUSD – 9/20/2010 AUDUSD gained ground once again, rising for fourth straight week as fresh all time high gold prices — in combination with favorable Chinese economic data released over the previous weekend — raised both international investor risk appetite and market sentiment. This supportive scenario benefitted the commodity currencies, although the Aussie showed the most impressive gains. Last week began for the Aussie with a positive tone taking the rate off of its weekly low point of 0.9287 seen during Monday’s session. AUDUSD rose in the wake of news that the Australian NAB Business Confidence index came out at 11 that was considerably above its former 2 reading. Read full report
Weekly Recap and Outlook for NZDUSD – 9/20/2010 NZDUSD saw volatile trading conditions prevail last week, as the rate moved sharply within a 0.7213 to 0.7392 range. The rate began the week by trading higher in spite of news that a 7.0 earthquake had hit Christchurch — a major New Zealand city — over the former weekend. The quake prompted the declaration of an official state of emergency in the region and extensively damaged property in the city. Monday also saw New Zealand FPI show a lower than expected decline of -0.1% for the month compared with its previous reading of a gain of +1.6%. Read full report
Weekly Recap and Outlook for USDJPY – 9/20/2010 USDJPY experienced considerable action in last week’s trading, in spite of minimal economic data being released from Japan. The pair began last week with a soft tone during Monday’s session as the Yen strengthened in advance of Japanese elections to be held the following day. Tuesday’s election results showed that ruling Democratic Party of Japan Prime Minister Naoto Kan was favored over his rival Ichiro Ozawa. As a result, Kan won a full term as president of his party, and promptly reshuffled his cabinet. In doing so, he shifted over half of its positions to fresh appointees, excluding Ozawa in the process. The Yen strengthened on this news, sending USDJPY to yet another fresh 15 year low point at 82.92 on Tuesday. Read full report
Weekly Recap and Outlook for USDCAD – 9/20/2010 USDCAD continued trading within its recent triangle consolidation pattern last week. The rate stayed within a fairly tight 1.0215 to 1.0349 range, with competing fundamental factors keeping the rate relatively stable. The week started off with a favorable tone for the Loonie as generally positive economic data out from China over the weekend raised international investor sentiment. Nevertheless, the rate found good support that was in part stemming from Greenback buying interest expressed by Canadian corporations. These hedge related U.S. Dollar purchases came strategically in front of a key gently upward sloping trend line that started the week at 1.0164 and then ended slightly higher at 1.0178 on Friday. Read full report
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