Sterling
Sterling finished the week in good form against the USD, pushing above $1.5900 before drifting lower. Against the euro it fell below €1.2000 on Friday as the single currency got a fillip from some positive news from Italy on labour reforms. However this may be short lived.
Overall Sterling looks in good shape. The risk premium in the market has subsided (thus less reason to hold USD), the UK should escape a double dip recession, and compared to the economic in Europe, the UK is doing ok. All these factors should see Sterling hold its own and look to improve in the week ahead. A test of $1.6000 versus the USD is possible and a retest of €1.2100 against the euro also on the cards.
US Dollar
The dollar remains in broad trading bands against all the major currencies as implied volatility fell further through the week. The dollar fell against sterling, Japanese yen and latterly the euro, but gained versus the commodity currencies such as the Canadian and Australian dollars. With risk premium now sharply reduced, the market will doubtless get back to trading fundamentals, so data watching is the key for now.
Being the last week of the month, there are no important economic data releases, so news from elsewhere in the world should be the driving force behind USD moves. Investors believe that USD interest rates will rise sooner than the Fed are predicting as data shows a gradually strengthening economy. Against that, the reduced risk premium should encourage investors to sell dollars. Overall, we see a continuation of the recent ranges, with a bias for sterling to improve and test the $1.6000 area soon.
Euro
Another relatively quiet week for the euro against the other major currencies with a less than 150 point range against the USD and just over 100 points against Sterling. A rally on Wednesday was soon reversed, with data releases from the 2 major Euro economies disappointing the markets.
The data will be key to GBP/EUR next week; however, we still favour a gradual weakening of the euro, and look for a retest of the recent high around $1.2060 before pushing on towards €1.2100.
The recent bounce in the EUR/USD rate looks to be corrective rather than a trend reversal. Resistance at $1.3455 should contain any further upside before the pair turns back towards $1.3000.
New Zealand Dollar
The kiwi dollar has struggled this week with concerns about Chinese growth and weak domestic data further reducing the chances of an interest rate rise in 2012.
GBP/NZD cleared NZ$1.9400 and pushed higher, with the short term target now at NZ$1.9713 and then NZ$1.9918 above that, although there may be some consolidation of the current move before the pair trades that high.
Australian Dollar
The Aussie dollar dropped this week on lower risk appetite and signs of slowing Chinese growth despite reassurances from Reserve Bank Governor Stevens about the central bank’s confidence in exports.
The GBP/AUD rate fell short of resistance at A$1.5300 this week, but looks likely to test that level in the coming days. A$1.5478 is up next, but some consolidation looks likely in the near term.
Canadian Dollar
Again the GBP/CAD rate mirrored moves GBP/USD, with the pound pushing higher to within a few points of the target we mentioned last week at C$1.5850. Data releases out of Canada were not overly helpful to the currency while sterling continues to benefit from the fall in the USD as risk aversion continues to wane.
The USD/CAD exchange rate continues to straddle parity and there is nothing to suggest that this will change in the short term. Given this, the direction of GBP/CAD will be influenced more by events in the UK than in Canada. With sterling still in demand, we see the GBP/CAD rate edging up towards C$1.5925
Chinese Yuan
The yuan strengthened late in the week after the People’s Bank of China announced measures intended to boost economic growth, even as a preliminary purchasing managers’ index suggested manufacturing activity as slowed further in March.
We don’t see much change to the outlook over the coming week. The same narrow range should persist with few, if any, surprises.
Japanese Yen
The yen managed to halt its slide versus the pound and dollar this week as renewed risk aversion and signs of an improving domestic economy boosted the appeal of the currency, amid speculation that the recent decline has been overdone.
USD/JPY now looks likely to retrace towards 80.50/60 support before pushing on towards 85.25/55. For the pound, this will equate to a dip below 130.00 before pushing on to resistance at 134.50 and higher.
South African Rand
The rand has lost ground this week on a pick-up in risk aversion that hit all commodity currencies in the wake of softer Chinese manufacturing data, while lower inflation rates reduced the chances of interest rate hikes.
GBP/ZAR now targets resistance at R12.29, with R12.69 above that, although consolidation in current ranges looks the more likely outcome. USD/ZAR could push as high as R7.885, but may struggle in the interim.
