Currency Briefing - what you need to know for Mon March 12, 2012

The US dollar edges up to $1.2584 against the Singapore dollar.

IG Markets Singapore said:

Singapore currency traders have a lot of economic news to digest this morning as the US dollar edges up to $1.2584 against the local currency.

Friday left the US economy in a healthier state with non-farms payroll data showing further expansion for employment. The Greek debt swap being pushed through also helped to improve risk sentiment.

The currency pair is likely to stick to a narrow range as uncertainty still remains for the global economy. This uncertainty was increased with the weekend’s thunderbolt from China that its trade deficit grew by $31.5 billion for the start of the year.

This could dampen the mood within Asia as the region’s outlook with the world’s second biggest economy slowing down. But it may push forward the PBOC’s plans for more liquidity by easing bank reserves. This would have a positive effect on regional risk assets. But for now China is putting a curb on the Singapore dollar rising and other Asian currencies.

The non-farm payroll data and Greek debt swap actually did little to move the markets as much of it was priced in. The next task for traders is to look for the next key event to move the currency pair while the dust settles.

GFT meanwhile noted (for 9 March 2012 trading):

The U.S. dollar traded higher against all of the major currencies today thanks to stronger than expected labor market numbers. Improvements in the U.S. economy have made investors and central bankers more confident about the recovery.

Fed Fund futures now show a 62 percent chance of a rate hike by January 2014. Some economists are even predicting a 2013 rate hike, which is far more aggressive than the Fed’s projections. The dollar has benefitted significantly from the upside surprises in U.S. data and the sustainability of the rally will hinge upon the tone of Tuesday’s FOMC statement.

If the Federal Reserve continues to acknowledge the improvements in the economy and places greater emphasis on the rise in oil and its impact on inflationary pressures, the dollar could extend its gains as this would reinforce the market’s belief that QE3 is no longer necessary. However if the central bank sounds cautious and downplays inflation or growth, the greenback could retreat quickly.

RBS, on the other hand, reported (for 9 March 2012 trading):

The USD positive reaction to today's stronger than expected non-farm payroll report and the upward revisions to previous data was in line with our expectation for stronger US data to begin to benefit the USD as markets continue to reduce expectations for QE3 by the Fed.

With most of the good news surrounding the EU sovereign debt crisis (such as the 3-year LTRO and the debt swap completion), we expect EUR downside over the coming weeks and we hold core short EUR/USD and EUR/CAD exposure and would continue to recommend selling rallies in both pairs.

Our EUR/CAD short-term fair value model continues to suggest downside and as a result we have lowered our target on this trade to 1.2780 as we expect a test of the January 2012 lows. (Originally established 27 Feb at 1.3430, target 1.2900)