Currency Briefing - what you need to know for Tues March 20, 2012

The local currency has gained a little on the US dollar, thanks to better-than-expected export numbers.

IG Markets Singapore said:

The Singapore dollar has gained a little on the greenback sitting at $1.2563. The local currency has managed to hang onto the gains made from its better-than-expected exports numbers on Friday.

But the currency pair continue to trade in a tight range while waiting for some strong market signals from the US or Europe, which are unlikely to happen this week.

All eyes will be on the Monetary Authority of Singapore next month when it holds its half-yearly policy review. The MAS is expected to maintain its slow appreciation of the Singapore dollar this year to curb creeping inflation.

A MAS survey last week showed inflation could hit 3.5% this year which is at the top end of official forecasts. Inflation in Asia has been stubborn and won’t be helped by rising oil prices for energy-hungry economies.

Expectations are for the Singapore dollar to trade at $1.26 by the end of the year, relatively flat with its current level.

GFT meanwhile reported (for 19 March 2012 trading):

For the third consecutive trading session, the euro rebounded against the U.S. dollar. Eurozone current account activity surged in the month of January to its highest level in 5 years while construction output declined sharply.

While investment flows were net negative, the surplus for goods and services rose strongly, reflecting healthier demand. The impact on the EUR/USD was nominal however given the outdated nature of this report. The first quarter was a much better one for most countries and the main question of whether demand has been sustained since then will be answered by the PMI numbers later this week.

Greek Finance Minister Venizelos resigned on the day of the Greek CDS auction to lead the country’s Socialist Party. His departure is not a significant one because it comes at a time when the volatility and uncertainty around Greece has settled.As for the CDS auction, the final settlement price was 21.5 percent which means that for every $10 million

in CDS protection bought against a Greek default, a payout of $7.85 billion will be given. Spanish and Greek bonds will be auctioned off tomorrow and as usual, the results will be a measure of investor confidence.

German producer prices are due for release tomorrow. Inflationary pressures are expected to moderate but higher oil prices could trigger an upside surprise. ECB member Nowotny said this morning that they cannot exclude the possibility of high oil prices impacting inflation.

For the time being, with no major European or U.S. catalysts on the calendar, we expect the EUR/USD to remain confined in a range between 1.31 and 1.34.

RBS, on the other hand, noted (for 19 March 2012 trading):

The recent positive correlation between rising US rates and the USD took a pause today as the USD fell broadly against the G10 (particularly vs. the Euro) despite the 5-year swap rate breaking definitively above its 200-day MA.

Anticipation of high profile cross-border M&A activity may have propelled the EUR higher and with investors still seemingly very short of EUR, a short squeeze was triggered. (CFTC data as of Tuesday 13 March showed net 99K contract EUR short position among investors on the IMM).

We still see the break higher in the US 5-year swap rate as USD supportive and would use this back up to establish long USD exposure, with our preferred positions being short EUR/USD and long USD/CHF.

Finally, we expect the RBA minutes to confirm the Board's easing bias, though the minutes may not be significantly different from the comments made by Governor Stevens on 19 March.