Weekly FX Roundup: US dollar drops against Euro, Sterling, commodities

By Gaurav Kashyap, Alpari ME DMCC

Conducting a post mortem of the US Dollar's performance against the Euro and Aussie amidst all the negative risk-related events plaguing the market this week proved to be a rather challenging exercise.

First we saw the People's Bank of China raising rates by 25 basis points, taking the lending rate to 6.31% and the deposit rate to 3.25%. Chinese rate hikes have traditionally been a high risk event for the currency markets, dampening the demand for higher yielding currencies, with the Aussie usually suffering the largest loss following such a move. But the PBoC's second hike of 2011 and the fourth since 2010 failed to shake Aussie Dollar bulls as the impact of these rate hikes continue to have a decreasing impact on markets. And secondly, Portugal's official request for a bailout could do little to hinder EURUSD's latest bull run as investors chose to focus on the ECB's rate decision.

European Central Bank ups rates

The ECB on Thursday increased rates by 25 basis points to 1.25%. The decision was largely expected and instead, traders looked for cues in Trichet's speech with regards to future rate hikes. The ECB President said that the monetary policy stance remained "very accommodative" and that the risk of inflation remained "on the upside" stoking views of possible future rate hikes. However in the Q&A session following his speech, his tone changed saying "We did not decide today that it was the first in a series of interest rate increases," deflating those earlier hawkish tones. EURUSD was trading between 1.4250 and 1.4320 levels following the announcement, before closing the week at 1.4482.

Portugal bailout has little impact on ECB rate decision

Portugal's request for a bailout just hours before the ECB's rate decision had little impact on EURUSD longs. Initial estimates show that Portugal could request anywhere between EUR75bn and EUR90bn Euros from the EFSF bailout mechanism. The announcement followed Portugal's latest auction which showed their 12 month bills offering had an average yield of 5.902%, well above the 4.331% yield from the previous auction. It will be challenging times ahead for Portugal, a country plagued with a growth rate of less than 1% over the past decade and unemployment rates in excess of 11%, the highest since 1998.

The country's budget deficit was reported at 8.6% of the 2010 GDP, higher than the 7.3% the Portuguese government had previously forecast and with several bond redemptions coming up (Portugal will have to pay up close to 4.3 billion Euros in April, followed by another 4.9 billion Euros in June) a bailout seemed inevitable. With the rate decision now firmly in the rear view mirror, attention will now shift back to Europe's developing sovereign debt crisis with the third of the so-called PIGS formally requesting a bailout.

Australia trade balance suffers on drop in global metal demand

Despite a week of rather disappointing data releases from down under, the Australian Dollar was able to hit its highest price against the US Dollar. Early in the week we had the release of the Australian trade balance which swung into the negative for the first time since March 2010 (-205 million AUD as compared to the previous month surplus of 1.433 billion AUD).

A sharp drop in global demand of metals and raw materials has hindered Australian exports and their stronger currency will do their exporters no additional favors. The trade news was followed by the RBA's rate decision which was kept on hold at 4.75%, as largely expected. The subsequent statement from the central bank indicated that current monetary policy was in line with inflation targets and that employment growth will be at a slower pace than 2010. The combo of weaker data briefly weakened the Aussie before it continued its move upwards.

In other news, the BoJ held rates between 0 and 0.10% as largely expected and announced that it would be offering up to 1 trillion Yen in the form of one-year loans to businesses affected by the nation's earthquake. Similarly, the Bank of England kept rates on hold at 0.50% with no changes to its £200 billion asset purchase plan target.