by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar was unable to secure any traction beyond 1.3680 against the Euro on Friday and the US currency dipped to lows around 1.3775 after weaker than expected economic data. The dollar was unable to gain any support from increased risk aversion and weakened further to 1.3810 later in US trade.
The headline US employment data was weaker than expected with non-farm payroll growth of 92,000 compared with a downwardly-revised 126,000 increase for June. This was the lowest increase since February while the unemployment rate also rose to 4.6% from 4.5%. There was a stabilisation in the manufacturing sector with job losses held to 2,000 while average earnings growth was steady at 0.3%.
The ISM report for the services sector was also lower than expected with a decline to 55.8 from 60.7 the previous month. The orders, employment and prices components were all weaker and this will reinforce expectations of slower growth, especially after the weaker manufacturing index.
The data will maintain expectations of an overall slowdown in the economy with continuing speculation over a Federal Reserve interest rate cut late in 2007. There is very little chance that the Fed will adjust interest rates next week, but the FOMC minutes will be watched very closely and market have now fully priced in a rate cut this year.
The ECB has maintained its firm stance on interest rates and has reinforced market expectations that there will be an interest rate increase in September which will underpin the Euro.
The dollar was unable to strengthen above the 119.30 level against the Japanese yen in Asia on Friday. Subsequently, the US currency also weakened to lows below 118.50 in US trading as the dollar came under general selling pressure.
There were no major domestic developments on Friday with the underlying mood of caution persisting as market attention was focussed on the global financial flows.
Overall levels of risk aversion remained higher and there was a fresh cutting of carry trades on Friday with investors looking to reduce risk ahead of the weekend. There will still be the threat of position capitulation due to margin calls and markets will remain much more cautious over carry trades.
Sterling found support below 2.0350 against the dollar on Friday and strengthened to highs above 2.0440 as the US currency stumbled in US trade. The UK currency weakened to 0.6755 against the Euro.
The UK CIPS index for the services sector edged lower to 57.0 in July from 57.7 the previous month and the drop in the prices component will also dampen expectations of interest rates moving above the 6.00% level.
Sustained speculation that interest rates have peaked would be much more damaging for Sterling. In this context, the housing data will be watched closely following data showing a significant increase in bad debts with home repossessions rising by over 30% in the fist half of 2007.
Carry trade influences will remain strong and a drop in risk appetite curbed Sterling buying to some extent in US trading on Friday.
The dollar was unable to make any impression on levels above the 1.2050 level against the Swiss currency on Friday and weakened sharply to 1.1880 in US trade, a 2007 low for the US currency. The franc also strengthened through the 1.65 level against the Euro as risk aversion spiked again.
Swiss consumer prices fell 0.6% in July on seasonal grounds. With prices also falling sharply last year, the year-on-year inflation rate edged slightly higher to 0.7% from 0.6%. The data was in line with expectations and should not have a major impact on the National Bank with markets looking for a September interest rate increase.
Short-term Swiss currency moves are likely to remain correlated strongly with global stock market trends and the franc will continue to benefit if asset prices fall.
The domestic data was firm with a solid PMI services report reading while the inflation survey was also stronger than expected. The data will maintain expectations of an interest rate increase next week which will underpin the Australian currency. There will still be caution given the underlying tightening in credit conditions with rising risk aversion a negative factor for the Australian dollar.