by Darrell Jobman, Editor-in-Chief TraderPlanet.com
Source: VantagePoint Software, Market Technologies, LLC
The dollar held close to 1.2775 ahead of the US payroll report on Friday before weakening to lows beyond 1.2850. The Euro struggled to hold gains, settling near 1.2815, and trading ranges were relatively narrow with the Euro stifled by a closing of long positions ahead of the weekend. In this context, the speculative positioning data will be watched closely over the weekend to assess the risk of more substantial Euro corrections.
The headline US payroll report was weaker than expected with the June employment increase held to 121,000 for June after a revised 92,000 increase in May. The background data was significantly stronger with the unemployment rate holding steady at 4.6% while the workweek rose back to the three-year high seen in April.
The earnings increase was also stronger than expected, with a 0.5% monthly increase pushing the annual increase to a 3-year high of 3.9%. The report will put the Fed in a difficult position as the employment data suggests there is scope to stop raising interest rates while the earnings data will maintain inflation concerns and reinforce pressure for higher borrowing costs. The dollar will find it difficult to generate buying interest on speculation over higher interest rates if growth appears to be deteriorating. Given the uncertainty, Fed comments will need be watched very closely next week and could have an important dollar impact.
The yen held close to 115.25 against the US dollar in local trading on Friday, but strengthened to test levels beyond 114.0 after the weaker than expected US payroll report and the yen also regained ground against the Euro.
The government has revised up its GDP projections for the current fiscal year and this suggests acceptance of a Bank of Japan interest rate increase next week. The yen will find it difficult to gain strongly on a small interest rate increase alone and will now be vulnerable to selling pressure if the bank leaves rates unchanged on July 14.
During Friday, the yen gained some support from speculation over an emergency Chinese central bank meeting and a further yuan revaluation. Although these reports were denied by the Chinese authorities, regional exchange rate policies will remain an important underlying focus and will offer some yen protection.
Sterling held firm against major currencies ahead of the US data on Friday and the ability to hold gains to 0.6925 against the Euro after the US employment report allowed Sterling to challenge levels above 1.85 against the US dollar.
Sterling gained some support from speculation that there will be hawkish appointments to the Monetary Policy Committee to fill the two vacant places. A change in balance could bring forward an interest rate increase, although new members would be reluctant to vote aggressively early on. The underlying global interest rate trends will still make it difficult for Sterling to secure strong buying interest or sustain major advances unless there is clear evidence of higher UK interest rates.
The Swiss currency strengthened to highs beyond 1.22 against the US dollar after the US payroll report, but was unable to extend the gains and consolidated around 1.2220. The franc strengthened to 1.5665 against the Euro.
The Swiss unemployment rate fell to 3.1% in June from 3.3% in May which offered some marginal support to the Swiss currency, although international trends are likely to remain dominant.
The Australian dollar continued to draw support from the combination of a firm Euro and high commodity prices during Friday. The trend for a firmer currency was magnified by the weaker than expected US payroll report with the Australian currency challenging levels above 0.7510 level in New York on Friday.
Underlying speculation over a Reserve Bank tightening will offer background support to the Australian currency, although international trends are still likely to dominate over the next week.