by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar weakened to fresh all-time lows against the Euro at the 1.38 level on Thursday before finding some relief in US trading and consolidating close to 1.3780. Kuwait allowed the dollar to weaken slightly against the dinar and this helped maintain negative US currency sentiment on fears over Middle East selling.
The US trade deficit increased to US$60.0bn in May from US$58.7bn previously and the export performance was robust with a 2.0% monthly increase. There was also a significant increase in imports led by the energy sector as volumes and prices both increased. The underlying data continues to show slow signs of improvement and the immediate market impact should be limited. The size of the deficit will still fuel concerns over financing difficulties if there are further US mortgage-sector stresses.
Jobless claims fell to 308,000 in the latest week from 320,000 previously which will provide some reassurance over near-term labour-market trends. The retail sales data will be watched closely on Friday and, although gasoline sales should underpin the data, a weak underlying figure would continue to undermine dollar sentiment.
The ECB continued to take a tough stance in its monthly report while there was a small upward revision to first-quarter Euro-zone GDP growth. Confidence in the Euro-zone will remain strong in the short term, although there are still significant underlying risks.
The Bank of Japan left interest rates at 0.50% by a 8-1 margin with Mizuno calling for an immediate rate increase. Bank of Japan Governor Fukui stated that the bank would increase interest rates gradually with the majority wanting to see further evidence before tightening again. Fukui also commented that he was certain that core consumer prices would rise over the year.
The fact that more members did not call for a rate increase will dampen expectations over an August rate increase and, although there is a strong chance that rates will be increased next month, this is already reflected in market expectations.
The latest capital account data recorded a small net surplus as overseas funds pushed into Japan. The biggest threat to yen stability will be a sudden reduction in flows out of Japan on increased risk aversion. There will be the potential for yen gains if global stock market weakness returns.
Sterling pushed to a high around 2.0360 against the dollar on Thursday before weakening back to below the 2.03 level and the UK currency weakened to 0.6790 against the Euro.
The latest RICS house-price survey was significantly weaker than expected with the proportion of agents reporting an increase in prices dropping to 10.6% from 22.5% previously.
This was the weakest survey since the beginning of 2006 and suggests that the property market is slowing.
Given the very high consumer debt levels, there will be the risk of a sharp deterioration in the sector which will undermine Sterling. The latest BCC survey also warned over the risk of a sharp slowdown in growth. Sustained weakness in global financial markets would tend to undermine the UK economy given that the financial sector has been a key contributor to recent growth.
The Swiss franc encountered further resistance close to the 1.20 level against the dollar on Thursday, but the US currency was also unable to make any significant headway and settled close to 1.2035. The franc drifted slightly weaker against the Euro to near 1.6590.
The recovery in global stock markets undermined near-term defensive demand for the Swiss currency. Underlying risk tolerances are, however, likely to remain lower and only a small shift in sentiment could trigger sharp franc gains.
The Australian dollar dipped after the domestic data on Thursday, but recovered back to 0.8650 in US trade as there was a recovery in global stock market prices.
The domestic labour-market data was weaker than expected with the unemployment rate rising to 4.3% from 4.2% while the increase in employment was held to 2,500 for June.
Consumer inflation expectations also eased slightly in the latest survey. Following the weaker than expected labour-market data, market expectations of an August rate increase dropped to below 30% which curbed Australian dollar buying interest.