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 found support below the 2.03 level against the dollar on Friday and strengthened to highs around 2.0365 before consolidating around 2.0330 in choppy trading. The UK currency resisted further losses against the Euro.
Bank of England Chief Economist Bean reinforced the need to anchor inflation expectations and the central bank will maintain a tightening policy bias. The data next week will be very important for UK interest rate expectations and Sterling. A set of weak data would increase pressure for an extended pause in rates and sap Sterling strength. Stronger growth and inflation figures would create additional pressure for an early move to increase interest rates again to 6.0%.
The Rio Tinto Group’s US$38bn bin for Canadian company Alcan may have some negative impact on the UK currency through capital outflows, although the impact should be limited as funding could be in dollars rather than Sterling.
The Swiss franc tested levels below the 1.20 level against the dollar following the US retails sales data, but the US currency found further support below this level and strengthened back to 1.2030 later in US trade. The franc edged weaker to near 1.6590 against the Euro.
Wall Street sustained Thursday’s gains during Friday and the recovery in risk appetite curbed short-term demand for the Swiss currency. Risk tolerances may remain firmer in the very short term, but underlying tightening in credit conditions will still provide important underlying franc support.