by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar failed to hold gains following Thursday’s Fed meeting and weakened to lows around 1.3540 against the Euro in US trading on Friday.
Market positioning was important at the end of the second quarter and institutional demand for Euros kept the dollar on the defensive as high weightings were maintained. The US currency will look to gain some renewed support at the start of the third quarter, but the decline in yield spreads over the past few days will make it difficult to secure strong buying support.
As far as growth indicators are concerned, the Chicago PMI index remained strong at above the 60.0 level for June which will reinforce optimism over the manufacturing sector, especially if there is a strong reading for the national ISM index on Monday. There was also a small increase in the Michigan consumer confidence index.
The core PCE prices index rose 0.1% in May, the same increase as in April, while the year-on-year increase edged lower to 1.9%. This is just below the 2.0% level which the Fed considers the upper limit and will maintain optimism that inflationary pressure is easing slightly. Moderation in inflation will lessen the potential for dollar gains.
The yen was unable to make any significant progress against the dollar for most of Friday, even though the US currency was generally under pressure, and this pushed the yen back to near record lows against the Euro. The yen secured some respite later in US trading with a move to 123.05 from 123.50 as US stock markets weakened.
Japanese consumer prices fell 0.1% in the year to May while Tokyo prices also fell 0.1% in the year to June. The other data was firm with unemployment holding at 3.8% while household spending rose 0.4% over the year. Nevertheless, the subdued inflation data will dampen expectations of a tough Bank of Japan stance on interest rates. The yen will be vulnerable on yield grounds, especially if there is a disappointing Tankan report on Monday.
The yen will remain under pressure if risk tolerances remain higher and global stock markets continue to advance, but sentiment will remain vulnerable to a rapid reversal. The asset allocations at the start of the third quarter will be very important and there is likely to be greater caution over institutional yen selling.
Sterling retained its position above 2.00 against the dollar on Friday and pushed to highs around 2.0080. Sterling was unable to make any headway against the Euro and dipped to lows near 0.6740.
The latest data should not have a big impact with a rise in mortgage approvals for May offset by a decline in net consumer lending as borrowing levels remained subdued. The data continues to suggest that consumers are increasing housing debt due to financing constraints on unsecured lending and this will undermine medium-term growth prospects. Sterling should still remain firm ahead of Thursday’s interest rate decision.
The current account deficit for the first quarter of 2007 was GBP12.2bn compared with an upwardly-revised GBP14.5bn in the fourth quarter of 2006. Markets are not focussing on the current account at this stage and the capital account was firm, but attention will increase sharply on trade issues if UK growth deteriorates.
The Swiss franc strengthened to highs around 1.2215 against the dollar on Friday and also recovered from lows around 1.6570 against the Euro to 1.6535 in US trading. The franc drew some support from a retreat on Wall Street.
National Bank President Roth stated that the bank was clear in its intentions, continuing to indicate that the authorities are uneasy over franc weakness. The volume of protests against currency weakness has increased significantly with comments now almost daily from central bank officials.
There will be further speculation that the bank could sanction an inter-meeting interest rate increase and verbal intervention will also deter franc selling.
The Australian dollar again attacked resistance levels above 0.85 against the dollar before retreating back below the 0.85 level later in US trading. Global risk tolerances continued to improve in local trading on Friday which supported the Australian currency, but a Wall Street retreat caused some doubts.
There was a firm reading for private credit while commodity prices also held firm which will underpin sentiment in the very short term. The domestic data will be watched closely next week for further evidence on the possibility of another Reserve Bank interest rate increase. Any sustained downward pressure on global stock markets would unsettle the Australian currency.