by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar managed to break Euro support close to the 1.37 level on Friday and strengthened to highs around 1.3635. The Euro remained under pressure on the crosses while the dollar secured further support from a cutting of aggressive positions.
Second-quarter US GDP increased to an annualised rate of 3.4% from a revised 0.6% previously. Residential investment fell again, although at a reduced rate from the first quarter. Business investment and consumer spending were solid while there was a positive contribution from trade.
The University of Michigan consumer confidence index edged lower to 90.4 in July from a preliminary 92.4, although this was still higher than in June. Markets will watch the ISM manufacturing index and monthly employment reports very closely next week. These releases will be particularly important as they have been firm over the past two months and any softening would undermine dollar confidence. Firm data would revive confidence, especially have markets have priced in an 80% chance of a Fed rate cut late this year.
Stock market conditions and wider levels of risk aversion will remain key dollar influences. Continuing stresses in emerging markets would provide significant protection to the dollar with a reduction in US equity holdings held overseas and a flow of funds back into the US currency. The overall tightening of credit conditions will not be a positive factor for the dollar given the need for capital inflows.
The dollar found support close to the 118.0 level against the yen and recovered back to highs above the 119.0 level in early Europe on Friday. Thereafter, the dollar fluctuated around the 119.0 level.
Japanese core consumer prices fell 0.1% in the year to June which dampened expectations of an August interest rate increase, especially with expectations that the LDP-led coalition would lose Sunday’s Upper-House elections. The chances of an August rate increase were cut to around 50% and a heavy government defeat on Sunday would be likely to unsettle the yen slightly.
Attention in the short term is likely to remain fixed firmly on global market conditions and carry trades. Japanese investors continued to sell the yen on rallies and there were reports of institutional yen selling, but the dollar was struggling to sustain rallies. The switch in sentiment has been illustrated by the fact that the cost of dollar put options has increased to a three-year high.
Further rapid yen gains would be likely to trigger verbal intervention by Japanese financial officials and yen selling by Japanese institutions to stabilise markets.
Sterling weakened to lows around 2.0250 against the dollar on Friday from 2.0420 yesterday and was unable to make any sustained impression on the Euro.
Global capital flows will tend to remain the dominant short-term influence. Any further increase in risk aversion and reduction in carry trades would undermine the UK currency with a continuing reduction in Sterling positions funded through the yen.
The UK currency will be much more vulnerable to selling pressure if there is speculation that rates will not be increased from the 5.75% level. Growth data will remain in focus next week with more evidence on consumer borrowing trends due out on Monday.
The Swiss currency strengthened to a high of 1.6475 against the Euro on Friday and was holding just stronger than 1.65 in US trading. The Swiss currency also found support weaker than 1.2130 against the dollar.
The Swiss KOF index strengthened to 2.10 in July from a revised 2.08 the previous month. This was the highest figure for 2007 which will continue to support confidence in the Swiss economy.
Swiss currency moves will still tend to be dominated in the short term by global levels of risk aversion and stock markets trends. There may be scope for some stabilisation in markets initially, but the underlying tone will remain more cautious which will curb the potential for Swiss currency selling.
After a temporary rally in Asian trading on Friday, there were renewed losses to lows below the 0.8600 level in early Europe on Friday. The Australian dollar will remain vulnerable if there is a sustained drop in regional stock markets, especially if carry trades continue to unwind.
The Australian currency will also be vulnerable due to the reduction bond issuance as this will slow capital inflows. Expectations of a firm Reserve Bank monetary stance will underpin the currency in the short term, but the currency weakened to lows of 0.8525 in US trading on position unwinding.