by Darrell Jobman, Editor-in-Chief TraderPlanet.com
EUR/US$
The dollar attacked Euro support levels close to 1.34 in early Europe on Friday and a break through this level triggered further dollar gains to a peak around 1.3325. This represented a 2-month high for the dollar with the trade-weighted index also strengthening to the highest level since early April. The Euro was able to consolidate close to 1.3555 later in US trade.
The market was again driven to a large extent by yield factors with the dollar gaining support from a further surge in US yields with 10-year bonds rising to a peak above 5.20%. US retail sales and inflation data will be watched closely next week for further evidence on economic trends and to assess whether the recent rise in yields is justified. Yields at current levels will continue to underpin the dollar.
The US trade deficit narrowed to US$58.5bn in April from a revised US$62.4bn the previous month. Exports edged stronger to record levels while there was a drop in imports reflecting the subdued economy during the first quarter. The lower deficit will underpin near-term dollar sentiment as structural fears ebb slightly while the data will also lead to an upgrading of second-quarter GDP growth estimates.
The German industrial production data was much weaker than expected with a 2.3% monthly drop for April. Annual growth was still healthy, but there will be some unease over Euro-zone trends if there is further disappointing data.
Yen
The yen strengthened to 120.80 against the dollar and 161.70 against the Euro in early European trading on Friday, but the yen was unable to sustain the gains as volatility increased.
Core machinery orders rose 2.2% in April after two consecutive monthly falls, but the recovery was weaker than expected and this provided no yen support.
Global bond yields remain significantly higher than at the start of the week and this will have a mixed impact on the yen. Rising interest rate differentials will tend to weaken the yen on a flow of funds overseas.
The rise in yields, however, will also maintain the risk of global stock market falls and a stronger yen as carry trades are reduced. Underlying caution is likely to persist which will lessen the risk of sharp yen falls. There is also still the possibility of a more abrupt disruption to stock markets and rapid yen gains with volatility likely to be the key feature.
Sterling
The UK currency weekend to a 2-month low around 1.9625 against the dollar on Friday before a recovery to 1.9660 and Sterling was also slightly weaker against the Euro during the day.
Industrial production rose 0.3% in April to give a 0.4% annual increase while manufacturing output also rose 0.3% over the month which will maintain expectations of slow manufacturing growth.
The retail spending, inflation and earnings data will be more important indicators for Sterling next week. The UK currency will be vulnerable to further selling pressure if there is convincing evidence of a slowdown in inflation or growth.
Carry trades will also remain important with Sterling trends linked with the global risk appetite. Any further sharp declines in global stocks would tend to weaken the UK currency.
Swiss franc
After gains against the Euro overnight, the Swiss currency retreated to near 1.65 against the Euro while the franc also weakened to near 1.2360 against the dollar.
There will be continuing speculation that the National Bank could increase interest rates by 0.5% at next week’s council meeting and this should support the Swiss currency ahead of Thursday’s announcement.
The franc performance will also remain correlated strongly with global stock markets trends. The Swiss currency will tend to weaken if markets stage a recovery and investors continue to target high-yield currencies for fresh funds.
Australian dollar
Australian dollar volatility has remained high over the past 24 hours with a 0.8370-0.8445 range as global volatility also increased with a move to the upper end of the range in US trading.
The currency was supported by greater confidence over the domestic economy with markets close to pricing in a further interest rate increase by September. The global trends will remain important and the Australian currency will still be vulnerable to selling pressure if there are sustained falls in global stock markets. The net result is that volatility is likely to remain higher in the short term.
