by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar was unable to strengthen though the 1.33 level ahead of the US data releases on Friday and weakened in US trading with lows around 1.3385.
US consumer prices rose 0.7% in May which was slightly above expectations as energy prices rose strongly while the core increase was below expectations at 0.1% to give an annual increase of 2.2%. The subdued core rate eased immediate inflation fears slightly and allowed some stabilisation in the bond market. There was, however, a rise in inflation expectations in the Michigan consumer confidence survey and there is the risk that rising energy prices will trigger a wider increase in inflation.
The New York Empire index rose strongly to 25.8 in June from 11.3 the previous month while industrial production was unchanged for May and the Michigan consumer confidence index slipped to 83.7 in June from 88.3. The US growth data has been strong over the past few weeks, but the Friday data was more ambiguous which will raise some doubts over the US economic trends. There is likely to be some reassessment of recent optimism, although overall confidence in the economy and dollar should still remain firm.
The first-quarter current account deficit was held to US$192.6bn from a downwardly-revised US$187.9bn the previous quarter. There was also a recovery in long-term capital inflows to US$84.1bn in April from a revised figure of US$51.2bn the previous month. Although fears over the US structural deficits are liable to ease slightly following the data, there will still be official dollar selling on rallies.
Markets will also watched the German economic survey evidence closely next week and the Euro will be vulnerable if there is evidence of a significant slowdown.
The yen was unable to make any headway in Asian trading on Friday and weakened to around 123.30 in early European trading as the Bank of Japan failed to take a tough policy stance. The Japanese currency weakened further in US trading to lows beyond 123.50 against the dollar and record lows against the Euro.
The Bank of Japan left interest rates at 0.5% following the latest policy meeting. There was a unanimous vote and the bank also left its assessment of the economy unchanged. Bank Governor Fukui stated that the bank would continue to increase rates gradually, but gave no commitment to a near-term increase and failed to express concern over the yen’s level. Overall, the bank’s stance was weaker than expected which will undermine the yen.
Yield considerations will remain very important and the recovery in global stock markets will maintain the temptation to sell the yen. There is still a high risk of complacency over the situation and a rapid reversal in carry trades even if there is further yen selling in the short term.
Sterling found support below the 1.97 level against the dollar and strengthened to highs around 1.9770 in US trade. The UK currency edged weaker against the Euro.
The latest IRS earnings survey reported a slowdown in the median rate of settlements to 3.0% in May from 3.1% and the data will maintain some optimism that wage pressures are moderating. There is also likely to be some further speculation that UK interest rates will peak below the 6.0% level which will curb Sterling buying.
The Bank of England minutes will be watched closely next week to assess the possibility of a further near-term increase in rates.
Carry trades will continue to play an important role with renewed yen losses and gains in global stock markets reinforcing near-term confidence in carry trades. The shift into high-yield assets will help support Sterling in the short term, although there is the risk of a sharp reversal in trends.
The Swiss currency remained on the defensive during Friday, weakening to near 1.66 against the Euro. The franc did find some support close to 1.2460 against the dollar and strengthened to 1.2420.
Carry trades remained a key influence on the markets and the yen weakness spilled over into the Swiss currency as there was further interest in selling low-yield currencies. Market volatilities are liable to remain higher in the short term.
The Australian dollar found support close to 0.8350 on Friday and strengthened to 0.8415 in US trade as the US currency stumbled.
The local currency is still being undermined by the reduced expectations of a near-term increase in domestic interest rates. The Australian dollar will gain further strength if commodity prices sustain a recovery and interest in carry trades continues, but volatility levels are liable to increase further.