by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar found support close to 1.3510 against the Euro and, after breaking Euro support close to 1.3490, the US currency secured further gains with a peak close to 1.3425 in US trade. The Euro was undermined by a further retreat against the yen.
US jobless claims fell slightly to 309,000 in the latest week from 310,000. The data suggests that the labour-market is still firm which will continue to underpin confidence over US economic conditions.
US Treasury bond yields remained firm during the day with a challenge on levels above the 5.0% level for the first time in 10 months. Rising yields will continue to underpin the dollar in the short term as spreads over German bunds rose to a 7-week high. Markets will be looking at fresh growth data next week to assess whether this optimism is justified.
The increase in bond yields also helped trigger a further round of losses in the global equity markets. Global stock market falls will tend to underpin the dollar as there will be a repatriation of funds and a reduction in capital flows from the US.
The latest monthly US trade deficit will be released on Friday and a further increase in the deficit would provide a stern test of improved dollar confidence.
The yen found support close to 121.45 against the dollar on Thursday, but found it difficult to sustain gains through 121.0 as the US currency was generally resilient. The yen strengthened to highs around 162.40 against the Euro.
Carry trade developments will remain important in the short term. Thursday’s resilience in Asian stock markets curbed immediate demand for the Japanese currency on defensive grounds, but further losses on Wall Street helped trigger renewed yen demand in US trade.
Global bond yields remain significantly higher than at the start of the week and the underlying mood of greater caution is likely to persist which will curb yen selling. There is also still the possibility of a more abrupt disruption to stock markets and rapid yen gains.
The latest capital account data registered a recovery in capital flows out of Japan, but there was still another week of net flows into Japan as buying of Japanese securities remained firm. The recent capital account trends still do not support the case for overall yen depreciation.
Sterling weakened after the decision on Thursday and fell to lows around 1.9750 against the dollar as the US currency rallied while the UK currency was unable to make any headway against the Euro.
The Bank of England left interest rates unchanged at 5.50% following the latest MPC meeting. There is the possibility that the vote was not unanimous and the minutes will, therefore, be important when they are released in two weeks time.
Sterling will still gain support from expectations that the Bank of England will increase interest rates within the next two months. The UK currency will be much more vulnerable if there is evidence of any significant deterioration in the housing sector.
Sterling trends will also continue to be correlated with carry trade developments and global stock market trends. Any wider increase in risk aversion would still tend to weaken Sterling as high-risk positions are scaled back.
After initial gains to 1.6425 on Thursday, the franc weakened back to 1.6490 against the Euro. A renewed slide on Wall Street helped trigger a move back to 1.6450 in US trade while the franc found support close to 1.2260 against the dollar.
There will be speculation that the National Bank could increase interest rates by 0.5% at next week’s council meeting. These expectations will be reinforced by the strong Swiss data with the seasonally-adjusted unemployment rate falling to 2.7% in May from 2.9% the previous month, the lowest rate since 2002.
The Australian dollar found support close to 0.8400 against the US dollar and strengthened to highs above 0.8470 in local trade on Thursday. A firmer US dollar and weaker global equity markets pushed the Australian currency back to 8410 in US trade.
The employment data was stronger than expected with unemployment dropping to a record low of 4.2% in May from 4.4% with an employment increase of close to 40,000 for the month.
The strong labour-market data will reinforce expectations that the Reserve Bank will move to increase interest rates again within the next few months which will underpin the currency.
The Australian dollar will still be vulnerable if there is a sustained increase in risk aversion and further falls in global stock markets.