by Darrell Jobman, Editor-in-Chief, TradingEducation.com, LLC
The dollar strengthened to near 1.3410 in early Europe on Friday before a retreat to 1.3470 after the US housing data. The US currency settled close to 1.3450 later in the US trade as liquidity declined head of the Monday market holidays.
The US existing home data recorded a decline in sales to an annual rate of 5.99mn for April from a revised 6.15mn the previous month. There was a rise in inventories to over 8 months supply while prices were higher.
There was, therefore, a sharp contrast in the new and existing home sales data issued the previous day. Builders are much more willing and find it necessary to cut prices in order to clear excess inventories. In contrast, existing private home owners will resist lower prices and this tends to curb market activity. Overall, there is the probability of an extended period of reduced activity in the housing sector which will dampen dollar optimism, although the short-term impact should be measured given that the overall data flow has improved.
The US data releases have been relatively limited this week, but there are a high number of important figures due next week including the weekly payroll report. The Fed minutes from the May FOMC meeting will also be released. The data tone next week will be important for dollar sentiment with the dollar gaining ground if there is a series of favourable indicators.
The yen temporarily strengthened through 121.0 against the dollar in Asian trading on Friday before weakening back to 121.70 and also erasing gains against the Euro. The yen was undermined slightly by reports that North Korea had conducted missile tests.
Japanese consumer prices data was in line with expectations as core prices fell 0.1% in the year to April. The headline inflation rate could turn positive over the next few months, although a significant rise in prices is unlikely. The evidence still suggests that the Bank of Japan is looking to increase interest rates again as soon as this can be justified. There will be political barriers to an early increase given the upper-house elections in July, but the central bank is likely to increase rates by August.
Asian stock markets were generally lower on Friday, but falls were limited and Wall Street rallied on Friday. There is still likely to be some further short-term caution over levels of risk aversion and this will maintain the potential for a closing of existing high-yield positions which would support the yen.
Underlying interest in high-yield currencies will persist with investors still looking to sell the yen on rallies, but the underlying risks will remain at a very high level.
Sterling hit selling pressure close to 0.6760 against the Euro on Friday and also failed to hold peaks close to 1.9880 against the dollar, settling close to 1.9850.
First-quarter GDP growth was confirmed at 0.7% with the annual increase slightly stronger at 2.9% from 2.8%. The growth data should not have a significant impact, but there was a high reading for the GDP deflator which will maintain unease over inflation trends.
Markets will continue to look for a further increase in interest rates with some further speculation over a June increase and this will provide short-term Sterling support.
The Swiss franc strengthened to 1.6480 against the Euro on Friday before weakening back to beyond 1.65 as global stock prices rallied.
The KOF leading index rose to 1.96 in May from 1.90 the previous month, maintaining the gradual increase seen over the past few months which will help underpin wider confidence over the economy.
There will be further expectations of at least a 0.25% interest rate increase in June which will continue to protect the franc from heavy selling. The franc will need increased risk aversion to make strong gains.
The Australian dollar weakened to 0.8180 in local trading on Friday. The domestic influences remained limited during Friday, although there was optimism that data releases next week would be robust which would reinforce the potential for higher interest rates. International trends are still likely to remain dominant in the short term.
A further corrections weaker in global stock prices would be likely to undermine the Australian dollar with a reduction in carry trades. The improvement in US dollar yields will also curb investment flows into the Australian currency. The currency rallied back above 0.82 in US trade before a fresh retreat to 0.8180.