by Darrell Jobman, Editor-in-Chief TraderPlanet.com
EUR/US$
The dollar strengthened to 1.3410 against the Euro on Wednesday, a 7-week high for the US currency, but was unable to break important resistance levels. The Euro, in turn, was unable to make any headway, stalling below the 1.3450 level.
The US ADP report recorded a May employment increase of 97,000 following a downwardly-revised 61,000 for April. There was a further decline in manufacturing jobs while there was steady growth in services employment. The ADP report suggests that there will be monthly BLS payroll increase of around 120,000 for May once government jobs are added in. This is close to expectations and will not provide a strong market lead.
The FOMC minutes from the May meeting were close to expectations with the Fed stating that inflation was still the predominant concern. The minutes stated that housing would weigh on the economy for longer than expected, but that the risks to capital spending had eased. The minutes continue to suggest that the Fed will be content to leave rates on hold in the short term. Futures markets as a whole have cut the chances of a rate cut this year to around 50% which will provide near-term dollar support.
Euro-zone money supply data recorded a drop in annual M3 growth to 10.4% from 10.9% the previous month. The ECB will take some comfort from the slowdown, but will want a sustained a deeper slowdown before suspending interest rate increases.
Yen
The yen was unable to make much headway against the dollar but gained to near 163.0 against the Euro before a retreat to 163.60. Thereafter, the yen fluctuated in these ranges during US trade with the yen tracking stock market movements.
The Chinese stock market fell sharply on Wednesday which offered some support to the yen, although the impact was measured. The Japanese yen will be in a better position to strengthen if there is sustained weakness in global stock markets.
The Japanese industrial production data was weaker than expected with a 0.1% decline in April compared with expectations of a modest increase for the month. The data will dampen immediate optimism over the economy, although the Bank of Japan is still likely to push for an early move to increase interest rates which will help protect the yen.
Sterling
Sterling was unable to make any significant headway against the Euro on Wednesday, weakening to near 0.68, and dipped to lows near 1.9730 against the dollar.
The latest YouGov survey reported that inflation expectations for the next 12 months were steady at 2.5% in May compared with a peak of 2.7% in January. The stabilisation in expectations will help ease inflation fears to some extent. BOE Governor Blanchflower warned that there were some upside inflation risks, but he also stated that there was spare capacity. Blanchflower tends to be dovish on policy and the immediate impact should be limited.
The consumer confidence and CBI retail surveys will be monitored over the next 24 hours for further evidence on retail spending trends. The UK currency will remain vulnerable if there is evidence of a significant slowdown in spending.
The UK currency will also tend to weaken if there is a sustained reversal in carry trades given that Sterling has benefited strongly from buying against the yen over the past few months.
Swiss franc
The franc retained a slightly firmer tone against the Euro on Wednesday and was again testing Euro support levels below 1.6450. The franc was little changed against the dollar with the US currency unable to mount a challenge on the 1.23 level.
The Swiss currency gained some support from a drop in Chinese stocks, although the market response was relatively limited. The Swiss currency will gain further ground if there is a more sustained increase in risk aversion.
Expectations of a tough National Bank policy in June will also continue to provide franc support, especially if there is a high consumer inflation report on Friday.
Australian dollar
The Australian dollar found support close to 0.8170 against the US currency before a rally to 0.8220 in US trade.
The retail sales data was weaker than expected with a 0.1% increase in April, although the annual increase was still firm at 6.2%. The Australian currency will be at risk of a steeper correction if US yields rise further in the short term even though domestic confidence will still provide protection. The levels of global risk aversion will also be watched closely and renewed gains for global stock markets would support the Australian dollar.
