Weekly Currency Wrap-up
| Economic trends in the United States and Eurozone remained a very important influence on the foreign exchange market over the week as bond yields continued to fluctuate.
The U.S. Dollar Index stumbled back to its late April lows early in the week on concerns about the economic outlook but with no major surprises in the U.S. employment report Friday seems to have righted itself to form a double bottom on the daily and weekly charts. It will take a rally above the 83.00 area to confirm the bottom, however.
The U.S. ISM index for the manufacturing sector increased again to 56.0 for June from 55.0 the previous month with orders and production indices remaining firm. The services sector index was also robust with an increase to 60.7 in June, the highest level since April 2006.
The ADP employment report recorded an increase of 150,000 for June, which increased optimism over a solid payroll report. That report did show a 132,000 increase in employment for the month while the May increase was revised up to 190,000 from 157,000. Unemployment held at 4.5% while there was a 0.3% increase in hourly earnings. Of course, there are still concerns surrounding the housing sector as pending home sales weakened, and this curbed optimism over U.S. growth trends.
U.S. 10-year Treasury bond yields fell to the 5.00% level before a recovery back to near 5.20% on Friday as expectations over a cut in interest rates faded again after the generally stronger than expected growth data.
The European Central Bank (ECB) left interest rates on hold at 4.00% following the latest council meeting. In the press conference following the decision, President Trichet stated that the bank would closely monitor inflationary pressure. The comments suggested that the bank will look to increase interest rates in September or October at the latest, especially with Trichet stating that he was not looking to alter market expectations.
The Eurozone retail sales data was weaker than expected with a 0.5% monthly decline for May, cutting annual growth to 0.4%, while German industrial orders were strong for the month.
There was evidence of some stress between the ECB and French President over the issue of exchange rate management with the ECB rejecting calls for a more interventionist policy.
The U.S. dollar was subjected to downward pressure at the end of last week. As confidence deteriorated, the trend continued this week with the U.S. currency weakening to lows beyond 1.3650 against the euro before a tentative recovery to 1.3580 on Friday.
The Bank of England increased interest rates to 5.75% from 5.50% following the latest Monetary Policy Committee (MPC) meeting with rates at the highest level in six years. In the statement following the decision, the bank stated that the medium-term inflation risks were still to the upside, even though the headline inflation rate should move back to the 2.0% level this year. The MPC judged that there was little spare capacity in the economy while money supply and credit growth remained elevated.
The CIPS survey evidence remained firm with an increase in the services index, although there was a small monthly decline in the manufacturing index. There was a solid increase in industrial production.
Sterling pushed to highs around 2.02 against the dollar before a retreat to below 2.01 while Sterling weakened against the euro.
The Canadian currency continued to draw support from high energy prices with crude oil consistently trading above $70 per barrel during the week. There was a strong recovery in Canadian building permits for the month, and employment data also recorded an increase of more than 37,000 jobs for June with the unemployment rate holding steady at 6.1%. The data reinforced market expectations that the Bank of Canada would increase interest rates in July. The Canadian dollar was able to resist significant losses against the U.S. currency during the week but hit resistance close to 1.0520. Carry trades regained influence over the second half of the week. A subdued inflation figure from Switzerland dampened expectations of a more aggressive National Bank stance on interest rates, and the franc was unable to strengthen through the 1.21 level. The yen also came under pressure with lows beyond 123.0 against the dollar and 167.50 against the Euro. |
| | Formerly editor-in-chief of Futures Magazine, Darrell Jobman has been writing about financial markets for more than 35 years and has become an acknowledged authority on derivative markets, technical analysis and various trading techniques. |
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