The dollar slipped away from its recent highs against a basket of currencies at the start of the week, but was nonetheless buoyant within sight of its peaks. At the start of this week, the greenback shed some of last week’s gains as a swathe of factory data from around the globe indicated a pickup in growth and lifted demand for riskier assets.
Tomorrow may be another day, so I believe one should take advantage of the present situation, take profits on bonds where necessary and reinvest for higher income
Stronger than expected factory data from the euro area, UK and more importantly the US offset disappointing data from China and sparked risk sentiment across the board. Appetite for risk outweighed fears of scaling back of monetary stimulus by the US Federal Reserve, and riskier currencies and global equity markets were boosted.
Manufacturing data from the US, published by the Institute for Supply Management climbed to a three-month high of 50.9 from 49, against market consensus for 50.5, as new orders picked up while the housing market and auto sales recorded strong gains. Global shares rose with Wall Street and the Nikkei closing higher.
From the eurozone, factory activity shrank less than expected in June, underscoring signs that the common currency zone is beginning to emerge out of its record-long recession.
Other data from the eurozone also showed inflation accelerated for a second consecutive month, as energy prices rose adding further signs that the area’s economy is starting to pick up, while the jobless rate inched lower.
Despite the surge in risk appetite, the greenback maintained a solid footing, and losses were limited as the stronger than expected data from the world’s largest economy supported the Fed’s view that the economy is gradually picking up.
Meanwhile, tomorrow investors will closely watch the jobs report from the US to gauge any improvement in the nation’s labour market.
The Fed has made unemployment a key barometer for its decision on when to start tapering its asset purchases programme; therefore a strong reading will reinforce the central bank’s outlook and give a strong boost to the greenback.
EUR/USD held above 1.3000 after dropping sharply from 1.3103 to 1.2991 at the end of last week. The pair fell as forex investors resumed pricing in the possibility that US central bank will start trimming its quantitative easing (QE) programme.
Its decline was accelerated by comments by Fed Governor Stein that September was a possible time when the Fed may need to consider reducing its QE programme.
Today, the European Central Bank is expected to announce no change to their benchmark or deposit rates currently at 0.50 and 0 per cent respectively.
Forex traders will focus on President Mario Draghi’s news conference after the rate decision, as growing worries over a faltering European economy, in contrast to the growing optimism over the US economy, were likely to hurt the single currency against the buck.
USD/JPY remained resilient, and rose to a fresh one-month high by the time of writing at 100.17, ahead of the key jobs data to be released from the US later in the week. Strong US Non-Farm Payrolls reading on Friday could be the spark to lift the pair towards a new high for the year. The likelihood that the Fed will taper its QE programme, in contrast to the Bank of Japan’s recently adopted ultra-accommodative policy, should continue to provide significant support to the greenback against its Nipponese rival.
Gold continued its decline last week, and hit a 34-month trough by $1180.71. The bullion is one of the hardest hit assets since Fed Chairman Ben Bernanke announced the central bank’s intentions to cut back on its $85 billion a month QE program by mid-2014, if the economy continues to improve.
Overnight on Tuesday, the Reserve Bank of Australia announced no change to their current cash rate. The RBA kept rates at 2.75 per cent as expected and said the Aussie remains high despite its recent slide. AUD/USD fell to 0.9145, within sight of a three-year low by 0.9110 hit on Monday.
Upcoming FX Key events:
Today: UK BoE interest rate decision and asset purchases target, EZ ECB interest rate decision and news conference.
Tomorrow: US Non-farm payrolls & Unemployment rate, Canadian Net change in employment & EZ LTRO repayments.
Technical Key points:
EUR/USD is neutral. EUR/GBP is neutral. USD/JPY is bullish, target 105.60, key reversal point 92.50. GBP/USD is neutral. USD/CHF is bullish, target 0.9900, key reversal point 0.9200. AUD/USD is bearish, target 0.8760 key reversal point 0.9520. NZD/USD is bearish, target 0.7500, key reversal point 0.8350.
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Emman Xuereb is a trader at RTFX Ltd.