Rather than give in to the summer lull, markets have had some important news coming up throughout July. Substantial policy changes from major central banks have been witnessed as economists and politicians attempt to juggle austerity and fiscal discipline in the context of dwindling growth. A growth undermined by cautious consumers worldwide, playing safe and cutting back on spending ahead of any possible “rainy days”.
Despite the weaker US data and the risks going forward, further stimulus does not seem to have been justified- Rudolf Muscat
The euro weakened; somewhat spooked, on Friday the 13th, when seen against the US dollar, it marked fresh two-year lows at 1.2162. The sense remains that overall, despite the outline of necessary steps forward, politicians’ tackling of the crisis in Europe still lacks a necessary sense of urgency.
EU officials tell us that the euro-wide bank supervisor will not be in place before mid-2013 and until then we note that the European Stability Mechanism would be unable to inject funds directly into those banks in need of capital.
Yet, of course, the single currency was also weighed by the ECB’s decision, earlier this month, to lower its benchmark interest rate to 0.75 per cent from one per cent and to slash the deposit facility to zero per cent. A move which, in layman’s terms, is equivalent to increasing the supply of euros, which, in itself, reduces support for the same currency. At the time of writing, since the beginning of the month, the euro is down an average 2.71 per cent when seen against the major currencies – it loses mostly against the Aussie, JPY and the USD.
To the contrary, for the current month, the US dollar enjoyed average gains of 0.66 per cent (seen against the major currencies), the greenback gained considerably against the euro and the CHF. Most of the USD’s gains come on the back of its safe haven appeal, especially at times when investor optimism subsides but also because currency moves reflect interest rate differentials (meaning the difference in interest rates offered for the currencies in question).
Let’s put this into practice: compare the EUR/USD and the GBP/USD for example. With European and British central banks easing or slashing benchmark rates it is understandable that interest rate differentials work in favour of support for the USD because the Fed has not as yet embarked or taken a clear stance in that direction.
Won’t the Fed embark on more easing or (simply put) continue providing US dollars cheaply? Possibly, considering the deteriorating recent data out of the US, but as mentioned in my earlier article Fed Could Be Easing, And USD Strengthens” (The Times Business, June 28) “the next FOMC meeting is not scheduled until early August and Forex investors will likely take the opportunity of a safe shelter in the meantime.”
Analysts are speculating that indeed the August 1 FOMC meeting is still too early for the Fed to commit to a new round of easing, and if anything does come up, it will more likely be in the September meeting, so that the Fed has more time to gauge the economic situation. This should continue to provide support for the USD in the near term.
Even the FOMC minutes published mid last week revealed that only a few members of the committee expressed the view that further policy stimulus would likely be necessary – so, despite the weaker US data and the risks going forward, further stimulus does not seem to have been justified – yet.
In the meantime, investor focus will have most likely shifted to Bernanke’s congressional testimony (throughout Tuesday and Wednesday of the current week) for any possible clues – but it is unlikely that he would have committed to a direction ahead of the upcoming FOMC meeting.
Since month start, the British pound has seen average gains of 0.40 per cent when seen against the rest of the major currencies. Most of the gains for the GBP come from against the euro and CHF, which offset and beat the losses made against the rest of the majors.
Last Tuesday, UK inflation for the month of June came out lower than expected – which briefly weakened the GBP when seen against the USD and the euro.
Upcoming FX key events:
Today: UK retail sales, US Philadelphia Fed Business Index and US Leading Indicators.
Tomorrow: German PPI , UK PSNB, and Canadian CPI.
Technical key points:
EUR/USD is bearish, target 1.2000, key reversal point 1.3000.
EUR/GBP is bearish, target 0.77 key reversal point 0.81.
USD/JPY is bearish, target 77.50, key reversal point 81.50.
GBP/USD is neutral.
USD/CHF is bullish, target 0.9930, key reversal point 0.9450.
AUD/USD is neutral.
NZD/USD is neutral.
trading@rtfx.com
RTFX Ltd is licensed to conduct investment services business by the Malta Financial Services Authority. This information does not constitute an offer or solicitation and is provided for information purposes only.
This information shall not be deemed to constitute advice and should not be relied on as such to enter into a transaction or for any investment decision. Any opinions expressed in this document represent the views of RTFX at the time of preparation.
They are thus subject to change without notice. RTFX believes that the information contained herein is accurate as at the date of publication. However, no warranty of accuracy is given by RTFX and no liability in respect of any errors or omissions, including any third party liability, are accepted by RTFX or any director, officer or employee.
Mr Muscat is a senior trader at RTFX Ltd.