Currency Market Analysis

Aug 05, 2015 | Currency Market Analysis

Global Themes

The US Dollar firmed up in late North American trade after remarks from voting member Dennis Lockhart that “it would take a “significant deterioration in the economic picture” for him to not support a rate hike in September. The market is not quite pricing in a the first rate hike in September and for the October meeting the probability of a rate hike at the October 28 meeting is just under 40% as per calculations by CME based on where the Fed Funds Futures are trading currently. Earlier today the imputes for further US Dollar strength was provided by weaker than expected Eurozone retail sales. In a staff report the IMF recommended that the move to add Yuan to the Special Drawing Rights basket should be delayed until September 2016. The report showed mixed performance of the Yuan on meeting key financial norms. In China the roller coaster ride of its stock market continued on Wednesday when it opened down about 1%, clawing back some gains to be in positive territory midway through the trading day only to plummet 1.7% at close. Closely watched Apple stock price further retreated from the crucial 200-Day moving average at around $120 in premarket trade and the stock is now down about 15% from its late July post quarterly earnings high. Today is a crucial day for data in the US with PMI both services and manufacturing, Trade Balance, ADP & ISM non-manufacturing data scheduled for release.


The Mexican Peso has also been hard hit by the steep fall in crude oil prices in recent weeks and is trading at historic lows. The fall in the currency is impacting the broader economy with one third of the federal governments revenue derived from crude oil sales. Crude Oil prices recovered with the Brent benchmark moving back above $50 barrel. The fall in US crude oil inventories as per data from API helped push prices higher.


Lower crude oil prices sent the Lonnie plummeting to lows not seen since 2004. The strength of the US Dollar post comments by FOMC voting member Dennis Lockhart also impacted the Canadian Dollar. The interest rate cut last month, weak economic data & lower crude oil prices have resulted in a fall of over 9% since May and the momentum does not seem to soften. Yesterday RBC’s Manufacturing PMI Index fell sharply to 50.8 for July, significantly lower than June’s 51.3. The beleaguered manufacturing sector could see some improvement in the coming months as the J-Curve effect kicks in after the sharp fall in the currency. Today, watch out for international trade data for June. The announcement of general elections in October could spur spending to some extent & we could see this impact on Q3 GDP.


The RBA held rates steady at its meeting earlier today and the statement was viewed by markets to be less dovish. The RBA statement gave a breather and arrested the steep fall in the AUD, but with commodity prices in a free fall and the Chinese economy showing signs of further stress we could see further pressure on the AUD in months to come. The market is divided on the expectations of another rate cut with some expectations of another cut in November.


Services PMI in UK fell to 57.4 in July from June’s 58.5. There are some initial signs that the economic recovery could be losing some momentum, which was reflected in weak construction PMI. All attention now is focused on Thursday, when the Bank of England’s Monetary Policy Committee will meet to discuss interest rate policy. We also have to watch out for 2 other important events, the publishing of the minutes of the monetary policy meeting and the latest quarterly forecasts for inflation and economic growth. It is quite possible that the Bank of England could wait for the US Federal Reserve to hike rates before it decides on raising rates. The risk of raising rates in the UK would be that it could send the Sterling Pound soaring higher which will impact UK exports which have been on the upswing thanks to the soft currency.


The Euro was weaker for the third consecutive day as the strong US Dollar and weaker than expected economic data from Eurozone pushed it lower. Eurozone retail sales fell by 0.6% in June well below analyst expectations of a 0.3% fall. The Greek crisis was at its peak in June and this could have impacted consumer spending resulting in lower consumer spending. Spain continued to be the outlier in Eurozone, with 74k jobs added in the economy in July and the unemployment level has fallen to 22.4% which is lowest since 2011. Eurozone Composite PMI for July was robust at 53.9 above market consensus at 53.7. The important services sector PMI was also above market expectations at 54.0. German composite PMI was strong at 53.7, whereas French composite PMI was flat at 51.5 and again Spain was the outlier with services PMI for July surging higher to 59.7. Eurozone retail sales were disappointing which sent the Euro lower to levels last traded in mid-July.

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