Currency Market Analysis
Aug 17, 2015 | Currency Market Analysis
A surprise contraction in a regional manufacturing survey weighed on the U.S. dollar and caused it to begin the week in shallow negative territory. A gauge of New York area manufacturing, called the Empire State index, unexpectedly slipped below zero, printing at the weakest level since 2009. The dollar has struggled of late as signs of uneven growth at home and abroad have clouded the outlook for the Fed to raise interest rates. Look for America’s currency this week to take important cues from events Wednesday when U.S. inflation comes due, along with the minutes of the Fed’s last meeting in late July. Outcomes that keep alive the risk of an imminent Fed rate hike would be supportive of the U.S. currency.
The pound had a fairly strong week after holding just above key support last Monday. All in, the currency managed to rally 1.50 percent to open in the mid 1.56’s this morning. This week holds two key figures to watch with UK Consumer Price Index inflation tomorrow morning and Retail Sales on Thursday. The currency continues to track movements in domestic and US yields and interest rate expectations and so it will be important to see if we get any pick up following a disappointing Quarterly Inflation Report from the Bank of England. It is unlikely to see any major breakouts as traders tread lightly in August so look to take advantage of the range.
The Dollar broadly weakened as the Chinese intervention story subsides into the background. With reduced volatility during August and a lack of impetus to cause investors to seek safe haven assets, the USD is now on the back foot. The greatest potential for movements remains speculation on the timing for monetary policy and so the US Consumer Price Index will be the key data to watch on Wednesday. It is not the Fed’s preferred inflation measure but the various indicators tend to be highly correlated.
With the themes of Yuan devaluation and the Greece crisis out of the way, the Euro is likely to be driven indirectly by rate speculation and commodity movements. The Euro was one of the best performing major currencies last week with over a 3 percent appreciation against the USD. Profit taking is seeing it pare back a little, allowing the GBP/EUR to make some inroads this morning. We will get an insight as to whether the weaker currency is helping out the European economy on Friday with a range of services and manufacturing data releases this week.
The Japanese economy slumped in Q2 with GDP falling -0.4 percent from 1.1 percent growth in Q1. This is a real setback from Japanese Prime Minister Abe who is fighting hard to reflate the economy and bring growth numbers in line with his Asian neighbour’s. PM Abe’s 3 arrow policy (focusing on fiscal stimulus, reflation and policy reform) isn’t bringing a ‘boon’ to the economy which most hoped it would. Exports slumped in the world’s third largest economy, which is surprising given the continued depreciation in the Yen thanks to a stronger dollar.
AUD & NZD
The Australian and New Zealand Dollars are trading with a subdued tone this morning after Chinese revaluation last week really shook the boat. Both currencies are feeling the brunt of the commodities slow down, impacted by falls in global Iron Ore and Milk prices. The pressure on interest rates remain, and all eyes will be on the Reserve Bank of Australia's (RBA’s) monetary policy minutes released early tomorrow morning GMT.
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