Currency Update – Monday 5th July
As Americans headed into a long Independence Day weekend, it was the Dollar that finished last week on the back foot against many of the major currencies. Friday’s non-farm payrolls figure, a drop of 125,000, (with a large number of temporary census workers being disposed of) was broadly in line with expectations, however it was the disappointing rise in private payrolls that caught the attention, with 83k as opposed to a 110k expectation. In recent times this would have given the Dollar a boost as a safe haven currency, however the correlation between risk aversion and Dollar strength continues to loosen. Despite the fall in equity markets, the dollar index is around 1% lower than last Monday, the largest fall coming after Friday’s payrolls. The Euro gained against the Dollar, currently standing at $1.2550, as did the Swiss Franc and Sterling.
Indeed, the immediate market reaction to Friday’s figures was to dump the Dollar and buy Yen, the other predominant risk-related currency of the past 24 months. It is arguable that US fundamentals are finally catching up with the Dollar. Traders have trashed the Euro during the current fiscal crisis and now attention may be turning on the Dollar. With EUR/USD up to 1.2550 (heady heights not since for nearly two months) and GBP/USD also at recent highs (trading so far this morning at 1.5150 – 1.5200) this could be a seminal moment for FX markets thus far during the recession, though the Euro’s troubles still dominate the landscape.
On the back of these developments, financial markets are in for a tense week following sharp falls in equities last week, prompted by renewed fears of a global double-dip recession. All eyes will be on economic data out this week, including US non-manufacturing, retail and jobless claims figures. Investors will have some respite on Monday, however, as the US takes a public holiday for Independence Day. The main events this week are the rate decisions from both the ECB and BoE. The ECB is expected to leave it’s re-fi rate unchanged at 1%, with the tone at the post meeting press conference likely to indicate that it is not considering policy changes any time soon given the major challenges the euro zone continues to face. The BoE also meets this week with no policy changes anticipated here either. The minutes of the June policy meeting show that differences of opinion are emerging amongst MPC members regarding the balance of risks for inflation. Most members however believe that the level of spare capacity currently in the economy should bear down on price pressures over the medium term, allowing CPI to fall back within target.
For sterling, trading data released from the Chicago Mercantile Exchange further confirms a shift in focus for markets, now that political uncertainties are subsiding post-election. In the seven days following the emergency budget the number of short positions in sterling fell from 62,267 to 52,397, according to data compiled by the US Commodity Futures Trading Commission. The number of long positions increased slightly over the same period from 15,921 to 17,626. Short selling of the pound hit record levels following the formation of the coalition Government, with the number of sell contracts reaching 76,745 amid fears that political uncertainty would hamper attempts to tackle the deficit. Despite accounting for a fraction of the daily turnover on the world’s currency markets, the exchange is seen as a useful proxy for the activities of the wider market.