Currencies | Jul 06 2013
– Weekly FX and precious metal return analysis
– Dollar and Treasuries surge on jobs news
– Fundamental wrap: UK, Europe and the US
By Kathleen Brooks, Research Director UK EMEA FOREX.com
FX return analysis
The dollar was the star performer in the markets last week as key fundamental risks helped to push the greenback to its highest level since 2011.
Source: FOREX.com and Bloomberg
Dollar gains were particularly impressive on Friday after a strong payrolls report for June. The CAD managed to hold up the best versus the USD, which is no surprise as a strong labour market in the US is good news for Canada’s economy due to the trade links between the two countries. In contrast, the GBP was one of the weakest performers along with the NOK, which fell to a 2.5 year low last week. There are two reasons for the NOK’s decline: 1, it is the least liquid of the G10 currencies, so is vulnerable to a sell off when volatility spikes, and 2, the central bank is planning on cutting interest rates this year. The GBP’s decline was also caused by a dovish statement from the Bank of England after it decided to keep rates and asset purchases on hold for another week. The BOE and the ECB are both implementing “Forward Guidance” as part of their monetary policy tool kits, which has proven to be FX negative in recent days.
The dollar appears to be in the middle of a multi-month uptrend, and after last week’s performance, where some major pairs crossed some key levels; it looks like the dollar may continue to out-perform in the near term.
Source: FOREX.com and Bloomberg
Precious metals came under attack last week as a mixture of Fed tapering, weak inflation pressures and a stronger dollar proved to be the perfect storm. Gold managed to outperform silver, which dropped more than 4%. This is surprising; silver is an industrial metal and is traditionally sensitive to changes in fortune in the US economy. However, not even a strong payrolls report could boost the grey metal. Gold dipped to $1,208 after the payrolls data; however, it managed to stay above the key $1,200 support zone. Below $1,150 things could get ugly for the yellow metal. While the dollar rally is in full swing and the market is focused on the Fed tapering its QE3 programme, it is hard to get too excited by the precious metal space.
Taper-fever hits the markets as USDJPY surges
The 195k increase in June jobs was a solid report; however the revisions to the April and May data were the real highlights. In the last three months’ jobs growth has averaged 196k per month, close enough to the 200k magic number that could see the Fed start tapering its QE programme in September. This month’s FOREX.com forecast was for 195k payrolls, virtually spot on!
There is some expectation that tapering could begin as early as this month’s Fed meeting on 31st July, however we think that the Fed will wait until September to gather more data and ensure the last three months’ have not been a blip. The September meeting also coincides with a press conference from Chairman Bernanke, which would be useful for him to explain to the details of tapering.
Highlights in the labour market data for June included a 202k increase in private sector payrolls, strong growth in leisure and hospitality sector (due to seasonal summer factors), and a smaller than expected decrease in government job cuts. Average hourly earnings also jumped two tenths of a per cent to 2.2% for June. PCE inflation is a mere 1.1%, which means that real wage growth is running at 1.1%, if this can continue it would be a major positive for the US economic outlook.
The weak spots in the report included a 300k increase in the number of under-employed (those working part time who want full time work), which pushed the underemployed rate to 14.3% from 13.8% in May. Added to this the overall unemployment rate stayed at 7.6%, the market had expected a decline to 7.5%. This suggests that we are no closer to the Fed actually ending its QE3 programme, although tapering could be round the corner.
Dollar and Treasuries surge on jobs news
Taper-fever has gripped the markets, which sent Treasury yields and the dollar flying on Friday. There has been a broad-based move higher in USD and we are approaching some critical levels for some USD pairs. USDJPY jumped more than 100 pips, but has been re-buffed ahead of the 101.20 level, the top of the daily cloud. We think there could be more upside for this pair if we get above the cloud, which would open the way to 102.50. EURUSD also came under pressure and sunk to 1.2806, where it found some support. However, we could test the 1.2750 2013 lows next week, as holiday-thinned markets may cause a continuation of the post-payrolls dollar blitz in the coming sessions.
GBPUSD was given a pounding, dipping as low as 1.4858 immediately after the report. This is just above the 1.4830 2013 low reached back in March. The pound’s beating may not be over yet, below here could see back to 1.45 in the medium-term as the market adjusts to a new Governor at the Bank of England, who has a new communication style and who thinks the economic recovery is still too weak.
Source: FOREX.com
Fundamental wrap: UK, Europe and the US
Further evidence emerged last week that the UK‘s economic recovery is gathering pace. The service sector PMI rose to its highest level for more than 3 years, with the new orders index surging to its best level since 2007. Better data on the manufacturing and construction sectors rounded off a week of good economic news. However, this is not good enough for new BOE governor Mark Carney. The BOE may have kept rates on hold last week, but the unusual addition of a statement was extremely dovish and caused a sharp drop in GBPUSD, which was the second worst performer in the G10.
It was not the economic outlook that worried the BOE; rather it was the rise in UK borrowing costs that Carney and co. were trying to target. UK gilt yields had risen to their highest level for 2 years in recent weeks in line with US Treasury yields, yet the UK economy is not nearly as strong as the US’s, so the BOE wanted to re-calibrate rates so that they more closely resemble the economic outlook for the UK. This caused a sharp drop in sterling, which closed the week at some of the lowest levels of this year. Since Gilt yields ended the week fairly flat, we could see more dovish rhetoric from the BOE in the coming weeks, which may weigh further on GBP, opening the way for a potential move back to 1.4700 in the coming days.
Source: FOREX.com and Bloomberg
Ahead this week, the key data releases for the UK include industrial production data, which is expected to remain muted for May, along with trade data and the June GDP estimate. BOE members will also be watched closely, speeches from Bailey and Miles will be dissected to gauge the extent of dovish opinion at the BOE.
The Eurozone was also in focus last week. The ECB went one step further than the BOE and actually adopted forward guidance at its July meeting. The Bank said that it expects rates to remain at low or lower levels for an “extended period of time”. The Bank would not elaborate on exactly how long an extended period of time is, but the market used this change in policy as a reason to dump the EUR, which well and truly lost its grip on the 1.30 handle last week. It is close to the lowest levels of the year so far although it managed to remain above the 1.2750 low from late March. The single currency looks weak, and could fall through this level to make fresh 2013 lows while the USD remains in the ascendency.
Ahead this week, the Eurozone’s data calendar is fairly thin, with industrial data the highlight. Germany is expected to see a 0.5% decline in May, which could weigh on EURUSD. Below 1.2750 opens the way to the 1.2660 lows from November 2012.
It’s also worth watching Greece and Portugal. Next week we should find out if the troika will release the next EUR 8 billion of loans to Greece so that it can meet a large bond redemption later this month. Any delay could cause sovereign fears to rise. There are concerns that the IMF may drag its feet on releasing funds because of slow progress on reforming Greece’s public sector. Greek bond yields crept higher last week as Portugal’s government looked in danger of collapsing, raising concerns that Lisbon may not stick to its bailout programme. The caused Portuguese bond yields to rise above 8% at one stage, the highest level since November 2012. Although Portugal’s government has managed to avoid collapse, things look worrying. Another bout of sovereign concerns could see EURUSD fall back to sub-1.2500.
In the US the key data releases next week are the minutes from the latest FOMC meeting, initial jobless claims and producer prices at the end of the week. The minutes are unlikely to be a market-moving event as last month’s meeting included a press conference and all eyes will be on Fed Chairman Bernanke’s speech on 10/07 an economic policy in Boston. The markets will be looking for Bernanke’s reaction to the payrolls report for June and also any hint at the timing of tapering. The markets are expected to be very sensitive to comments from Bernanke, if he confirms market suspicions that tapering is likely in the next few months then we could see strong gains for USDJPY, potentially back to the 103.70 May highs during the next month.
All views expressed are the author's and not by association FNArena's (see our disclaimer).
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