It remains the case that all the major currencies have important areas of vulnerability. In this environment, it will still be difficult for any currency to make strong headway despite market attempts to forge a clear trend. Risk appetite is liable to deteriorate to some extent over the next few weeks which should provide some degree of dollar protection even though the US currency is unlikely to make much headway.
Key events for the forthcoming week
Date
|
Time (GMT)
|
Data release/event
|
Tuesday July 28th
|
14.00
|
US consumer confidence
|
Friday July 31st
|
12.30
|
US GDP (Q2 advance)
|
Dollar:
Underlying confidence in the US monetary and fiscal policies will remain fragile in the short-term. There will also be further speculation over a medium-term diversification away from the US dollar. The economy could remain firmer in the near term, but conditions are liable to deteriorate later in the year as underlying credit stresses continue. There is still the potential for increased defensive dollar support if global risk appetite also deteriorates. Weakness in other major economies and currencies could be pivotal in providing underlying dollar protection, but the currency will find it difficult to secure strong support.
Currency markets generally have been trapped within relatively narrow ranges over the past few weeks. In this environment, institutional investors looked to target a breakout and secure a substantial move. The US currency was still found support at lower levels and recovered from an intra-week trough.
There was still a lack of underlying confidence in the Federal Reserve’s monetary policies while there are also very important concerns over the fiscal outlook which is dampening confidence in the dollar.
In his semi-annual testimony to Congress, Fed Chairman Bernanke stated that there were tentative signs of stabilisation in the economy and that the pace of decline appeared to have slowed significantly. Bernanke also re-iterated that the bank did have a credible exit strategy from the ultra-loose interest rate policy. The bank is clearly taken this aspect of policy very seriously, especially as there was a Wall Street Journal article on exit strategies ahead of the Fed testimony.
These comments illustrate that the Fed is very sensitive to the issue of maintaining confidence in the US assets, particularly the Treasury market and dollar.
Nevertheless, Bernanke also stated that the Fed would maintain a highly accommodative monetary policy for an extended period and there is still very little chance of a near-term tightening.
The latest US initial jobless claims data was close to expectations with an increase to 554,000 for the week after a revised 524,000 the previous week while the continuing claims data was better than expected.
The existing home sales data recorded a slightly larger than expected monthly increase to 4.89mn for June from a revised 4.72mn the previous month. Prices were higher over the month while inventories also declined for the month which provided some degree of reassurance over the housing-sector trends, although sales were still at historically very subdued levels.
The latest US house-price data also recorded a 0.9% monthly increase for May which cut the annual decline to 5.9% and provided some degree of support for risk appetite. There was fresh speculation that US lender CIT would file for insolvency despite securing a US$3.0bn credit line while the corporate earnings reports were mixed with an overall firm bias. |