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The USD rally takes a pause

Written by Ian Dobbs on June 4th, 2013.      0 comments

4:50pm (NZT)
Market Overview:
Strong positive sentiment toward the US economy, which has been driving the USD strength recently, has taken a hit with the release of very weak manufacturing data. This comes on the heels of better readings for manufacturing out of Europe and the UK. As a result the USD has lost ground across the board. As expected, it seem volatility is picking up across a number of asset classes with equities, bonds and currencies, all putting in decent ranges. This can be expected to continue this week with plenty of significant events scheduled. We have central bank rate decisions from Australia, UK and Europe, ahead of key US employment data on Friday.

It’s been an interesting few days for the Australian dollar, and the rest of the week looks set to offer lots more action. The AUD has suffered badly over the last few weeks at the hands of a strong USD and a softening outlook for the Australian economy. Over the weekend however, stronger data out of China tempered that view, and started a turnaround in demand for the AUD. The recovery in the AUD really gathered steam after soft US manufacturing data last night. The AUD surged up over 0.9750 where it currently trades. The RBA rate decision today will offer further volatility, as will GDP data that follows later in the week. Although the RBA retains an easing bias, it seems unlikely we will get another cut from them today.

New Zealand
This week looks set to be a very quiet one for domestic economic news in New Zealand, with little in the way of scheduled economic data due for release. That being said, the recent pickup in volatility has seen the NZD being anything but quiet. The last few days have seen some good ranges on most NZD pairings, as offshore factors provide the lead. The NZD broke below 0.8000 against the USD at the very end of last week, and was holding below there for much of yesterday. However weak data out of the US overnight has seen a snap higher and the currency now trades just below 0.8100. We can expect more of this volatility going forward as the market tries to asses just when the US Fed with start easing back their programme of asset purchases. Key to that decision will be employment data out in the US on Friday.

United States
The US dollars strong run of the past few weeks looks to have hit a snag. Manufacturing data out last night was surprisingly weak. In fact it was the weakest reading in four years, and the third consecutive fall in the reading. The USD was sharply lower on the back of the result. This was compounded by soft data on the construction sector. We could easily see further weakness as speculators who have bought USD’s to take advantage of the recent run, look to sell and get out of their positions. Although over the last few days there have been further comments from Fed officials suggesting the possibility of tapering quantitative easing purchases over the coming months, this recent data makes it less likely. Key figures on employment to be released at the end of this week will be even more closely watched than normal.

This week is a big one for the Euro-zone, with the ECB meeting and GDP data just two of the highlights. Throw US employment data into the mix and we have a recipe for all sorts of volatility. Things have started out well for Europe this week, with the release of manufacturing data last night beating expectations across the board. That was in contrast to US manufacturing data which was very disappointing. The result was a surge in the EUR to the best levels seen in month. Where it goes from here is in the hands of the ECB. Another cut from them this week seems unlikely, but we know they are very keen to get credit flowing to small and medium sized enterprises. How they are going to achieve that remains to be seen.

United Kingdom
Data out of the UK seems to be heading back in the right direction. Late last week saw an improvement in consumer confidence, and last night’s reading on the manufacturing sector was much better than expected. This has served to support the GBP across the board as growth forecasts for the second quarter could now get revised higher. The rest of the week sees data on the construction and service sectors ahead of the Bank of England (BOE) monetary policy decision on Thursday. The recovery in the GBP took a pause in the second half of May as data started to disappoint a little. If this recent turn back to stronger economic releases continues over the coming days, the GBP’s upward march will continue.

Japan had some better than expected data out on capital spending yesterday. which has supported the improving outlook. However, the Bank of Japan (BOJ) continues to look for ways to stimulate their economy further. The latest news is that they are looking to extend the terms of low interest lending to banks. It’s not a game changing move in itself, but it shows that even after all the policy moves they have made so far, the BOJ still looking to do more to get their economy moving. Volatility in stock and bonds hasn’t abated however, and remains a significant risk for the wider economy.

The end of last week saw Canadian GDP figures that lent support to their currency. Coming in better than expected, the figures for the first quarter have improved the outlook going forward. This comes on the back of a slightly improved tone from the Bank of Canada (BOC) after last week’s rate announcement. This week’s employment data will be closely watched to see if it can confirm a solid outlook for the economy.
Major Announcements Last Week
  • Bank of Canada rate announcement      No change
  • US GDP          2.4% vs 2.5% expected
  • Canadian GDP            0.2% vs 0.1% expected
  • Chinese Manufacturing PMI  50.8% vs 49.9% expected