An extremely volatile week in the currency market with the US dollar losing ground in the middle of the week after the FOMC stated its preference to see further labour market improvement before tapering begins. While the initial reaction on Wednesday night saw treasuries and equities rise, these moves retraced with treasuries ending near their lows and stock indices little changed. The main move was however, in currencies, as the USD fell sharply versus the other majors with gains in the EUR, JPY and GBP.
As mentioned earlier, the FOMC minutes were slightly more Dovish than expected as there was more of a focus on deflationary pressures than had been expressed in the post meeting press release. Bernanke also mentioned highly accommodative monetary policy will be needed for the foreseeable future and the Fed were failing on both of their mandates that is inflation and employment. The Fed seems to be keen for the market to wind back some of their tapering expectations, however, investors did not buy this argument as the US data has been improving and some removal of QE is clearly warranted.
On the foreign exchange side, currencies closed the week with a recovering US Dollar after its weakness prevailed during the middle of the week. After dropping on Wednesday night by 2.76 percent, from a high 84.75, the Dollar index recouped some of the losses to close the week around the 83.00 level. The Euro exploded higher on Bernanke’s dovish comments and on a very violent short squeeze that took it all the way from a low of 1.2755 to a high of 1.3207 on Wednesday night. Investors took the opportunity to short the pair back and Euro gave back its gain to close the week at 1.3050.
With the Japanese election looming on July 21, investors preferred to remain on the sideline and the Japanese Yen continue to range trade between the 98 and the 101.50 level. Market expectations are tilting towards the ruling democratic party and the new Komeito party together to win 70 seats to secure a stable majority in the chamber and to keep Japan’s economy on its continuous fragile recovery. In the commodity complex, Gold prices jumped to almost $1,300.00 as Fed Chairman Bernanke’s dovish monetary policy comments triggered a buying spree among investors. Gold prices closed at $1,285.00 today. The continuous volatile situation in Egypt continue to put upward pressures on Oil prices, along with the US inventory coming much worse than expected. Oil prices reached a high of 107.45 to end the week at $105.95.
Initial jobless claims for the week of July 6 increased +16k to 360k after the prior week was revised up +1k to 344k. This had the effect of raising the four-week moving average +6k to 352k. Analysts have argued that it is not unusual to see significant volatility in jobless claims around the beginning of July. In fact, the Department of Labour commentary on today’s data admitted as much as they highlighted the difficulty with seasonal adjustment factors in July for a variety of reasons—namely auto sector retooling and the July 4 holiday. Next week’s data take on added significance as they correspond to the survey period for July nonfarm payrolls.
During the week, European Central Bank VP Vitor Constancio also mentioned that the Euro zone is likely to see an extended period of slower economic growth, and ECB’s policy will stay loose for a long time. ECB would not exit from crisis measures yet. ECB forward guidance has been successful in stabilising financial markets after Fed taper talks. Euro area is still facing a painful crisis of imbalances, financial fragmentation and low growth.
The Euro zone May industrial production fell 0.3 percent m/m in line with analysts’ expectations. Following the German, French and Italian data, this just re-affirms the message from earlier data releases this week. The yr/yr fall was 1.3 percent. Weakness was most noticeable in consumer durable goods, which dropped 2.3 percent m/m and 6.2 percent yr/yr. The lack of available credit remains a major constraint on household purchases of large ticket items and indicates the need for a swift implementation of banking union.
Employment in Australia rose 10.3k in June, although the composition was a little soft with full-time dipping 4.4k while part-time rising 14.8k. Hours worked rose a 0.5 percent m-o-m to be 1.9 percent higher y-o-y, suggesting that the peak period of weakness here has passed. China’s finance minister mentioned that the country may expand less than the government set target in 2013. While the government had a target of 7.5 percent, Lou Jiwei, mentioned they were confident to achieve 7 percent rate this year. In addition, Lou also mentioned, “we don’t think 6.5 percent or 7 percent will be a big problem” in a response to a question on whether there is a limit on slower growth that official will tolerate
On the data front, China’s exports and imports declined in June more than expected. While analysts had forecasted an increase in exports of 3.7 percent and the number came negative 3.1 percent, which increased the likelihood of the Bank of china remaining accommodative for a long time and put pressure on Asian currencies. Imports also dropped 0.7 percent while analysts expected a 6 percent increase. Gold jumped this week to reach a high of $1,298, as the impact of Federal Reserve chairman Ben Bernanke’s dovish monetary policy comments echoed in the financial markets while encouraging investors buying for Gold. A day earlier, Bernanke stated that a highly accommodative monetary policy is necessary for the foreseeable future to help aid in the US economy, as the unemployment rate was too high at 7.6 percent and inflation too low at 1 percent.
As Egypt continues to be a big topic for oil investors, it is only the last of several financial and geopolitical reasons that have kept oil strong for the past several months despite the shaky performance of just about every other asset class. Add on this, a big shortage in US oil inventories, caused oil to shoot up and remains very well bid for the moment.The Peninsula
