The fortunes of the forex market have been hinged almost entirely on the fate of the US dollar in the past few weeks and this was particularly evident after Friday’s disappointing Non-Farm Payrolls (NFP) data was announced and the US dollar weakened against all of the major currencies.
After the announcement on Friday, EUR/USD rose from 1.3188 to hit a high of 1.3300 on Monday, 5th August, the yen strengthened against the USD going from 99.93 to 97.83 on Tuesday, 6th August, and GBP/USD made a substantial jump from 1.5107 to 1.5377 on Monday, 5th August. Another currency that has benefitted from the USD weakness is the Swiss franc, with USD/CHF dropping from 0.9332 on Friday to trade at 0.9245 on Tuesday 6 August.
The NFP is the most influential data release in the forex market and the lower-than-expected figure was somehow a paradox as the US unemployment rate fell from 7.6% to 7.4% even though there were fewer new jobs created in the past month.
The market is now eagerly awaiting this week’s unemployment claims announcement to see whether the drop in unemployment is also reflected in this data. If this is not confirmed with a reciprocated fall in unemployment claims the market may begin to question the accuracy of the data and the USD may claw back some of the losses experienced in the past few days.
The uncertainty surrounding the US economy is making it very difficult for Federal Reserve Chairman Ben Bernanke to make a decision on when to withdraw the economic stimulus. Even though the bond buying programme has helped stabilise the economy, there are fears that retaining the stimulus for too long could impact inflation and actually do more harm than good. Bernanke has indicated he may withdraw the stimulus as early as September, but as the improvements in the health of the economy are slower than Bernanke initially hoped, it now seems December is a more likely timeframe. Bernanke’s term as Chairman will expire in January 2014 and it is possible that he will try to begin the withdrawal of the stimulus while he is still in post.
While the US economy seems to be having a rollercoaster experience of ups and downs, the Eurozone economy has been making small, incremental improvements with data releases consistently improving of late and the euro quietly strengthening. This week we have seen positive Eurozone PMI data which further strengthens sentiment that the Eurozone economy is improving. European Central Bank President Mario Draghi has persistently said he is waiting to see what happens to the economy before making any decisions regarding the stimulus. Some analysts think Draghi is waiting for Bernanke to make the first move as any withdrawal of the stimulus in the US will likely lead to US dollar weakness.
Likewise, the UK economy also seems to be making a modest improvement with PMI data coming out at 60.2, much higher than the 57.4 that was expected. This data indicates that the manufacturing sector is growing – another sign of economic recovery. While the sterling benefited from USD weakness after the NFP announcement, further data releases will be the true test of GBP strength.
The Reserve Bank of Australia (RBA) announced another interest rate cut of 25 bps on Tuesday, 6th August to 2.5% to support the struggling economy. The announcement caused a small jump in AUD/USD from 0.8918 to 0.8988 in trading on Tuesday.
The Australian economy has been hit on two fronts recently – the US economy showing improvements and pressuring the local currency and the Chinese economy weakening. Australia has also been affected by the end of the mining boom, which has substantially contributed towards Australia’s wealth in the past few years. While RBA Chairman Glenn Stevens says there is still room to cut rates further to boost the economy, experience from the US and the Eurozone, where interest rates are very low, shows that it is much harder to raise interest rates than it is to cut them. Any increase in interest rates causes a currency to weaken and, for those economies trying to recover, this is an eventuality they want to avoid.
As gold and the USD have historically moved against each other, it was no surprise to see gold prices boost as the USD weakened. Gold moved from $1,283 an ounce on Friday to $1,320 on Monday, 5th August. However, this strength was short-lived with the price dropping back to $1,291 on Tuesday, 6th August. This on-going volatility in gold is indicative of the popularity of this pair.
In contrast, oil prices are correlated with USD strength and thus we saw a drop in oil from 108.73 on Friday to 105.68 on Monday 5 August. Stockpile inventories are due on Wednesday this week and if there is a decline in the inventory, suggesting a greater demand than there are stockpiles, it is likely that prices will rise once again.
What to watch this week:
With the performance of the USD expected to continue to dominate the market, the pairs of USD/JPY, GBP/USD, AUD/USD and USD/CHF should be closely watched.
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This article was first published on 7th August 2013