Following its long period of flat range trading the dollar has finally managed to generate some more meaningful movement since my last update. Initially it looked as if it had made a break lower as the old range lows broke but the follow-through was short lived and made a sharp recovery on Friday as the U.S. announced better than expected employment numbers, even seeing the underlying unemployment rate edge lower.
The market began to sense blood, eying the potential for a period of growth and with it higher interest rates in an attempt to place a lid on the widely anticipated rise in inflation.
What is not clear is whether this strength can be sustained. Certainly the numbers being announced in the States are showing an improvement, the housing market at last showing early signs of recovery, vehicle sales rising and along with it manufacturing. However, there does seem to be a lag in consumers actually releasing the shackles on spending and on borrowing.
June personal spending was lower while consumer credit made a significant dip. The early signs are positive but the next few months will show whether there is sufficient confidence in consumers and more critically in banks’ willingness to lend.
Japanese economic releases have been better too. The trade balance is showing signs of improving along with manufacturing. However, there is still a lack of confidence in consumers, their cash earnings having dipped rather worryingly by 7.1 percent over the past 12 months. Consumer confidence numbers will be releases this week.
With more confidence being shown in the U.S. economy, the underlying benefit to the yen through risk aversion has allowed the yen to slip further both against the dollar and the European currencies. This is beneficial for exporters who can compete better on a price basis. However, I’m not really confident that we’ll see the yen weaken significantly from current levels, at least not yet.
Overall these are still early days in the global recovery and the risk of further pitfalls remains. Central bankers are not getting carried away with the better number just yet and still point to weakness in the financial system – the Bank of England even injecting a further 50 billion pounds into the economy due to the fact that the recession has been much deeper than expected.
So for now the current pro-dollar sentiment is likely to persist but as we have seen over the past months the initial mini bout of euphoria can very quickly subside into lack of direction. So for the moment it looks as if we may just remain in range trading conditions for a while longer.
Ian Copsey
www.fx-forecaster.com
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