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Last week in review

Main theme driving the market.

The safe haven Swiss franc and Japanese yen were the major movers this week in currency markets. The dollar’s attractiveness as one of the three safe havens was diminished by weaker than expected economic data. The soft data increases the chance of more QE by the Fed and thereby enhances the dollar’s function as a funding currency for carry trades. While investors’ confidence in the euro zone remains fragile, the contrasting economic data out of Germany and decently received debt auctions with dismal US housing data helped to support the euro.

Sterling (GBP):

This was a very thin week in terms of economic data and event risk in the UK. At the beginning of the week, sterling suffered on the back of weak BBA mortgage approvals data and after particularly dovish comments were made by one of the newest members on the central bank’s MPC. Martin Weale suggested that the UK economy remained fragile and said that there remained a significant risk that the economy could slide back into recession. Sterling was able to recover most of its losses made after the weak data and dovish statement, but its upside was limited in front of the end of week revised Q2 GDP data.

US Dollar (USD):

The US dollar has been placed in a tug of war. On the one hand weak economic data both in the US and globally tends to prompt safe haven buying of the buck. However, data in the US has been so weak recently that some investors are again using the US dollar as a funding currency for carry trade positions, which is dollar negative. As a result, major dollar crosses outside of the Swiss franc and Japanese yen, could begin to establish a relatively tight trading range in the last weeks of summer. For the record, housing figures were as dismal as anyone could have expected. New home sales dropped to the lowest levels since record keeping began in 1963. Existing home sales figures dropped to 15-year lows, while durable goods also failed to even get close to market expectations, suggesting business spending remains weak and will weigh on growth data in this quarter.

Euro (EUR):

The euro touched 9-year lows against the yen this week and new record lows against the Swiss franc. The S&P rating agency downgraded Ireland’s sovereign debt rating, but despite the downgrade, government debt auctions in Spain and Portugal were well received. The economic data released in Germany was better than forecast and helped to limit the euro’s downside. Details of the second quarter GDP data for Germany revealed a much broader based recovery than investors had expected. The data was further supported by a rise in business and consumer sentiment. The German IFO business sentiment survey reached fresh three year highs, while GfK consumer confidence surprisingly beat forecast and saw the prior month’s release revised higher. Other euro zone data also provided mild support for the euro with new industrial orders beating expectations in June and flash estimates for PMI manufacturing and service sector surveys being released more or less in line with forecast.

Japanese Yen (JPY):

Japanese exports were seen rising this week, but are expected to moderate in coming months because of a stronger yen and weaker global growth outlook. In fact it was the yen’s rise to 9-year highs against the euro and 15-year highs against the US dollar which prompted talk over possible direct currency intervention from the MoF. The FinMin tried to talk down the yen when he said that excessive moves will not be tolerated and that he was watching currency markets carefully. Speculation was rife that the government and central bank were working closely together to further loosen fiscal and monetary policy in an effort to stem the yen’s recent ascent.

Recent key releases:

Highlights for this week

Sterling (GBP):

• This week’s UK agenda is a little more exciting than last week’s. CIPS PMI survey for the manufacturing and service sector will be released after BoE money supply and consumer credit figures. The manufacturing survey eased slightly last month, but remains near 15-year highs. In contrast the service sector survey slipped last month to reach a 13-month low and if coupled with weak consumer credit figures could limit sterling’s upside going into the following week’s BoE MPC monetary policy decision. Consumer credit figures have pointed to a slowdown in the housing sector over the past couple of months.

US Dollar (USD):

• FOMC minutes will be released, but the fallout from Bernanke’s comments made last Friday are likely to impact currency markets first and foremost this week. The minutes are likely to be considered dated after the string of weaker than expected economic data grew longer over the course of last week. All eyes will be turned to employment data this week. An ADP report on Wednesday will be seen as a precursor to non-farm payrolls on Friday. The release is forecast to see further job losses, which suggests that the recovery to date has been one supported only by government programs and is not sustainable. A weak jobs figure combined with a drop in the service and manufacturing ISM survey would likely weaken the US dollar as investors continued to view it as a funding currency for carry trades.

Euro (EUR):

• The ECB MPC meeting is widely seen leaving interest rates on hold. Considering the better economic data recently released in Germany and the Euro zone, it would not be surprising to see Trichet try to tone down market optimism. A more cautious and dovish sounding Trichet at the ECB’s press conference is likely to be seen as status quo, since he gave the same tone at last month’s meeting. It could well be that economic data that is scheduled for release this week in the euro zone actually overshadows this week’s ECB’s MPC decision. Higher inflation figures and notably a pick up in consumed demand figures would benefit the euro. Consumer demand in the euro zone is notoriously weak and a small revival of this could suggest that the recovery is becoming more broad-based and therefore sustainable.

Japanese Yen (JPY):

• Preliminary industrial output figures will be monitored if only to try to assess the damage that the rising yen has had on demand. Investors will be keen to hear rhetoric from officials being ramped up in an effort to offset any further strengthening. More details regarding an increase in the central bank’s quantitative easing program could also be released and may temporarily limit the yen’s upside, particularly if coupled with direct intervention in currency markets by the MoF.

Upcoming key releases