Prices of US Treasuries edged up on Friday in light trading, with investors reluctant to take on large positions ahead of a Federal Reserve meeting next week, which will be scrutinised for signs over when the US central bank is likely to reduce its bond purchase programme.
Most economists and investors expect the Fed will reduce the size of the programme in September, though Fed chairman Ben Bernanke has stressed that any pullback remains data dependent. The meeting comes two days before Friday’s crucial payrolls employment for July, the next major release that will give traders guidance on the likely next direction of bond yields.
The dollar was unable to make any headway during the week and eventually declined to five-week lows on a trade-weighted basis with all-round losses against major pairs.
The latest US existing home sales data was slightly weaker than expected with a decline to an annualised rate of 5.08mn for June from a revised 5.14mn previously. The data continued to suggest a gradual underlying improvement in conditions, but with some unease that higher yields were dampening activity.
The flash PMI manufacturing data rose to 53.2 for July from 51.9 previously. The US new-home sales data was stronger than expected with an annualised rate of 497,000 from a revised 459,000 previously.
The headline US durable goods orders data was stronger than expected with a 4.2% gain for June from a revised 3.7% advance previously. As was the case last month, the improvement was driven to a large extent by aircraft orders and core orders were unchanged.
Elsewhere, initial jobless claims rose slightly to 343,000 from 336,000 previously which suggested little change in the labour market.
The dollar failed to sustain an initial advance following the US data releases during the week even with an increase in US Treasury yields as benchmark 10-year rates briefly moved above 2.65%.
Later in the US session on Thursday, an article in the Wall Street Journal said the Fed would keep policy on hold at next week’s policy meeting. More importantly, there were also suggestions that there would be a revision to forward guidance with a potentially more dovish stance and a new lower inflation band and higher unemployment hurdle for increasing interest rates.
These comments weakened the dollar sharply with the euro pushing to highs near 1.33 as the dollar dipped to five-week lows.
There will be further short-term uncertainty surrounding the US outlook with a mixed set of economic releases. Federal Reserve policy will remain extremely important in the short-term with the Fed meeting next week. There has been a more dovish tone and the dollar will be vulnerable if there is any move away from Fed tapering later this year. The US currency will also be vulnerable to further position adjustment as long positions are scaled back.
The euro was able to gain ground and pushed to five-week highs above 1.3250 against the dollar as confidence in the eurozone economy improved.
The eurozone manufacturing PMI index moved above the 50 level for the first time for over two years. There was also a stronger reading for the services sector, supported by a jump in the German sector. The data was significant in boosting confidence towards the eurozone economy with hopes that it could record positive GDP data for the third quarter. In this context, there were also expectations that the European Central Bank would hold back on any further monetary measures at the August meeting.
The German IFO index was broadly in line with expectations as it advanced for the third successive month to 106.2 for July from 105.9 previously. Given significant gains for the PMI index released on Wednesday, there was some disappointment that the data was not stronger. The latest eurozone monetary data was weaker than expected with a slowdown in money supply growth to 2.3% from 2.9% and there was an annual decline in private loans for the thirteenth successive month at -1.6%.
Confidence surrounding the Spanish economy remained stronger with second-quarter unemployment falling to 26.3% from 27.2%, maintaining the firm data tone. Markets continued to assume that there would be no action by the ECB at next week’s policy meeting. The IMF, however, did call for further central bank rate cuts to be considered with the imposition of negative deposit rates.
There will be grater optimism surrounding the eurozone outlook following the stronger than expected PMI surveys which suggests that there could be GDP expansion for the third quarter. There will also be greater optimism surrounding Spain, but the overall peripheral outlook is still bleak, especially given very high unemployment. The ECB is likely to leave monetary policy on hold in the short-term which will tend to underpin the euro.
Range for previous week: $1.3128–$1.3296
Range for this week: $1.3050–$1.3350
Sterling held a firm tone during the week, although a weaker dollar was the main catalyst for further gains against the US currency and a peak above 1.54. Sterling overall was little changed against the euro.
The latest BBA mortgage lending was slightly weaker than expected with an increase to 37,300 for June from 36,300 previously. This was, however, the highest figure since February 2012 and maintained the positive run of housing-sector releases. The latest BCC (British Chambers of Commerce) survey reported exports at a six-year high.
Sterling held a firm tone ahead of key weekly data on expectations of a robust second-quarter GDP release. In the event, provisional growth of 0.6% from 0.3% previously was in line with consensus expectations. This disappointed more bullish market elements which had expected an even stronger release and Sterling was vulnerable to significant profit taking following the release.
There were also expectations that the Bank of England would maintain an aggressive policy of monetary expansion to help sustain stronger growth in the medium term.
There will be greater economic confidence following the second-quarter GDP data. A significant improvement has, however, been priced in which will limit the potential for further sterling gains. The BoE is also likely to maintain an expansionary policy and will look to contain any increase in bond yields through aggressive forward guidance. The UK will also maintain underlying balance of payments vulnerability, especially if there is a sustained deterioration in global risk appetite with little scope for strong sterling gains.
Range for previous week: $1.5256–$1.5433
Range for this week: $1.5150–$1.5550
The LDP (Liberal Democratic Party) has secured a comfortable Upper-House majority which will maintain political momentum behind the aggressive policy stance to combat deflation. The Bank of Japan will maintain a very loose policy in the short-term which will limit any underlying yen support. Increased confidence in the eurozone outlook would increase the potential for capital outflows from Japan into eurozone and also US bond markets. The yen could still gain support if there is a sustained deterioration in risk conditions, but further deterioration in Asia would also maintain pressure for a competitive yen.
The dollar was unable to make any impression on levels above 101 against the yen during the week and was generally weaker with a slide below 99.
There were expectations that Prime Minister Shinzo Abe would maintain an aggressive policy of monetary and fiscal expansion following his stronger political position and Upper-House election victory. There were still expectations that this would weaken the yen in the longer term. These expectations were countered by speculation that much of the potential impact had already been priced in.
The latest trade data recorded a lower seasonally-adjusted deficit at ¥0.60tn from a revised ¥0.78trn previously. There was a slowdown in annual export growth to 7.4% from 10.1% which will maintain some concerns surrounding the Asian economic outlook in particular and will maintain pressure for a competitive yen.
The latest capital-account (data recorded) net Japanese flows into overseas assets of ¥549bn in the latest week from ¥1105bn the previous month and the underlying flows will maintain expectations of a weaker yen. Reports of a potentially more dovish Fed tone triggered renewed losses as US yield support weakened again.
The latest inflation data was slightly stronger than expected with national core prices rising 0.4% in the year to June which suggested that deflation may be easing slightly, although much of the gain reflected yen losses rather than structural factors.
After initially weakening, the yen regained some ground as the dollar dipped to lows below 98.70. Any further evidence of rising prices would increase speculation that the Bank of Japan would not need to be as aggressive on monetary policy.
Range for previous week: ¥97.94–¥100.71
Range for this week: ¥97.00– ¥100.00
An employee is walking past a large poster for the Bosch electric breaker drill displayed inside the professional power tools division of Robert Bosch GmbH in Leinfelden, Germany, on Tuesday. The eurozone manufacturing PMI index moved above the 50 level for the first time for over two years. There was also a stronger reading for the services sector,
supported by a jump in the German sector. The data was significant in boosting confidence towards the eurozone economy with hopes that it could record positive GDP growth for the third quarter.