USD broadly stronger on better-than-expected US manufacturing data

  • EUR weaker as geopolitical issues linger


Commodity currencies weaker after BoC held interest rates steady at 1%

USD – The dollar is stronger across the board after the Philly Fed manufacturing index rose to a 28 month high. Manufacturing activity in the Philadelphia-region in July showed its fastest expansion since March 2011, easing concerns over the U.S. economic outlook. In the report, the Federal Reserve Bank of Philadelphia stated that the manufacturing index rose to 19.8 in July from June’s reading of 12.5. The reading was a huge market surprise to the upside since analysts had actually expected the index to decline to 7.8. Also released was initial jobless claims, which came in better than expected. Claims for unemployment fell by 24k to 334,000, which was lower than the 345,000 expected. The market will turn its attention to Fed Chairmen Ben Bernanke, who is set to speak again to the Senate Banking committee on the state of the U.S. economy. Expectations are that Bernanke will reiterate what he said yesterday in his testimony before congress. Bernanke stated that he expects to begin reducing stimulus later this year if the economy continues on its course. Look for the dollar to hold on to today’s gains and continue to strengthen on the anticipated reduction in stimulus by year end.

EUR - The euro is weaker, but holding on to recent ranges after the release of the eurozone’s current account balance. The data showed that the eurozone’s current account narrowed to €19.6bn. German Finance Minister Schaeuble suggested that if Greece reached certain milestones they would be prepared to negotiate some form of debt relief. Expect the market to focus on political issues across Europe, in particular the situation in Greece and Portugal. Look for the EUR to continue to hold close to its average this year, but a longer term weakening trend given the geopolitical issues in the eurozone is likely.

GBP – Sterling remained weaker against the dollar, but did manage to climb above its overnight low after the release of Retail Sales data. Data showed a bigger than expected rise in UK retail sales in June. The Office for National Statistics said Thursday that retail sales grew 0.9% in the second quarter compared with the previous three months. That marked acceleration from a 0.6% expansion in the first quarter and will likely contribute 0.1 percentage point to second-quarter gross domestic product. The stronger retail sales figure comes just after yesterday’s release of better-than-forecast British jobs figures. The positive data could help curb the downtrend analysts expect in the GBP/USD currency pair. Investors remain cautious that the BoE may start issuing "forward guidance" on interest rates. Expectations, however, remain that the BoE will pledge to keep rates low until a more sustainable recovery is cemented.

JPY – The yen is broadly weaker today as many traders expect Sunday’s upcoming upper house elections to strengthen Prime Minister Shinzo Abe’s position and enable him to further continue his monetary stimulus plans. The yen hit a seven-week low versus the euro while breaking through the key technical level of 100 versus the dollar and is currently trading around 100.5, down 1% from yesterday’s close. With little Japanese economic data set to be released between now and the weekend, the markets will remain focused on Sunday’s elections.

Commodity Currencies – The Canadian dollar slightly weakened against the US dollar after the BoC said yesterday that it will hold its benchmark interest rate steady at 1.0%. Delivering the announcement was new Governor Stephen Poloz, who emphasized that the economy still remains fragile with minimal inflationary pressure, but that the central bank sees rates rising if the economy performs in line with expectations. Meanwhile, Canadian wholesale trade grew by a stronger-than-expected 2.3% in May from April, the biggest monthly jump since January 2011. The Australian dollar slid 0.94% against the US dollar, threatened by the recent lower than expected growth data from China. One third of Australia's exports, mostly iron ore and coal, are shipped to the Asian giant, making it vulnerable to any slowdown there. However, demand from China has held up surprisingly well as Australian exports there climbed to a record high in May. While Chinese data showed a shortfall in overall exports and imports in June, imports from Australia were up 12% over the same month last year.

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