Monday August 2, 2010

After Friday's GDP report the dollar starts the week facing fresh weakness amid more signs of Asian expansion continuing to highlight a plausible theory that the United States has become a growth laggard.

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U.S. Dollar - The index slipped to a fresh three-month low to begin a new trading week as investors looked elsewhere at better growth prospects. Stock markets around the world were sharply higher as a new month got underway sucking undecided capital off the sidelines as investors brush off the prospect of an ever-falling yield curve and try their luck at another asset class.

Optimism over the health of the Asian economy was boosted after South Korea reported trade continued its robust performance with export orders 29.6% higher than a year ago. A Chinese State Council researcher predicted strengthening growth. Zhang Liqun forecast that China's economy would expand by 9.5% compared to 9.1% during 2009. The Federation of Logistics and Purchasing said that the performance of domestic manufacturing continued to expand although at a lesser pace than in June with the official PMI coming in at 51.2 down from 52.1. The HSBC manufacturing PMI index moved from minor expansion to minor contraction as that index fell to 49.4. Over the next two days we'll hear about the service sector of the economy.

One final strand of optimistic news for growth out of China comes in the shape of comments from Deputy Governor at the PBOC who welcomed the recent relaxation of exchange rate controls saying that the depegging of the yuan to the dollar helped balance international payments, boost domestic demand and was a positive development for economic structuring. Forward yuan contracts rose as the perception of further movement ahead drove down the yuan per dollar to 6.7745 while the one-year forward rate eased to 6.6745.

Japanese yen -The yen is lower as risk aversion slides to backstage aided by the optimism displayed in those PMI manufacturing numbers. The MSCI Asia Pacific index was up 1.1% this morning, which helped put the dampener on the performance of the yen, which slipped to ¥86.88 against the dollar at its worst today.

Aussie dollar - It was a seventh straight monthly gain for the Australian Industry Group's manufacturing performance index that in part helped send the Aussie close to a three-month high against the dollar. The index expanded to 54.4 in July after 52.9 the previous month. The Aussie rose to 91.35 at its best point while against the Japanese yen it rose to ¥78.89.

Euro - The euro is notable for its inaction to kick-off August. While the dollar cheapens the euro can only manage a sideways movement vilifying the bearish crowd who continue to depict a weaker growth trajectory through the Fall. Nevertheless the euro remains higher and not a million miles off its early morning peak at $1.3089. Strong results from Europe's largest bank HSBC and the biggest French bank, BNP Paribas have also helped lift stock markets as risk appetite recovers.

Canadian dollar - The Canadian dollar rode all the way up to 97.78 U.S. cents to a five-week high as the price of crude oil rose in response to the buoyant Asian market tone. The Canadian dollar has been unpredictable recently as dealers try to react to the wedge struck between U.S. growth and that emerging elsewhere. Commodity demand plays an enormous role in the domestic economy and as more investors look to other reviving parts of the world they are equally willing to downplay the impact of tepid U.S. demand on the Canadian economy. September delivery crude oil has come within a nickel of $80 per barrel this morning as investors digest the implications of the Chinese PMI survey data.

British pound - Despite a dip to the lowest reading in five months for the U.K. purchasing mangers index, a reading of 57.3 was brighter than predicted, accompanied by an upgrade to the June performance and marked a tenth straight monthly expansion. And with the number of net British pound shorts as displayed in CFTC data dropping week-after-week it's becoming easier to see how the woeful bears are packing up their bags and quitting the scene, driving the pound higher as they do. Today the pound reached $1.5837 for a six-month high.

Andrew Wilkinson

Senior Market Analyst       

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