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The US dollar and Japanese yen ended Tuesday on a mixed note, mostly consolidating Monday's moves.
Indeed, US stock market price action also reflected some consolidation, but with the DJIA and S&P 500 ultimately closing above key support levels at 9300 and 1000, respectively, the outlook for risky assets still looks good in the near-term, creating a bearish bias for the US dollar and Japanese yen. Looking to the day's data, the US Commerce Department said that personal income plunged 1.3 percent in June, the sharpest drop since January 2005, after rising 1.3 percent in May. That said, the decline was due primarily to a 5.9 percent drop off in transfer payments, which includes government benefits like disability and unemployment insurance, while wage and salary growth failed to rise for the ninth straight month. Meanwhile, personal spending rose by 0.4 percent during the month and the savings rate eased back to 4.6 percent from 6.2 percent. However, based on the declines we saw in the Conference Board and University of Michigan measures of consumer confidence during June and July, today's data doesn't necessarily suggest that American sentiment has improved significantly, especially since incomes continue to weaken.
In more optimistic news, the National Association of Realtors said that pending home sales rose for the fifth straight month in June at a better-than-expected rate of 3.6 percent, pushing the annual rate of growth up to a nearly 5-year high of 9.2 percent. While this is not always the best indicator for the US housing sector, combined with the June new and existing home sales reports, recent data suggests that the property market is gaining some traction thanks to lower interest rates, discounted prices, and incentives like the $8,000 tax credit for first-time homebuyers, as stipulated in the government's stimulus package.
Looking ahead to Wednesday, data is expected to show that conditions in US non-manufacturing sector - which accounts for approximately 70 percent of total economic activity in the country and includes retail, services, and finance - improved somewhat in July as the Institute for Supply Management index is estimated to rise to 48.0 from 47.0. However, consumer confidence has faded in recent months, primarily on the economic outlook, as the Conference Board's measure surprisingly fell to 46.6 in July from 49.3 in June and 54.8 in May. Since risk trends have proven to be the greater driver of price action in the forex markets, a weaker than expected result could trigger flight-to-quality and thus, gains for the US dollar. On the other hand, surprisingly strong numbers could lift FX carry trades and weigh on the greenback.
British Pound Holds on to Gains Amid Increased Speculation of Rising UK Interest Rates
The British pound was the third strongest of the majors on Tuesday, just behind the Australian dollar and New Zealand dollar, but the price action reflected a consolidation of Monday's surge as the currency just barely ended higher versus the Japanese yen, US dollar, euro, and Swiss franc. UK construction PMI beat forecasts by rising to 47.0 in July from 44.5, but since the index remains below 50, it continues to indicate a contraction in activity, albeit at a slower pace. As we mentioned last week, the Bank of England's Bank Rate is set at an ultra-low 0.50 percent, so yield has obviously not been a driver of the British pound strength.
Instead, the currency has been making headway during times of broad-based risk appetite thanks to climbing interest rate expectations. Indeed, according to Credit Suisse overnight index swaps (OIS), the market is pricing in 120 basis points worth of rate increases by the BOE over the next 12 months, which is among the highest of all the major central banks. Likewise, the Reserve Bank of Australia and the Reserve Bank of New Zealand are projected to hike by 152 basis points and 80 basis points, respectively, during the next 12 months, highlighting why the British pound joined the Australian dollar and New Zealand dollar as being the dominant major currencies today.
Related Article: British Pound Weekly Trading Forecast
Australian Dollar Gains as RBA Leaves Rate at 3.00%, Strikes Clear Neutral Tone
The Australian dollar and New Zealand dollar benefited from continued risk appetite, as the currencies finished the day up against the rest of the majors. On an intraday basis, the Australian dollar fell throughout the European trading session, but subsequently recouped losses during US trading. This was interesting because the Reserve Bank of Australian announced at 00:30 ET that they had left their cash rate target at 3.00 percent and shifted their bias from being slightly dovish to decidedly neutral. Indeed, RBA Governor Glenn Stevens dropped a line in his policy statement that said that the outlook for inflation allows some scope for further easing of monetary policy, suggesting that they have no intention of cutting rates any further. Accordingly, Credit Suisse overnight index swaps have shifted to price in 152 basis points worth of RBA rate hikes during the next 12 months, compared to 137 basis points on Monday and 43 basis points one month ago.
Related Article: Australian Dollar Weekly Trading Forecast
Canadian Dollar Dives on Verbal Intervention Efforts by Canada's Flaherty - No Physical Intervention Expected
The Canadian dollar was generally trading lower throughout the European and US trading sessions, but comments by Canadian Finance Minister Jim Flaherty just after 13:30 ET hammered the currency down, leading it to end the day as the weakest of the majors. While speaking to reporters, Flaherty said that he was concerned about any rapid changes in the Canadian dollar, and that steps can be taken to curb currency volatility. Based on these words and the Canadian dollar's 17.6 percent appreciation against the US dollar since March 9, it's fair to say that Canadian government and central bank officials are concerned about the impact of FX rates on the export-reliant economy. Will the Bank of Canada actually step up and physically intervene? Probably not. According to the Bank of Canada's website, they last intervened in September 1998 after their efforts to prevent a sharp deterioration in the Canadian dollar against the US dollar failed, and the Bank now flouts the belief that the currency's rate should be determined by the market. Nevertheless, as traders saw today, a little verbal intervention can sometimes have the desired effect on a short-term basis.
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