A degree of stability has hit the market in the wake of the volatility of last week, but this may be short lived with important US unemployment data due out later in the week. There are rumours in the market that, should there be stronger than forecast unemployment data, the Federal Reserve may decide to trim the stimulus earlier than they previously indicated.
The two data announcements that are expected to influence the market are Wednesday’s ADP Employment Report and Friday’s Non Farms Payroll (NFP), and any improvement on market expectations could provide the evidence Fed Reserve Chairman Bernanke needs to reduce the stimulus that is currently supporting the US economy.
The euro has strengthened on the back of Eurozone data that indicated better than expected manufacturing and unemployment results for June; however USD may claw back some of these gains later in the week.
The Bank of England’s new Governor, Mark Carney, has been welcomed into his new position with signs that the UK economy is recovering. A British Chamber of Commerce report shows evidence of economic growth, increased exports and confidence. It is expected that Carney will leave interest rates unchanged at this week’s meeting; however he will no doubt be keeping a close eye on the country’s recovery in order to monitor the level of stimulus needed.
The yen continues to fall, dropping to a three month low against the USD this week. In what may seem to be a paradox, this is an indication that the stimulus programme from the Bank of Japan is working. Economic data emerging from Japan shows the economy is improving with business sentiment in manufacturers turning positive and capital spending boosted to 5.5%. The government has also announced tax breaks to attract domestic investors, while the low currency rate is good for the export business.
The weak Japanese yen has also attracted substantial interest from the carry trade market. Carry trade is a sophisticated strategy where an investor sells a currency with a relatively low interest rate and purchases an asset with a higher interest rate. Traders aim to benefit from the difference between the rates, and with the Japanese interest rate at 0.10%, the funding for the carry trade is now yen.
The Reserve Bank of Australia is applying a similar strategy to the weakening of their currency as their Japanese counterparts. Although AUD continues to slowly decline, the Reserve Bank of Australia has maintained interest rates on Tuesday as a weaker currency is considered beneficial to boosting exports and for attracting interest from international investors. RBA Governor Glenn Stevens has even said he expects that a further decline may be seen which is expected to help the economy grow in a more balanced way.
While gold experienced a 27% slump to the end of June, it did enjoy a surprising jump from last week. On Friday 28 June, the precious metal was trading at the very low rate of $1,180 an ounce, but it rebounded strongly to $1,267 on Tuesday 2 July on the back of increased demand due to the substantial price drop. While it was a good time to buy last week, traders are now holding their positions to see what the US data later in the week may bring.
Oil prices have also strengthened this week over fears that Egypt’s political crisis may spread to influence neighbouring oil-producing countries and impact demand for oil. If such contagion becomes a reality it is likely that we will see further rises in oil. This week we have seen a modest jump in the oil price from $96.05 a barrel on Monday 1 July, to $98.29 on Tuesday 2 July.
What to watch this week:
The major pairs of GBP/USD, EUR/USD, AUD/USD should be closely watched for volatility off the back of US unemployment data releases scheduled for Wednesday and Friday. For more information visit: www.forextime.com