US Dollar Bulls Rule
US Dollar growth is the primary market mover today. Bonds continue to fall in the US, driving yields to their highest level since 2002. And that has significant repercussions for all other currencies in the foreign exchange market.
Despite strong economic data for the yen, the strong dollar growth continues to dominate. Japan came out with great e data yesterday as the current account surplus blew past expectations of 1948 billion yen, arriving in at 2279 billion yen. The weak yen proved beneficial to Japanese exports. But US bond yields are at their highest level in five years causing Japanese investors to continue to buy US bonds, for which they need US dollars. So despite the positive economic results in Japan, in the forex market, USD/JPY continues to be bought, keeping it above 122.00.
In Europe, the Euro has been sold for seven straight days now, putting it at a new two-month low against the dollar. This is on the basis of not only overall dollar strength but also bad economic data. As we stated previously, industrial production in Germany and France has plummeted. But despite the data, the European central bank has continued to be hawkish. If the ECB follows through on its rate hike promise, or at least if the market believes it will follow through on the promise, then that could limit dollar growth. It is important in the currency market because the Fed is certainly not going to raise rates at its next meeting.
In the UK, we also have evidence of broad dollar strength. But the pound has done well against the dollar in past couple of days, on the back of a narrowing trade deficit and a very slight rise in core price inflation. But today’s slower than expected wage growth has put a slight hold on the Bank of England’s plans for a rate hike. When combined with the bid support under the US dollar, that has driven GBP/USD under 1.9700.
The Australian, New Zealand and Canadian dollars also suffered yesterday. The strong dollar was a factor, but so was the decline in carry trading. With the US stock market falling again, carry traders were looking to liquidate. Markets are interlinked, and if the current condition in the US equities market continues to hold, then that could put a damper on carry trading.
It certainly looks as thought the rise of the US dollar will continue for now. This morning, US retail sales rose 1.4% beating estimates of 0.7%, and last moth’s sales data were revised upwards as well. Import prices did rise, but that was expected considering the weak US dollar in April and May. The sales data demonstrates that consumers are hanging in there, and that is definitely bullish for US yields. As long as the US consumer continues to hold off his long-predicted fall, dollar bulls will continue to rule the market.
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