FX Market View #13

As we approach month-end, investor interest in the Dollar accumulated resulting in the greenback shoring up against the majors. It is not clear however if this Dollar strengthening can be seen as a shift in the near-term trend or simply a balancing of investor portfolios. Any sustainable shift towards an uptick in a new Dollar trend would require the currency to consolidate higher as we close out the second quarter. For this scenario to occur, the Dollar will need to be supported by a period of interest rate yield growth. Therefore, this slight jump in Dollar strengthening will likely be a short term reprieve with the market responding to the employment reports if yields do not recover.

During last week the Chinese Yuan rose to a 3-year high, capitalising on its strongest weekly gain in half a year. China’s policy makers released a statement recognising the need for market driven 2-way price movement of its currency. Despite this statement that exchange rates will not be used as a tool to achieve other economic policies in China, investors took the Yuan higher over six consecutive trading sessions. In Europe, comments from the BOE lifted Sterling higher against the Dollar. Discussions of an impending rate hike next year supported the Pound. As for the common currency, the earlier rise of the Euro eventually stalled on news of the slowing ECB bond buying program.

In the US the Core PCE spiked higher in April. Being a key inflation indicator for the FED, the market-led Dollar rally is seen as a near-term reaction. However, concerns remain as to whether or not inflation will normalise from these levels. With the focus remaining on inflationary pressures, the key data reports for this week will be the Chinese PMI release on Monday, followed by US PMI figures a day later. During the second half of the week market participants will pay close attention to the US Non-Farm Payroll release on Friday. Strong jobs growth data is expected along with further inflationary pressures, possibly increasing the risk of the Fed reducing their support policies.

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