DOLLAR HAS POTENTIAL TO REBOUND
DIRECTOR OF CURRENCY RESEARCH, GFT
The biggest story in the currency market last week was not the Eurozone stress tests, but rather the surprisingly robust economic results reported by Germany and France. While the stress tests proved to be entirely anti-climactic, the news on the economic front was much better than expected. Eurozone flash PMI surveys for July handily beat forecasts indicating that activity remains well above the 50 boom/bust line while the IFO survey saw the biggest monthly jump since German reunification.
The news from the Eurozone suggests that growth in the second and third quarters of this year may be stronger – good news for investors concerned about European banks’ balance sheet exposure to sovereign debt. Any sign that the economies in the region will grow at a faster than expected pace should minimise the risk of default and prove supportive to the euro. Still, having risen more than 1,000 points off its yearly lows, the rally in the euro-dollar has clearly run into resistance at the $1.3000 level and I believe it is likely to stall in this area until September.
As we enter the dog days of summer the main debate in the currency market remains between the bulls who argue that the recovery trade is alive and well and the bears who predict a massive slowdown in economic activity in the second half of the year. Since the US economy represents nearly 25 per cent of global demand, it is the lynchpin for both scenarios. The recent spate of disappointing US data has driven US yields lower and dragged dollar-yen down with them. However, with the pair having found support near the ¥86 level, any upside surprise this week could spur a rally back towards ¥89 as the recovery trade gets a second wind.
The focus this week will shift to North America as US data dominates the economic calendar. The key event will be this Friday’s US GDP report with the market anticipating a reading of 2.5 per cent versus 2.7 per cent the period prior. If the data meets or beats expectations, then the news should provide a lift for dollar-yen as double-dip fears begin to fade away.
Boris Schlossberg and Kathy Lien are directors of currency research at GFT. Read commentary at www.GFTUK.com/commentary or e-mail [email protected].