NEW YORK: The dollar remains vulnerable in the upcoming week as a slew of US economic data is likely to show that the outlook for the global economy has improved, which should reduce demand for the currency as a safe-haven.
Aside from the data, the equity market will continue to be the focus of currency traders next week. Most traders think rallies in the dollar as a result of pullbacks in equities are good selling opportunities.
The dollar slipped against the euro this week in choppy trading, down about 0.3%, mostly pressured by rising US equities. While poor US economic numbers such as consumer confidence and durable goods had earlier fueled some dollar buying, the impact was mostly short-lived.
Next week’s US data calendar led by the all-important US non-farm payrolls report — the forecast is for lower job losses of 320,000 in July compared with 467,000 the previous month — could show the US economy may be emerging, albeit, slowly from recession. That should be dollar-negative, for now.
“Improving US economic indicators remain dollar-bearish at this stage,” said Marc Chandler, global head of FX strategy at Brown Brothers Harriman in New York.
Key manufacturing data from the Institute for Supply Management for July, and personal income and spending figures, pending home sales and factory orders for June, all due next week, are all expected to confirm a stabilizing economic environment.
“We have not altered our more bullish longer-term US dollar outlook,” Chandler said. “But it will take a break in the currency/stock market correlation for investors to focus on the leading and outperforming nature of the US economy as the recovery process gets under way.”
Correlation between euro/dollar, stocks fading?: Some analysts, however said, there are signs the positive correlation between the euro/dollar pair and stocks is fading. This week, for instance, the S&P 500 gained nearly 1%, but euro has fallen 0.2%.
On Thursday, a day when strong Euro zone data came out, the market paid more attention to generally benign comments from the International Monetary Fund saying the euro was overvalued as investors sold the single eurozone currency.
“Certainly, the link between equities and euro/dollar is becoming less prominent and euro sentiment has become vulnerable,” said Vassili Serebriakov, senior currency strategist at Wells Fargo in New York. Although the news out of the euro zone has become increasingly upbeat, analysts said persistent tight credit conditions in the region remain a risk, with banks reluctant to lend to households and small businesses.
“Credit to non-financial private entities is shrinking fast and while overall credit supply growth may still look reasonable, it has been held up by bank lending to financial institutions, including hedge funds,” wrote BNP Paribas in a research note.
In contrast, lending to corporates and households has been weak as shown by the latest European Central Bank money supply report. “The result has been an unprecedented decline of monetary velocity against which the recent rise of the euro looks stretched,” BNP said. Also next week, the Bank of England and European Central Bank are holding their regular meetings. Analysts do not expect any change in rates, although they will be watching for signals about any exit from the banks’ quantitative easing policies.
In other currencies, analysts see more upside potential in the Australian dollar after a hawkish tone from the Reserve Bank of Australia this week.
Last Tuesday, RBA Governor Glenn Stevens said the risks to the economy were now more balanced and that low interest rates could inflate a housing bubble. These remarks were the clearest signal yet that the RBA was likely done easing. reuters
source:
Daily Times
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