The US dollar remained firm overnight and looks to register its ninth consecutive week of gains, as commodity prices faltered with oil touching a two year low of $92.84 and gold declining to an eight month low of $1,238. Divergence in central bank policies have also contributed to the strength of the greenback.
On the one hand, markets are pricing in the possibility that the Federal Reserve at its meeting slated for September 17 will take on a hawkish tilt and on the other, the European Central Bank is set to launch its quantitative easing program in short order and the Bank of Japan could inject further stimulus to the tune of $47 billion to offset the potential next rate hike to 10% from the current 8% next year should it want to stave off another round of economic contraction as evidenced in the latest GDP figures for Q2 which showed that the Japanese economy shrank 7.1%, its biggest contraction since the first quarter of 2009 as consumers reigned in their spending.
Commodity linked currencies have also come under renewed pressure from a strong US dollar heading into next week’s FOMC meeting and a decline in demand for raw materials from China and the US. Further, data released overnight from China continue to draw concern that a sustained economic recovery may be at risk for the remainder of the year despite the government’s measures to spur growth. August New Loans did little to stir markets as it came in line with estimates at 702.5 Billion yuan while M2 money supply decelerated to its lowest level in five months, rising only 12.8% from a year ago. Heading into the weekend, markets will focus on the release of industrial production, retail sales and urban investment for August for further clues of the pace of growth in China.
The Aussie which has benefitted from the carry trade has seen its fortune turn reaching a six month lower of 0.9053 while the kiwi has been on the defensive with a dovish Reserve Bank of New Zealand. The Canadian dollar which has declined 1% in the last two sessions will be at the mercy of broader market movements and US centric data with the lack of domestic economic data on the docket.
The euro traded in a narrow range overnight despite a stronger than expected print of industrial production of 2.2% for the month of July from June’s reading of 0.2%, led by manufacturing of capital goods. In other data released, employment in the euro zone improved a meager 0.2% in the second quarter. Markets will turn its focus to the meeting in Milan today of Eurozone finance ministers following ECB President Draghi’s speech on Thursday where he reiterated that although the central bank’s pledge that it “stands ready to take further action if needed, in compliance with its mandate to maintain price stabilityâ€, the onus still remains on individual governments to enact measures that will attract investment for small business loans and public investment spending.
Despite the slight reprieve the pound has received the in the last couple of sessions retracing its losses to trade above the $1.6200 handle, its near term fate remains fragile ahead of the Scottish referendum with the latest YouGov’s polls showing that the No campaign has regained its tenuous lead – its first time since August, receiving a 52% of “No†votes contrary to 48% Yes.
As we head into the North American session, retail sales rebounded in August at 0.6% and July figures were revised upward to 0.3% which adds fuel to the fire that the Federal Reserve may drop its commitment to maintain rates low for a “considerable time†after QE winds down. Other fundamental data due out later this morning include September Reuters/Michigan Consumer Sentiment Index, anticipated to improve from July’s print of 82.5 to 83.2 and July business inventories.
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