The USD has strengthen against all other major currencies over the last one year given the expectations of the Fed looking to turn policy neutral from accommodative. However with the recent volatility in global markets on China worries and fall in S&P 500 by over 10% from peaks, expectations are that the Fed may either postpone its rate hike decision or signal an extremely slow shift in policy stance.
Given that the markets are heavily long USD and short all other currencies, there could be long unwinding of the USD as markets book profits.
USD, after a volatile session during the week, managed to close marginally up after the release of U.S. jobless and trade reports. USD Index (DXY), which tracks the movement of the USD against six major currencies, managed to post a gain of 0.13% on weekly basis to close at levels of 96.23. USD gain is seen limited as the expectation of U.S. Fed rate hike is taking a backseat on the recent jitters in the Chinese economy, which raises worries over global economic outlook. Data indicated that China’s factory sector contracted at the fastest rate in three years while manufacturing activity in Europe and the U.S. came in weaker than expected.
U.S reported mixed set of economic data during the week, which brought the USD under pressure. ISM report released on Tuesday showed that its manufacturing index fell to 51.1 in the month of August from the previous month’s reading of 52.7. It was the lowest reading since May 2013 and was below the expectation of 52.6.
ADP on Wednesday reported that non-farm private employment rose by 190,000 in the month August, which was below the expectations of a rise of 201,000. Data on Wednesday also showed that U.S. factory orders rose by 0.4% in the month of July, which was below the expectation of a rise of 0.9%.
U.S. Department of Labour on Thursday reported that number of individuals filing for initial jobless benefits in the week ended 29th August declined by 12,000 to 282,000 from the previous week’s total of 270,000 and against expectations of a rise of 5,000 to 275,000.
Data on Thursday also showed that the U.S. trade deficit narrowed to USD 41.86 billion in the month of July from a deficit of USD 45.21 billion in the month of June against the expectation of USD 42.4 billion.
ISM on Thursday reported that its non-manufacturing purchasing manager’s index fell to 59.0 in the month of August from 60.3 in the month of July beating the expectation of 58.1.
U.S. Labour Department on Friday reported that the U.S. economy added 173,000 jobs in the month of August, which was below the expectation of 220,000, the economy had added 245,000 jobs in the month of July. The report also showed that the U.S. unemployment rate ticked down to 5.1% in the month of August from 5.3% in July against the expectation of 5.2%.
Euro depreciated by 0.32% against the USD last week as ECB kept its benchmark interest rate at a record-low of 0.05%, which was in line with the expectation. ECB also lowered its forecast for growth and inflation citing oil prices and slowing growth in China.
Euro gained in the early part of the week after data released on Monday showed that the Eurozone’s CPI rose by 0.2% in the month of August, which was above the expectations of a gain of 0.1%, following a 0.2% rise in the month of July. Euro gained despite the fact that the CPI has been below 1% for 21 straight months, which was well under the ECB target level of 2%. Euro got further support from unemployment rate, which declined to 10.9% in the month of July from 11.1% in June, this was the lowest rate recorded in the Euro area since February 2012.
Russian Ruble depreciated by 4.8% against the USD in the last week. The currency is following crude oil price trajectory, which declined by 2% during the week from 50.38 USD/bbl to 49.61 USD/bbl.
Brazilian Real led the global currency decline as it depreciated by 6.81% against the USD last week. The sharp decline came after a recent poll conducted suggesting that President Dilma Rousseff has lost almost all her credibility with the Brazilian people amid corruption charges and fall out in the economic recovery.
Asian currencies were broadly down on worries of weak global economic growth outlook and lower commodity prices. Australian Dollar depreciated by 3.96%, New Zealand Dollar depreciated by 2.77%, South Korean Won depreciated by 1.62%, Philippines Peso depreciated by 0.13%, Indonesia Rupiah depreciated by 1.34%, Indian Rupee depreciated by 0.46% against USD and by 0.51% against Euro, Malaysian Ringgit depreciated by 1.43% and Thai Baht depreciated by 0.35%.
Japanese Yen appreciated by 2.29% against USD due to rising risk aversion globally amid negative global economic growth outlook. Low interest rates in Japan has made the Yen a global funding currency as investors often use low-yielding currencies to fund positions in higher-yielding currencies known as carry trade. In a rising risk aversion scenario the investor will reverse the position to cover the short position in the funding currency.