The dollar was steady in Monday’s Asian session after seeing some volatility on Friday. Weaker-than-expected employment cost index caused a dollar sell-off on Friday but the greenback managed to stage a late US session rally to recover most of its losses. The trigger for the dollar’s reversal was comments from St. Louis Fed President James Bullard who was quoted as saying that the US economy was “in good shape”.
The dollar was back above the 124 handle against the yen, trading just above it in late Asian session, after touching a low of 123.51 on Friday. The euro was unable to hold on to Friday’s gains after briefly surging above 1.11 and was trading at 1.0978 against the dollar. It was lower against the pound at 0.7021. Cable was more resilient as it managed to hold on to half of its gains from Friday as markets await the Bank of England’s ‘Super Thursday’ barrage of releases on the latest MPC meeting minutes and the quarterly inflation report.
Asian markets were mostly negative on Monday with shares in China continuing to slide. Chinese manufacturing data is pointing to an ongoing slowdown in manufacturing output with the official PMI data on Saturday showing that manufacturing activity was stagnant at 50.0 in July, versus estimates of slight expansion at 50.2. The Caixin/Markit final manufacturing PMI for July showed an even worsening outlook as it was revised down to 47.8 from the initial 48.3.
Japan’s final manufacturing PMI for July was also revised down, but only slightly to 51.2 from 51.4, and was still the highest rate of expansion since February.
In Greece, the Athens stock exchange is set to reopen today for the first time in five weeks. Shares are expected to open lower due to ongoing capital controls and the deterioration seen in the Greek economy over the past two months. The IMF confirmed last week that it would not participate in a third bailout until Eurozone governments give assurances of debt relief.
Oil prices saw their biggest monthly drop in July since 2008. Brent crude futures were 0.5% lower at $51.66. In other commodities, gold prices were steadier but copper prices dropped to new 6-year lows.
The Aussie and the Kiwi were steady in late Asian trading at 0.7282 and 0.6594 respectively against the dollar. But the Canadian dollar sank to an 11-year low against the US dollar after the Canadian prime minister called elections for October, pushing the greenback higher at 1.3128.
Coming up later today are the Eurozone and UK manufacturing PMI, as well as the personal spending, PCE price index and ISM manufacturing data for the US. A speech by Fed member Jerome Powell could also be interesting to watch on any clues on the Fed’s rates outlook.
Technical Analysis – Dollar makes new all-time highs versus Turkish Lira
The US dollar has been rallying against the Turkish lira, as the lira is an example of an emerging market currency that could be hit by interest rate hikes by the Federal Reserve. The dollar has recently been making all-time highs against the lira, with the latest record being around 2.80. The dollar has been climbing against the lira since October of 2008, when the pair was trading at 1.20.
More recently, the indications for the dollar are bullish since price action is above the Ichimoku cloud and the Tenkan-sen line has crossed above the Kijun-Sen line. Price action might have gotten a little ahead of itself and it might be better for longs to be established on a test of the cloud support around 2.70.
A feature that should be noted is that the cloud is rather thin and price could fall through it if there is a substantial correction.
Another point of caution is that with Turkish interest rates around 7.5%, the lira enjoys a hefty interest rate advantage over the dollar’s zero interest rate, which could eat into any gains from longer-term positions.
To sum up, the picture is bullish, althoughthe rally is possibly overextended in the short-run.
