Local knock-out of US dollar

On Friday, speculators were happy to cause a drop-down of dollar against all the main currencies
Last week proved once again that all the information regarding recovery of US dollar has been quite exaggerated. Employment Cost Index (ECI) value, which turned out to be the lowest in the whole history of calculations (since 1982) was a shock for dollar that impacted much more than any type of FRS. That information overshadowed market events (even Greece) and, generally, called into question, to a larger degree, rate increase by the Federal Reserve in the current year. The market has not been able to work off that impact to the end; however, it is possible that positive NFP will soften the consequences.

The market has also taken the present statement of FRS in a practically neutral response; however, it waited so much for a signal for rate increase that it "heard" it and produced some nervous growth on Wednesday and on Thursday. Nevertheless, it should be noted that, since last Wednesday, the futures market has been showing the probability of rate increase in September as equal to zero in response to Federal Funds Rate (FFR). Stock and bond market have, in fact, begun to include growing probability of increase into prices, however, with regard to December. Why? The crowd, as always, focuses only on the terms of rate increase, ignoring details behind the scenes. Appearing as neutral, instruction received from FOMC last Wednesday had only one item that has market value - everything will depend on statistics. Now, as the USA wants, the market believes that weak numbers in the 1st quarter are American seasonal traditions, and we are supposed to wait for strong data and following rate increase in September.

Nevertheless, what matters for capital markets are not dates but rather rates - that was proved by the dynamics of treasury papers and players behavior with regard to assets with fixed income. There is no clarity exactly regarding rates. The upcoming NFP will give only quantitative assessment, and the problems of economy quality produced the first loud alarm last Friday. Reduction of salaries and bonuses in the private sector can be considered as seriously negative; logically, we need to wait for the same in the government sector in the 3rd quarter. The publication of Chicago PMI regional indicators is better than expected and Michigan's normal index has somewhat improved the picture; however, the Michigan release note also contained concerns regarding salaries. A gap in costs with regard to personnel support speaks either of weak production in general, or of labor market weakness (reduction of requirements for labor payment and conditions). Let's keep in mind once again: rates need to be raised not because there is some growth of salaries of inflation, but rather because low rates cause irrational speculative consumption of capital, which results in non-productive investments. The current situation will hardly dispose to cardinal economic decisions in the nearest months. So the chances for December are growing.

On Friday, speculators were happy to cause a drop-down of dollar against all the main currencies; moreover, large players locked transactions at the end of the month and caused new sales in the zones of strong resistance. American GDP data (due to revision of value for the 1st quarter) may strengthen dollar only in the mid-term perspective provided there is an active support of employment information. Within Monday, dollar recovered a part of Friday losses - the further growth is obstructed with weak statistics. NFP is expected to be positive; meanwhile USD is having difficulties now. Increase of real inflation level in Eurozone is under a big question, since general inflation remains at extremely low level (0.2%); however, even the slightest hints of growth are capable of producing speculative growth of euro.

Nothing serious came from the Greek news line:
- IMF is not going to participate in the third aid package until a clear and specific offer from current creditors regarding reduction of the Greek debt burden arrive.
- Tsipras, who is losing attention, officially declared at the week-end that Athens had a plan to leave Eurozone - everyone realized it had one, but such public audacity in the midst of incredible efforts made by European institutions to save Greece has produced, to put it mildly, angry indignation.

Instead of technical recommendations, we would like to offer to assess the general balance of forces with regard to GBP and EUR. No clear direction of trend for them has been observed for several months, there is only accumulation of orders in local areas; however, that range can look too wide to some and yet, it is not a trend. Most of limit orders for purchase of pound and euro are below the current price, the volume of sales is, mainly, above that. Everybody is waiting for a strong trend and only then positions will be added up.

Author: Lachlan Patel,
ForexChief Currency strategist