Data released in the US yesterday showed a shocking 30% drop in pending home sales from a 6% rise the month before. Whilst the expectations had been for a -18% drop no-one expected the true figure to be almost double as bad. In addition the ISM manufacturing index was down below estimates from 59.7 to 56.2. There is concern the much advertised recovery is faltering. Unemployment is still high and investors will be eagerly awaiting employment stats today to see if the creeping doom has infected them too. Meanwhile global austerity cuts are removing whole swathes of the state administration and adding to the queues of the unemployed. Despite all the evidence the official line remains optimistic with growth set to slowly increase and it only being a ‘matter of time’ before higher levels of employment return. The private sector has not been creating new jobs fast enough to make up the short-fall and its unlikely to in the foreseeable future. Since the 2008/09 recession companies have primarily been concerned with cutting costs rather than expansion. The dollar, until recently has benefited from risk aversion in the market almost entirely as a result of what is happening on the opposite side of the Atlantic. Providing new crises develop in Europe this should continue and the dollar should get even stronger. Yesterday the dollar fell heavily as the ECB called in its loan and everyone managed to pay up more or less without a problem. How this liquidity vacuum will affect banks and the economy in the longer term, however, remains to be seen. Longer term the dollar begins to look shaky and it is only because of the ‘too big to fail’ creditworthiness of the US itself that the dollar has safe haven status at all, and yet given the bleak economic outlook that iron-clad creditworthiness may not last forever. The dollar ended the session down to 1.2525 against the euro and 1.0590 against the Swiss franc.

   The euro avoided another crisis on Thursday after euro-zone banks managed to repay the 442bn 12-month loan made by the ECB in the aftermath of the financial crisis. However, 78 of the 1,100 banks still required €111.2bn in six-day funds to carry them over, showing some were still facing difficulties in finding funds. The euro jumped to 1.2525 on the back of the news which renewed investor confidence in European assets. Sterling closed up to 1.5175 against the dollar and up at 1.3292 against the yen.

   The pound traded mixed boosted by reassuring news from Europe but weakening on poor economic data from the UK. The UK purchasing manager index fell as much as expected but no more from 58 to 57.5 in June. Bank of England board member David Miles was dovish in a newspaper interview saying he expects “reasonable growth” this year and that that the recovery may gather pace over the coming months. However, he said the current situation does not call for a tightening monetary policy as the global financial system remains frail. Meanwhile, the BoE said mortgage demands unexpectedly declined in the second-quarter and that the ongoing weakness in the private sector may constrain the availability of credit growing forward. Sterling closed up to 1.5175 against the dollar and was up at 1.3292 against the yen.

   The yen fell against most currencies except the dollar where it benefited from the safe haven trade as investors steadily lost confidence in the greenback. Economic data for June showed a large drop in vehicle sales from 28% to 20.6% and a contraction of money supply from 3.7% to 3.6% was also deflationary. With the yen ever strengthening against the dollar and reaching critically high levels the possibility of either verbal or physical intervention by the administration to curb the yen’s ascent increases. The yen closed up at 87.59 against the US dollar and down to 109.72 against the euro.

Analysis prepared by:

Joaquin Monfort
Forex4you analyst