Consolidation was the general theme for much of Friday following very sharp currency moves over the previous 36 hours, but the underlying trend was still of underlying dollar demand as it secured renewed buying support later in the New York session.
There was very little in the way of data releases for the market to digest which kept the focus on bond markets, US economic outlook and the Chinese credit crunch. The PBOC relented only slightly as money-market rates remained extremely tight amid fears over bankruptcies within the banking sector. China will continue to be an extremely important focus given its impact on global trade and capital flows.
US Regional Fed President Bullard stated followed-up his dissenting vote at Wednesday’s FOMC meeting with comments that the Fed’s signalling of intent over a tapering of bond purchases was timed inappropriately. Bullard repeated his concerns that inflation was too low at present and that the Fed should actually consider an even more aggressive pace of quantitative easing to combat the threat of deflation unless and until there is evidence of a stronger recovery.
For now, the market was still dominated by stresses following the Fed intention to tighten later this year. Equity markets failed to sustain gains in US trading, moving into negative territory for the day as bond markets were subjected to renewed selling. EUR/USD was unable to recover back above the 1.3250 level and came under renewed pressure during US trading. A break below 1.32 triggered stop-loss selling as did the decline through Thursday’s low around 1.3160 as the pair dipped below 1.3140. With the dollar unable to hold 98 against the yen, EUR/JPY dipped sharply to lows around 128.0.
With no US economic releases, the latest Canadian data received more attention than usual. There was a slightly weaker reading for retail sales with a 0.1% headline increase and a core 0.3% decline, dampening confidence in the growth outlook and there was also a weaker than expected reading for consumer inflation. This combination triggered sharp losses for the Canadian dollar as USD/CAD peaked above 1.0480, comfortably moving past the previous 2013 high.
The latest headline UK government borrowing requirement was lower than expected at GBP10.5bn for may compared with an expected GBP12.7bn. The data was, however, distorted by the proceeds of Bank of England bond purchases and by a one-off tax settlement from Swiss banks. In this context, the underlying data was much less favourable as debt pushed to a record high. GBP/USD was unable to hold above the 1.55 level and dipped sharply to test support below 1.54 later in the US session.