There was a sense of déjà-vu in Asian trading on Friday as markets briefly returned to the pattern seen during the first half of June. There was a sharp decline in the Nikkei index with a drop of close to 600 points in around 30 minutes trading. This decline triggered a sharp drop in the dollar as it retreated from highs around 100.80 to lows below 100. There was reported hedge-fund selling, but there was no real evidence of follow-through selling and the dollar was able to stabilise at lower levels.
Asian events also had an important influence during the European session with little of note within the Euro-zone. The central bank of China (PBOC) announced that it would remove the lower limit on the lending rate as part of on-going market liberalisation and reform. There was no immediate move to relax the deposit rate, although the PBOC promised that there would be further reforms.
The PBOC move triggered some expectations that it would act as a relaxation of monetary policy which would also support growth. In this environment, there was a sharp move higher in the Australian dollar as it pushed to a high above 0.9220 from earlier lows near 0.9160. In this environment, there was a wider retreat in the dollar which influenced other major pairs. GBP/USD maintained a firm tone following the series of stronger data releases and moved above the 1.5250 level.
EUR/USD found it very difficult to make significant headway in either direction during the day with even narrower ranges than that seen on Thursday. After an overnight move to the 1.3150 area, EUR/USD drifted weaker to the 1.3100 region. Markets were unable to make any impression on the important technical support levels below 1.3100.
Position adjustment was important during the New York session. The latest official data had continued to show a substantial net long dollar position. This data was taken before the major US currency decline seen last week and there was uncertainty over underlying positioning at this stage. In this environment, consolidation dominated during the New York session.