FX Market Summary 08-16-2013: Dollar back on the defensive

After failing to extend gains, the dollar was crushed later in the US session on Thursday and struggled to regain lost ground on Friday. From lows near 1.32, EUR/USD spiked higher to a peak above 1.3360 with analysts struggling to find a convincing explanation. The dollar lost ground against all the majors as gold prices rallied sharply.

The main action in Asian markets was centred around a malfunctioning algorithm which triggered a surge of over 5% in the Chinese Shanghai equity index on a huge buy order. The move very quickly reversed, but did raise some speculation that the PBOC was looking to relax monetary policy through a cut in Reserve Ratio Requirements. The Australian dollar was a beneficiary of such speculation and AUD/USD moved higher during the session to test resistance near 0.92 despite a brief decline on reports of a New Zealand earthquake.

There were no significant developments during the European session due to the impact of very low liquidity during the peak holiday season and no economic releases. The Euro did maintain a firm tone with investors still struggling for enthusiasm for the other major currencies. The ECB is likely to be fretting over the impact of tighter monetary conditions, but there was no sign of verbal intervention.

The US housing data was marginally weaker than expected with starts at 0.90mn for July compared with an expected 0.91mn and permits were also slightly weaker than expected, although both recorded monthly gains. There was also a decline in the latest University of Michigan consumer confidence index to 80.0, the lowest reading since April.

The data did not have a major impact initially, but the releases did little to underpin the US currency. The dollar was also again undermined by the retail positioning bias with players still looking to short EUR/USD and forced to cover positions. In this environment, EUR/USD rallied to a peak around 1.3380 before edging lower again.

The Canadian economic data remained disappointing with a decline in manufacturing sales and a substantial outflow of overseas funds according to the latest data. USD/CAD found support close to 1.03 and rallied back towards 1.0350 despite vulnerability elsewhere.

Sterling consolidated sharp gains seen during the week as GBP/USD hit resistance close to close to 1.5650 which was an eight-week high for the pair. EUR/GBP also edged higher, but registered gains for the week as a whole.

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