FX View 4 March 2016

The Euro was able to hold comfortably above the 1.0800 area against the dollar on Thursday and moved to test resistance levels above 1.0900 as the dollar was unable to gain any traction.  Euro-zone economic data had a slightly more positive tone, although the overall impact was limited. The final PMI services-sector report was revised up to 53.3 from 53.0 previously and there was a 0.4% gain in retail sales with no evidence that very low inflation was discouraging spending. US jobless claims were slightly higher than expected at 278,000 in the latest week from272,000 previously while the increase in unit labour costs for the fourth quarter was revised down to 3.3% from 4.5%. The Markit services final PMI index confirmed below 50 0 for the first time in over two years. The ISM non-manufacturing index was slightly above expectations at 53.4 from 53.5 previously and orders held firm. There was disappointment that the employment component dipped to below 50.0 and inventories increased which suggested that future growth could be weaker.  Dallas Fed President Kaplan stated that patience and diligence was required when considering further interest rate increases given dollar strength and the market sell-off and that it was better to wait if there were significant doubts. There were further gains for commodity currencies which tended to undermine the dollar and the Euro pushed to highs above 1.0950. There was caution ahead of Friday’s employment report as the dollar held a weaker tone in early Europe.
The dollar was unable to hold above 114.00 against the yen on Thursday and retreated to lows below 113.50 after the US data was unable to provide a convincing reason to buy.  Although greater confidence in commodity currencies should have undermined the Japanese currency it remained resilient during the day. There was speculation that domestic opposition to the Bank of Japan’s monetary policy was increasing.  This would make it more difficult for the central bank to sanction further easing. Bank Governor Kuroda stated that the bank wasn’t considering cutting interest rates further at this point, but stood ready to ease without hesitation if necessary. Sakurai was nominated to join the Bank of Japan board and would be expected to have a very dovish stance on the board. Overall cash earnings were slightly stronger than expected at 0.4% from -0.2% previously, although overtime earnings were weak. The dollar dipped to lows near 113.25 following Kuroda’s comments before rebounding to the 113.80 area as crude oil rallied slightly further.
The latest PMI services-sector report was significantly weaker than expected with a decline to 52.7 for February from 55.6 previously and a consensus estimate at 55.1. This was the lowest reading since March 2013 and below the long-term average for the series and suggested quarterly GDP growth could dip towards the 0.3% area. There were concerns surrounding the global outlook and, significantly, there were also reports in the survey that concerns over a possible referendum vote to leave the EU was having a negative impact.   Sterling was again resilient following the data, but failed to generate the same recovery against the Euro seen over the previous two days. Weaker than expected data for all three PMI indices will raise significant concerns over the outlook. There was net currency support from improved risk conditions and rally in commodity prices. Sterling pushed to highs near 1.4200 against the dollar as it recovered from over-sold conditions and corrections were held to the 1.4150 area on Friday.
The euro was able to find some net support against the franc on Thursday and was able to hold above 1.0850. The dollar was unable to make any impression on the parity area once again after a series of failures this week and dipped to lows just below 0.9900 during the New York session. Renewed demand for commodity currencies will tend to curb defensive demand for the Swiss currency, although there were still important concerns surrounding the EU outlook which could provide defensive franc support as migration fears continue.
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