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ShareThe first trading week of the New Year saw risk appetite improve as market participants pushed riskier assets higher. Price action in the currency market for most of the week however, supported the US dollar, despite improving risk appetite, as market participants awaited the most important US data release in the monthly economic calendar - the non-farm payrolls data.
The data assumed more importance because of expectations that the US manufacturing and services sectors would have added jobs for the first time in two years - an indication of the steadily improving health of the economy.
The hopes were dashed for an end to the cycle of US job losses, after a weak non-farm payrolls data dragged the US dollar lower against the Japanese yen, euro and the pound. US employers cut 85,000 jobs in December, confounding hopes of a large section of the market, which had expected that the employment would rise for the first time since December 2007.
However, the US unemployment rate was unchanged at 10% for the month.Moreover, the November reading was revised upwards to a 4,000 job additions. Although the US dollar was well supported in the days ahead of the data on upbeat expectations, the greenback fell 0.4% against the euro and lost 0.7% against the yen after the announcement. Over the week, the US dollar lost 0.6% against the euro and fell 0.4% against the yen.
The yen regained ground after the new Japanese finance minister, Naoto Kan, retracted his call for a weaker currency. An apparently chastened Kan had to backtrack on his comments about wanting a weaker Yen and on Friday he stated that markets should decide foreign exchange rates. This helped the yen to gain, before Kan added that he still had the authority to intervene, should he wish, which promptly caused it to slide again.
The pound regained some of its recent losses after an opinion poll suggested the opposition Conservative party could win a majority in the coming UK general elections. The YouGov poll eased investor fears that the UK could have a hung Parliament and the possibility that a government without a working majority would struggle to bring down UK’s fiscal deficit. The pound was supported by the weak US data and stronger than expected UK producer prices data. The sterling added 0.9% against the greenback on the week but lost 1.5% against the euro.
The Australian dollar was one of the biggest gainers this week, up 3.1% against the dollar, as commodity prices resumed their climb last week. The Aussie dollar held at near a 26-month high against the euro and a 25-year peak against the pound. The New Zealand dollar also gained against the US dollar, adding 1.4% over the week. In other commodity currencies, the Norwegian krone added 1.8% on the week.
In the local market, the rupee appreciated by close to 2% against the greenback last week. The Indian unit was helped by the bounce in other Asian currencies and an arbitrage opportunity between the onshore and offshore forwards markets, which attracted dollar inflows. The FIIs also supported the rupee, as they bought local stocks and bonds worth $1.77 billion over the week. Rising oil prices and some corporate dollar buying, however, curtailed Indian unit’s gains. The rupee-dollar pair climbed to a 15-month high and the pair traded in the range of 45.56-46.62 during the week.
Looking ahead, the US dollar needs a true catalyst to force a breakout from the tight trading range that has set in over the past three weeks. The only driver with the necessary influence to create that breakout and establish a new trading range is investors risk appetite. Through 2009, the greenback was pushed into a steady descent as risk appetite led investors to diversify away from dollar-based safe havens and fund trades through cheap dollar-based leverage. Risk appetite waned into the final months of the year, however and market participants have essentially waited for a sign to either add to positions or take profit for two months now.
This week’s economic data release calendar offers many indicators (retail sales, durable goods, consumer confidence, CPI inflation etc) that can create volatility in the dollar. But to affect underlying risk appetite, it may take the confluence of all the releases working together. Stronger- than-expected data across these indicators could weaken risk appetite.
This is especially true if the US consumer-related data appears better, as it could again stoke expectations of sooner-than-expected monetary tightening by the US Federal Reserve.
In the local market, the rupee could continue to receive support from the strengthening Asian currencies against the US dollar.
Otherwise, headwinds are developing in the form of rising commodity prices, especially of oil. So the magnitude of capital inflows would become crucial as the merchandise trade deficit grows.
But with local stock market, the main source of dollar inflows, looking stretched in terms of valuations, inflow of capital through the portfolio route could take a breather. Over this week the rupee-dollar pair can trade in the range of 45.50- 46.25.
The writer is senior economist, ABN Amro Bank. Views expressed herein are personal.
