MARKETS: Dollar slides after reported Obama comments

Not only did the employment report at the end of last week reiterate that job creation is the star performer in the US economy, the NFP also provided further reassurance that the Fed will be raising interest rates later this year. While vulnerabilities in the US economy outside of job creation have been exposed recently, this is not going to delay the Fed from pulling the trigger on rate rises. Despite the particular weaknesses in consumer spending, the Fed should still raise rates because it will express confidence in the US economy and this will boost global optimism as a whole.
Will the USD be at risk to further volatility this week? Yes, and expect volatility to rise on Thursday when the latest US retail sales data is released. Traders are not going to be happy if retail sales continue to expose that there is no correlation between substantial job creation and improved consumer confidence readings resulting in consumer expenditure.
The failure of the EURUSD to close below 1.10 on Friday has allowed the pair to recover some losses. The EURUSD has bounced to 1.1177 and I remain bullish on the pair for as long as we don’t close below 1.10. There is a reduced volume of economic data from Europe this week, therefore it is how traders react to the US economic news that will provide direction for the Eurodollar. With Greece delaying all repayments to the IMF until the end of June, this will prevent the currency from being as vulnerable to sudden pressures as very few expect any potential deal to be reached by the June 30 deadline. Although we continue to read about how a deal is “close” you only have to pay attention to the tone of PM Tsipras’ speech delivered to the Greek parliament, to understand how far away from a deal we remain.
Emerging currencies could really benefit from USD weakness, because they received real punishment following the NFP result – the Malaysian ringgit flattened to a new nine-year low against the dollar on Monday with the USDMYR extending beyond 3.76. Although the NFP outcome and the resumption of USD appetite among traders would have pressured the ringgit, it is the reports of a scandal at a Malaysian state-backed fund that has accelerated the decline in the currency. The currency was already facing pressure due to the resumption of USD demand and confirmation that oil prices are set to stay lower for longer, but this is the last thing the ringgit needs and will make it extremely vulnerable to sudden declines as this makes any economy vulnerable to a sudden outflow of capital. After strengthening at the beginning of Q2 when the dollar was vulnerable to profit-taking, the ringgit is exposed to a painful conclusion to the second quarter. While the Malaysian economy is performing well, these concerns encourage investors to pull money away from Malaysia. Although one could argue that the Negara bank can raise interest rates to prevent any further currency weakness, this is unlikely to be the case. It is more likely that the Negara bank will change its monetary stance and decrease interest rates later in the year.
Speaking of central banks, pressure has resumed on the People’s Bank of China (PBoC) to continue easing monetary policy after economic data once again highlighted that China is facing downside economic problems. It was domestic demand that once again raised concerns, after imports tumbled 18.1% on a yearly basis in May. Not only is this an incredible decline, but imports have now fallen for seven straight months and it is slowing domestic growth that is really pressuring the China economy. When data like this is released, you have to understand that concerns are going to intensify over whether GDP is going to slip below the 7% government target.

This is looking like a real risk now, and I expect the PBoC to cut interest rates once again – it wouldn’t surprise me if it was this week either.

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