The US dollar had a good week. It was helped by the strongest service ISM this year, with strong gains in forward-looking new orders component and an increase in export orders. Non-farm payrolls snapped back from a downwardly revised 11k jobs (-6k private sector) to 287k (265k private sector). It was the strongest employment gain in eight months. Also, as more bonds denominated in euro, yen, and Swiss francs offer negative nominal yields, an increasing part of the world’s savings appear to be drawn to the positive returns of dollar-denominated paper.
The dollar advanced against most of the major currencies, except the irrepressible yen, and the Australian and New Zealand dollars. The RBA was neutral, and the RBNZ hinted that until new macro-prudential policies were implemented to address the housing market, a rate cut could be counterproductive. The greenback also appreciated against most emerging market currencies. The only exception to note is the Argentine peso. After selling off 12.25% in the second half of June, it recovered 2.3% last week.
Sterling and the yen are center stage. Sterling remained under pressure in the second week after the referendum. It reached a low just below $1.28 in the middle of the week before consolidating. It appears to be encountering fresh sales on short-covering bounces through $1.30.
The pound has fallen for three consecutive weeks and in five of the past six weeks. Although technical indicators are stretched, there is no sign of divergences or a change in trend. With the Tory PM candidates selected, and little post-referendum data, sterling may soon exhaust the current news stream. A 15% depreciation of sterling from its pre-referendum high would bring it to around $1.2750, which would allow for a marginal new low.
Of course, we will monitor the price action, but the point is that investors may want to be on watch for a reversal pattern in sterling. This is a short-term, tactical call. Over the medium- to longer-term, we continue to see potential toward $1.15-$1.20.
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