UK pound hits five-month high in unsettled trading
The U.K. pound scrambled to a five-month high Friday, bolstered by buying against the euro in unsettled market conditions.
The yen advanced against the dollar and the euro as concerns about global growth remained a dominant theme, but it has ceded most of the gains against the dollar in volatile trading.
“On balance, the yen strength has to do with jittery financial markets, and uncertainty about growth in China and the U.S.,” said Vassili Serebriakov, currency strategist at Wells Fargo Bank in New York.
Thin summer trading flows coupled with month-end activity created volatile trading conditions.
Month-end flows were a key contributor to the rally in the pound, said Steve Butler, director of foreign exchange at Scotia Capital in Toronto. Sterling touched a high of $1.5721, its peak since Feb. 17, according to EBS via CQG.
“It certainly does feel like the pound’s had a reasonably good run, of late,” Butler said. “It feels like it’s got a little more topside momentum.”
Late Friday morning, the euro was at $1.3043 from $1.3090 late Thursday in New York. It was at Y112.70 from Y113.77. The dollar was at Y86.42 from Y86.96 and at CHF1.0410 from CHF1.0414. The pound was at $1.5702 from $1.5617.
The ICE Dollar Index, which tracks the greenback against a trade-weighted basket of currencies, was at 81.574 from 81.599.
U.S. data were mixed Friday and did not convince investors the economy is headed to a solid recovery. The dollar was able to rebound against both the yen and the euro after the Institute for Supply Management-Chicago said its Chicago Business Barometer jumped to 62.3 in July from 59.1 in June and 59.7 in May in mid-morning trading.
News the Thomson Reuters/University of Michigan confidence index for July came in better than expected at 67.8 was also supportive even though the index was still down from 76 in June.
The dollar bounced back against the yen after those releases, recovering from its daily low at Y85.95, which was also its lowest level against the Japanese currency since Nov. 27, according to EBS via CQG.
Worries about growth were reinforced early Friday when it was reported that gross domestic product in the U.S. grew 2.4% at an annual rate in the second quarter, slightly below the 2.5% expected by economists. Growth in the first quarter was revised to 3.7% from the initial estimate of 2.7%.
“I still think the market is getting increasingly concerned with the health of the U.S. economy,” said Butler at Scotia Capital.
U.S. yields slumped again after the U.S. data, with two-year note’s yield touching 0.547%, near the record low of 0.545% set on July 22.
Concerns about economic prospects in the U.S. and the possibility of deflation were reinforced earlier Friday when Federal Reserve Bank of St. Louis President James Bullard said that the U.S. is at risk of falling into a Japan-like deflationary trap and that the best way for the Federal Reserve to avoid that pitfall would be to revive its securities-buying program. Bullard was being interviewed on “Squawk Box” on CNBC and reiterated a sentiment he expressed Thursday in a St. Louis Fed paper.
Any further display of strength by the euro appeared to be stymied by a number of factors, including month-end rebalancing of hedging positions.
“The market has, over the last few days, got very bulled up about Europe, buying it into month end,” said Adam Cole, chief currency market strategist at RBC Capital Markets in London
“All those people who had positioned for that are now taking profits, and that’s pushing euro lower, he said.
Asian short-term investors were selling the euro on speculation that Japanese margin currency investors who bought a significant amount of the euro will be forced to unwind such holdings in this global day due to a law change next week, said Yuji Saito, director of the foreign-exchange department at Credit Agricole Corporate and Investment Bank.
Aiming to protect amateur investors, the government will implement a new regulation Monday to lower the volume of foreign exchange Japanese retail investors can purchase in proportion to the collateral they deposit in an account at a brokerage. The maximum purchase ceiling will now be lowered to 50 times their margin money. Retail investors previously used leverage as large as 400 times their margin money.
Source: WSJ