Rate expectations: Greenback keeps its balance

After experiencing a week of gains, the US dollar stabilised against both the pound and the yen on Friday (7 August 2015) on the back of expectations that US non-farm payroll data could be the trigger for the Federal Reserve to raise interest rates next month. The US added 215,000 jobs over the course of July and the unemployment rate is at a seven-year low of 5.3%.
 
The euro failed to find any momentum, but managed to edge away slightly from the two-week low that it hit mid-week. Overall, it has shed 0.6% against the Greenback over the last five days.
 
Against the yen, the dollar remained stable after shrinking on Thursday night as the market prepared itself for the release of US payrolls data.
 
The Greenback is on track to gain around 0.7% for this week, after surging to a two-month peak on Wednesday. The dollar has been boosted by positive US economic indicators that have supported the case for upping interest rates in September.
 
In addition, comments made by Federal Reserve Bank of Atlanta President Dennis Lockhart – who’s a voting member on the Fed’s monetary policy committee – added to expectations of an imminent rise. He told the Wall Street Journal that he will recommend increasing interest rates unless there’s a “significant deterioration” in the economy over the next month.
 
While Mr Lockhart's comments are an indicator of the Fed's mind-set, it’s likely that its decision will be based, in part, on today's payrolls data. Economists had predicted that 223,000 jobs were created in July, meaning that those extra 2,000 jobs could be just the push the Fed needed.

Bank of Japan follows BoE and US Fed’s example
 
The Bank of Japan stood its ground on monetary policy on Friday, maintaining its significant stimulus plan. This had already been priced in by a prepared market, and so provoked little reaction.
 
However, the market waited with bated breath to see if Governor Haruhiko Kuroda would discuss the yen's recent deprecation at Friday morning's post-meeting news conference. He said: “A weak yen is positive for exports and companies operating globally… On the other hand, it hurts households and small firms via rising import costs. As agreed among G7 nations, exchange rates should move in a way reflecting economic fundamentals. If they are moving so, it should be positive for the economy.”
 
Last month, Mr Kuroda sent shockwaves through the market by calling the yen “very weak” when it sank to a 13-year low against the dollar. But today he said the comments he made in parliament last month never touched on specific dollar/yen levels.

Super Thursday not so super after all
 
In the UK, Sterling continued to struggle because of the dovish message sent by the Bank of England overnight. At the policy meeting yesterday, dubbed “Super Thursday” because of the amount of pound-influencing data due out – just one member voted for an immediate increase in interest rates (it was expected that at least two members would make the call).
 
The central bank indicated a rise next year, but the pound still lost 0.6 overnight.

Have an excellent weekend.