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Please add to your favourites       Daily market strategy  03-07-09 -  Dollar secures defensive support

Trading conditions will be subdued on Friday with US markets closed for a holiday. There will be the risk of erratic trading, although the more likely outcome is that narrow ranges will prevail. Risk appetite is liable to be slightly weaker following the US payroll report and this could trigger some further defensive dollar demand, especially if global equity markets continue to weaken. The US currency will find it difficult to strengthen through the 1.39 region against the Euro with underlying dollar sentiment still subdued.

The headline US employment data was weaker than expected with a payroll decline of 467,000 for June following a revised 322,000 the previous month. The unemployment rate increase was slightly lower than expected with an increase to a 26-year high of 9.5% from 9.4%. The secondary elements in the data continued to give significant cause for concern with a decline in weekly hours while the unemployment increase was held back by a decline in the workforce which will maintain fears over the consumer spending outlook. Jobless claims also remained above the 600,000 level in the latest week at 614,000.

Risk appetite was generally weaker following the US employment report and this helped push the Euro weaker against the US currency,  The Euro dipped sharply to lows near 1.3925 in early Asia on Friday, but recovered back to near 1.40 later in the day. Choppy trading may be a significant risk later in the day with the US markets closed.

Confidence in the US economy will remain very fragile as the stream of weak data releases continue.  In the short term, the dollar will remain in the paradoxical situation that the US dollar will gain some support on defensive grounds and weak US data could still provide some dollar support, especially if the financial sector remains under pressure.  The budget position will continue to deteriorate and the medium-term fundamentals will remain extremely weak. The dollar will still gain support from fears over the Euro-zone economy and structural tensions within Europe. Overall, the Euro will quickly attract selling interest on rallies above the 1.3050 region, but will offer value on significant dips given the very weak US fundamental outlook.     

There will be further fears over the Asian economy as the industrial sector remains under severe pressure. With the Japanese economy already vulnerable, there will be additional pressure on the Japanese authorities to resist upward pressure on the yen. Given this speculation over intervention, there will be caution over yen buying, especially if it pushes towards the 85 region against the dollar.  The US currency is likely to hit selling pressure towards the 90 level with near-term support close to 88.

Confidence in the economy will remain very weak in the short term with expectations of a further deterioration and deep recession. The near-term Sterling trends will also be influenced strongly by trends in risk appetite with a particular focus on the UK banking sector. The UK currency will come under further pressure if confidence in the sector continues to deteriorate while any reassurance over the banks could trigger a sharp corrective rally for the UK currency.  In this environment, trading volatility is likely to remain at elevated levels with good buying support on retreats towards 1.35. The Euro looks to offer little short-term value above the 0.95 level against Sterling.

The Australian dollar has continued to find support below the 0.65 level against the US currency, but rallies have also again encountered selling pressure quickly.  Confidence in the regional economy remains weak and this will continue to hamper confidence in the Australian dollar. There will be particular fears over the export sector and the outlook for commodity earnings, but the Australian currency will also gain some support from the strength in gold prices. Overall, there is scope for further support below the 0.65 level against the US currency even if gains are limited.