Tuesday, July 5, 2011

Forex Morning Overview - July 5, 2011

Previous session overview
The dollar gained against the euro and the yen in Asia Tuesday as concerns about a possible Chinese interest rate hike reduced investor risk appetite, while expectations those U.S. multinational firms may bring their overseas profits home added to the dollar's strength. 

The People's Bank of China said in a statement Monday that inflationary pressures "are still high" while the economy continues to grow at a steady and relatively fast pace. On Tuesday, two local papers interpreted the PBOC's statement to mean that a hike in interest rates could be imminent. 

A Moody's Investors Service report on Monday said that Chinese banks may be facing bigger problems with municipal loans. This news also put downward pressure on the euro. 

At 0350 GMT, the euro was at USD1.4485 from USD1.4541 late North America Monday. The dollar was at JPY80.99 from JPY80.77, while the euro was at JPY117.37 from JPY117.47. The U.K. pound was at USD1.6045 from USD1.6090 from USD1.6067. The dollar was at CHF0.8484 from CHF0.8475.

The dollar briefly rose as high as JPY81.11 but then retreated due to selling demand by Japanese exporters who are looking to lock in their overseas earnings in yen.

The ICE Dollar Index, which tracks the U.S. dollar against a basket of currencies, was at 74.467 from 74.254. 

The Australian dollar slid Tuesday, weighed down by a seemingly more dovish Australian central bank and concerns about China's banking system. At 0610 GMT, the Australian dollar was at USD1.0675, down from USD1.0720 late Monday. Against the Japanese yen, the Australian dollar was at JPY86.535, down from JPY86.715.
Market expectation
Dealers tipped support for the Australian dollar at USD1.0650, with resistance at USD1.0730.

Traders are focused on the European Central Bank's policy-setting meeting and ECB President Trichet's press conference Thursday. "As a 25 basis point hike is widely expected, the focus is on whether Mr. Trichet indicates further rate hikes later this year," said dealers.

In terms of Tuesday's economic data, the euro-zone services purchasing managers index and retail sales figures are due at 0800 GMT and 0900 GMT, respectively, while the U.K. services PMI is at 0830 GMT. In the U.S., industrial new orders are at 1400 GMT.

European stocks are expected to open slightly lower Tuesday, with no cues from U.S. markets which were closed for Independence Day and as investors look to consolidate gains following the recent strong run.