Market analysis: US data sets the tone

Developments from the US Federal Reserve and the US economic docket kept investors cautious on the near-term outlook of the US economy.

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A host of key US data releases along with geopolitical developments dictated market sentiments through June, causing the US Dollar Index to end the month half a per cent lower.

The US Dollar Index, which tracks the value of the dollar against a basket of currencies, including the euro, yen and pound, touched a three-month high at 81.00 but pared any gains to close marginally above 80.00 as developments from the US Federal Reserve and the US economic docket kept investors cautious on the near-term outlook of the US economy.

In her most recent testimony, Fed chairwoman Janet Yellen adopted a rather dovish tone towards future interest rates and indicated that the Fed remains committed to keeping rates low to stimulate economic growth in the US. The dovish views underpinned market sentiment that the US recovery still remains rather sensitive – and this was reinforced by a rather dismal first-quarter US GDP reading which shrank -2.9 per cent (expected -1.8 per cent/previous -1 per cent).

It was the worst reading since the first quarter of 2009 – but perhaps more alarming was the fall in the personal consumption figures in June. Personal consumption, a measure of household spending on durable, non-durable goods and services (essentially spending which makes up 75 per cent of the US GDP reading), sank to 1 per cent (expected 2.4 per cent/previous 3.1 per cent).

Previously, colder weather was blamed for slower spending, however, with consumer numbers weakening through spring and the start of summer, following a rather robust period in the winter, it is obvious the recent slowdown extends past weather-related issues.

The US non-farm payrolls report due out on Thursday will continue to dictate sentiment of the US recovery. A reading above 210,000, as expected, would re-instil some short-term confidence following that disastrous GDP reading – however key to the report will be the revisions to the previous month’s readings.

We would need to see a nice upward revision in May’s report to reaffirm that the US jobs recovery is holding and remains true. An upward revision of at least 30,000 in May’s report would reaffirm the strengthening of the US jobs market. Also key to the report will be the labour force participation rate. Through the fourth quarter of 2013, drops in the overall US unemployment rate were as a result of a shrinking labour force. Therefore, we would need to see the labour force participation rate holding at the very least to continue to reaffirm the stability of the jobs market.

Oil prices continued to thrive on deteriorating geopolitical developments to close the month more than 2 per cent higher. The West Texas Intermediate crude contract moved north of US$105 a barrel as the escalation in Iraq and the failed ceasefire in Ukraine along with the most recent missile launches from North Korea rattled investor sentiment. We can expect energy prices to remain elevated through the summer months, with resistance at $110 expected to hold. Also benefiting from political developments was the Japanese yen, which strengthened following an increased flow into safe haven asset buying. The yen, the major currency with the lowest interest rate among the G7 bloc, closed near seven-month lows against the dollar.

Increasing oil prices weighed down the prospects of the Indian rupee during June. With India importing close to 80 per cent of its oil needs, increasing prices have resulted in the trade deficit widening to more than $11 billion, the highest in 10 months. They have also increased inflation pressures, with the most reading coming in at 6.01 per cent during June. These combined factors have involved the rupee dropping more than 1 per cent against the dollar. The rupee should consolidate at the current levels, with resistance coming in at 61.30.

And finally, perhaps the star on the month was the Chinese yuan. The currency closed the month with the largest monthly gain of the year as improved optimism regarding growth in China turned investor sentiment bullish about the second largest economy. Also benefiting on the news was the Australian dollar, which gained 1 per cent on the month. It has now recorded five consecutive months of higher closings, a period in which the currency has gained 7.24 per cent.

Gaurav Kashyap is the head of futures at Alpari Middle East

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