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Dollar’s advance pauses for breath as Chinese, Japanese data come in soft

The final day of the third quarter is witnessing the US dollar pause for breath after some outstanding gains during the past three months. According to some technical indicators, such as the Relative Strength Index, the greenback was quite overbought – say versus the Japanese yen – hence a pause was to be expected.

Looking back to the beginning of the quarter, it is worth pointing out the dollar’s big gains. Euro / dollar was then trading above 1.36 while most recently it has been trading below 1.27 – a quarterly loss of around 1000 pips. For dollar / yen the starting point was the 102 level while it was trading above the 109 mark this morning, while for the UK pound, cable has dropped from 1.71 to 1.62. Following such outsized gains, it would appear that the dollar could use a rest on the final day of the quarter, which can be characterized by position-squaring and window-dressing as many investors report their end-quarter positions for performance purposes.

In today’s economic numbers, Japanese industrial output disappointed as it dropped 1.5% month-on-month compared to economists’ expectations of a 0.2% rise. Household spending was also worse than expected, although it was not all bad news as the unemployment rate surprised on the downside by coming in at 3.5% in August from 3.8% the previous month. The jobs-to-applicants ratio also remained at the 20-year plus high of 1.1 jobs for every applicant. The Bank of Japan’s Tankan survey of businesses to be released tomorrow will shed more light on the Japanese economy.

In China, the final HSBC Manufacturing PMI dropped to 50.2 for September from 50.5 initially reported, in a sign that the world’s second largest economy could be slowing down. The Hong Kong pro-democracy protests are also having a negative impact on sentiment on China.

Looking ahead to the remainder of the day, Eurozone flash inflation for September will be important as inflation is expected to drop to 0.3% from August’s 0.4%. German CPI slightly beat expectations yesterday, which helped the euro a bit. Consumer confidence out of the US will also be watched, as will final UK second quarter GDP and German unemployment for September.

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