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Dollar hits four-week high on strong sentiment
Dollar rose in European trade on Monday against a basket of major rivals, extending gains for the second day and hitting a four-week high amid a strong buying sentiment.
Gains are boosted by a surge in US 10-year treasury yields following strong US employment data, which hurt the odds of multiple Fed rate cuts this year.
The Index
The dollar index rose 0.4% to 105.39, the highest since May 14, with a session-low at 104.93.
The index rallied by over 0.8% on Friday, the third profit in four days, away from two-month lows at 103.99.
The dollar was underpinned by stellar US payrolls data last week, which helped it snag a 0.3% profit last week, the second weekly profit in three weeks.
US Yields
US 10-year treasury yields rose 0.8% on Monday, the second profit in a row, marking a week high at 4.469% and underpinning the dollar.
The developments came after the US payrolls report showed the world’s largest economy added more jobs than expected in May.
The gains came after the US payrolls report showed the addition of 272 thousand new jobs last month, above estimates of 182 thousand.
Following the data, the odds of a Fed 0.25% interest rate cut in September fell to 47%, and the odds of such a cut in November tumbled to 61%.
Euro sharpens decline to five-week low on early French elections
Euro declined in European trade on Monday against a basket of major rivals, sharpening losses for the second straight session against the dollar and plumbing five-week lows after the announcement of early French elections.
French president Emanuel Macron decided to dissolve the Parliament and call for early elections after the governing party lost the EU elections to the far right.
Euro is also pressured by renewed concerns about the widening Europe-US interest rate gap as the odds of Fed rate cuts this year decline.
The Price
The EUR/USD fell 0.5% today to $1.0748, the lowest since May 9, with a session-high at $1.0802.
The EUR/USD pair lost 0.85% on Friday, the largest loss since April 10 following strong US labor data.
The pair also lost 0.5% last week, after the European Central Bank cut interest rates by 0.25 basis points while casting doubt on future rate cuts.
Early French Elections
French President Emanuel Macron dissolved the parliament and called for early legislative elections after the results of the EU Parliament elections.
The governing French party lost the EU elections to the far right, forcing Macron to gamble with the new local elections to try and reassert authority.
Analysts note that the odds of a surprise win by the far right in French elections will keep the euro under pressure in the short term.
The ECB
The European Central Bank cut interest rates last week as expected, however it failed to provide strong hints of upcoming cuts this year.
In fact, according to a Bloomberg report, ECB members have ruled out another interest rate cut in July.
Interest Rate Gap
The current Europe-US interest rate gap stands at 125 basis points in favor of the US and will likely remain so throughout the summer.
Yen skids to week lows as US 10-year treasury yields spike
Yen declined in Asian trade on Monday against a basket of major rivals, sharpening losses for the second straight day against the dollar and plumbing week lows as US treasury yields powered up.
Recent strong US labor data hurt the odds of multiple Federal Reserve rate cuts this year as investors await the Fed’s upcoming policy meeting this week.
The BOJ is convening this week to discuss monetary policies, with analysts expecting the bank to discuss cutting down the scope and pace of government bond purchases.
The Price
The USD/JPY rose 0.2% today to 157.18, the highest in a week, with a session-low at 156.69.
The yen lost 0.7% on Friday against the dollar, the second loss in three days following the US payrolls report.
The yen gained 0.35% last week against the dollar, the first weekly profit in three weeks amid increasing speculation about the BOJ’s monetary policy meeting.
US Yields
US 10-year treasury yields rose 0.4% on Monday on track for the second straight profit, marking a week high at 4.453%, and underpinning the dollar.
The gains came after the US payrolls report showed the addition of 272 thousand new jobs last month, above estimates of 182 thousand.
Following the data, the odds of a Fed 0.25% interest rate cut in September fell to 47%, and the odds of such a cut in November tumbled to 61%.
The BOJ
The Bank of Japan is convening this week to discuss policies, expected to maintain rates unchanged.
Bloomberg reported last week that the BOJ will likely discuss cutting down its purchases of government bonds.
Similar insights came from a Reuters report, which indicated the BOJ is preparing to unwind its balance sheet of $5 trillion in a gradual manner.
Again, Swiss Franc Dominates the Market! Are You Ready to Capitalize on Its Momentum?
• The Swiss currency continues to outperform major and minor currencies
• The Swiss National Bank intervenes in the exchange market to support the franc
• Reduced likelihood of Swiss interest rate cuts this year
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In last week's trading, the Swiss franc continued to outperform most major and minor currencies, topping the foreign exchange market for the second consecutive week, amid accelerated purchases of the Swiss currency thanks to the Swiss National Bank's policies.
The Swiss central bank has once again shifted towards a policy of supporting the local currency due to accelerating inflation in the United States, the United Kingdom, and Europe recently, coinciding with the excessive weakness of the franc in the foreign exchange market.
The Swiss National Bank expressed concern over global inflation developments and the weakness of the local currency. Therefore, it seems that the bank has returned to relying on its strategy that enabled the franc to dominate the global currency market in 2023.
Looking at the list of winning currencies, the Australian dollar was at the bottom due to weak economic growth data in Sydney, which renewed hopes for Australian interest rate cuts this year.
Before detailing the reasons that supported the Swiss franc and heavily pressured the Australian dollar, let's first look at the performance of the eight major currencies in the foreign exchange market over the past week.
The Swiss franc rose by 10 points on the "FX News Today" weekly currency strength index, followed by the Japanese yen in second place with 7 points, then the US dollar in third place with 3 points, and the Australian dollar in last place with a negative 10 points.
Swiss Franc
Looking at the detailed performance of the Swiss franc last week against the seven major currencies, it outperformed the Australian dollar with a 1.8% rise, reaching a two-month high of 1.6952 dollars on Friday, June 7.
It rose by 1.7% against the Canadian dollar, reaching a three-month high of 1.5384 dollars on Friday, and increased by 1.3% against the New Zealand dollar, reaching a three-week high of 1.8278 dollars on Friday.
It added 1.1% against the euro, reaching a two-month high of 0.6970 francs on Tuesday, and rose by 0.8% against the British pound, reaching a three-week high of 1.1363 francs on Tuesday.
It rose by 0.65% against the US dollar, reaching a three-month high of 0.8880 francs on Friday, and increased by 0.3% against the Japanese yen, reaching an all-time high of 175.38 yen on Thursday.
Thomas Jordan
The Governor of the Swiss National Bank, "Thomas Jordan," recently stated that the central bank may start selling foreign exchange reserves to defend the value of the local currency.
Speaking at the Bank of Korea's 2024 international conference, Jordan said: "If the upside risks to inflation materialize, it is likely to be associated with a weak Swiss franc, which we can counter by selling foreign currencies."
The Swiss franc has been under strong negative pressure since the Swiss central bank cut interest rates last March and indicated that maintaining a strong currency was no longer a priority.
Inflation in Switzerland
The past three months have seen a surprising rise in Swiss monthly inflation. Recently, prices in Switzerland increased by 0.3% on a monthly basis in May.
Growth in Switzerland
According to the Federal Statistical Office, Switzerland's GDP grew by 0.5% on a quarterly basis in the first quarter of this year, after growing by 0.3% in each of the previous two quarters, and higher than market estimates of 0.3% growth. This is the fastest growth rate since the second quarter of 2022.
The strong growth was driven by services and retail trade, indicating higher domestic demand and consumption levels, which could limit the deceleration of inflation in the country.
Swiss Interest Rates
The above data provides important context for Thomas Jordan's speech, in which he expressed concern that the franc's weakness might contribute to inflationary pressures.
Clearly, this issue has returned to focus, and the Swiss central bank will not want to appear as though it made a mistake by cutting the interest rate prematurely.
Consequently, the likelihood of the Swiss National Bank cutting Swiss interest rates by about 25 basis points again at its meeting on June 20 has decreased.
Opinions and Analyses
- Charlotte Ong, European forex markets analyst at HSBC, said: "After facing significant downside pressure in recent weeks, the Swiss franc saw some relief last week."
- Ong added: "From our perspective, part of this may stem from recent comments made by Swiss central bank governor Thomas Jordan."
- HSBC recently turned bullish on Swiss franc forecasts, noting that the Swiss central bank may not be as cautious as its G8 peers. This is particularly important as Swiss inflation has proven to be more resilient than expected recently.
- Ong explained: "Macroeconomic dynamics have changed since the first quarter, as price pressures have proven to be more stable than expected, and the currency weakened significantly in Swiss franc carry trades."
- Ong added: "Under these circumstances, the 'weak Swiss franc' stance could only exacerbate inflationary pressures. This aligns with Governor Jordan's statements."
- HSBC said: "The franc could remain vulnerable in the short term as markets continue to favor higher-yielding currencies."
- The bank's analysts added: "But in the medium term, downward pressure on the Swiss franc should diminish, especially if the Swiss central bank begins selling foreign currencies."
Australian Dollar
The image above illustrates the losses incurred by the Australian dollar last week against the seven major currencies in the foreign exchange market, due to renewed hopes that the Reserve Bank of Australia might cut interest rates this year.
The Australian economy grew by 0.1% in Q1 2024, less than market expectations of 0.2% growth, and the economy grew by 0.3% in Q4 2023.
These data have reduced the tight conditions facing the Reserve Bank of Australia and increased the likelihood of a 25 basis point cut in Australian interest rates before the end of this year.