Dollar seesaws during week as extreme volatility hits FX mkts Yen strengthens; Swiss franc among biggest movers

Extreme volatility dominated the FX markets, at the start of the week after the downgrade of the United States. Moreover, the negative sentiment in the Eurozone remains on the list of dangers that could hamper the global economies; worries of a French downgrade emerged, while bond yields of Spain and Italy surged to record highs before paring back to below the critical level of 6%.
In parallel, equity markets remained very nervous, with volatility peaking at 48% on Monday. To contain the fears of equity selloff, some European countries temporarily banned naked short selling. The US Dollar index seesawed during the week to close on Friday at 74.56, very close to the week’s opening level.

The Euro reached a week high of 1.4432 on Monday, before plummeting back to a low of 1.4104 on Thursday after volatile sessions. The Euro closed the week at 1.4248. The Sterling Pound opened to reach a high of 1.6478, then dropped progressively to a low of 1.6111 before recuperating some of its losses and closing the week at 1.6279.
The Australian Dollar fell again below parity with the US Dollar; the Aussie opened the week at a high of 1.0447 then plunged on Tuesday to a low of 0.9928. The Japanese Yen gained more than 2% during the week; it opened after the US downgrade at a week high at 78.47; the Yen later strengthened during the week and closed at 76.42 on Friday.
One of the biggest movers this week was the Swiss Franc. Reaching all time record highs against the US Dollar, the Franc touched 0.7071, increasing speculations of a Swiss National Bank intervention. The Swiss Franc started to weaken on Wednesday after rumors of a Swiss Franc peg to the Euro.
The news had a significant effect on the safe-haven currency, boosting the USDCHF exchange from its low to a week high of 0.7778 on Friday. Moreover, the CHF witnessed a high volatility against the Euro. The Euro/Swiss pair reached a low of 1.0075 on Tuesday, before shooting up by more than 10% and closing the week at 1.1085.
The EURCHF volatility reached a high of 21% last week, far above its long-time average of 11%.

Fed keeps key rate at record low until 2013
The Federal Reserve pledged to keep its benchmark interest rate at a record low through mid 2013, in order to stimulate the slow recovery. It is the first time that the Fed sets a specific date for any further changes on the interest rates. The rate is currently at 0.25%. The Federal Open Market Committee also stated that it is prepared to employ additional tools to boost the weak economy.
Trade deficit widens
The United States trade deficit unexpectedly increased last June to the highest level since October 2008 as exports declined at a faster rate than imports. The deficit gap widened at a rate of 4.4% to $53.1 billion, exceeding market consensus of a $48 billion deficit. Exports have dropped the most since January 2009.

Jobless claims unexpectedly dropped
First-time jobless claims fell last week to a four-month low. Applications for jobless benefits dropped to 395,000, beating economists’ expectations by 7,000. The existing number of people on unemployment benefits also dropped. Nonetheless, unemployment remains sticky above 9% as the growth in hiring to support the lower firing remains subdued.

Retail sales climb
Retail sales in the US climbed in July to the highest level in four months, indicating that consumers are spending more despite a weak labor market. Retail sales gained 0.5% in July, after increasing at a revised rate of 0.3% in the previous month.
The increase is attributed to higher sales for electronic stores, furniture retailers, auto dealers and service stations, with autos being the leader with a 0.4% increase.

Consumer sentiment plummets
The University of Michigan Consumer Sentiment index plunged to 54.9, the lowest level in more than three decades, exceeding an already low estimate of 63.2. The drop in sentiment contradicts the higher retail sales and slightly improving employment data.
High unemployment, stagnant wages and a protracted debate over raising the U.S. government debt ceiling startled consumers who were polled before Standard and Poor’s downgraded the U.S. government’s credit rating last Friday.
The low sentiment added more concern that weak labor market and high volatility in the stock market will prompt households to cut back on spending. Many economists have stated a 50% probability of having the US economy going into a double-dip recession.

European crisis worries turn to France
The downgrade of the United States by Standard & Poor’s has taken its toll on the global markets. European banks shares tumbled to the lowest levels since March 2009, with Euro Stoxx dropping 6% at the beginning of the week. The French economy unexpectedly stagnated in the second quarter as consumer spending plunged. Concerns about the debt and slow growth have caused credit-default swaps on France’s government debt to approach record highs above 170bps. Speculation about the worsening debt crisis sparked talks of a credit downgrade, leading President Sarkozy to ask his advisors to come out with new plans to tackle the national debt, currently at 83% of GDP.
S&P and Moody’s later reaffirmed the AAA rating of France as they concluded that France is showing more seriousness to lower its debt and sounder balance sheet management. On the peripheral side, Italy and Spain saw their yields decrease from above 6% to 5%, as the European Central Bank purchased an undisclosed amount of the countries’ debt in the secondary market.

Industrial Production Falls
As governments struggle to contain the debt crisis, European industrial production fell in June by 0.7%, led by a drop in capital goods, indicating that the economy is losing momentum. On a year-on-year basis, industrial activity is up 2.9%, versus a prior month hike of 4.4%. On a country level, Germany posted a 7% growth in production, while UK and Greece figures dropped by 5% and 13% respectively.

United Kingdom
Manufacturing and industrial
production drop
The UK Manufacturing Index unexpectedly fell in June, adding evidence that the economic recovery is uncertain. Factory output declined 0.4% after it rose by 1.8% last month. Moreover, industrial production fell by 0.3% on an annual basis, below the markets’ expectations of a hike of 0.2%. The decrease in activity adds to the worries related to the health of the UK economy, facing the largest austerity plans since more than 50 years.

Rest of the World
unemployment in Australia rose
Australia’s unemployment rate unexpectedly rose in July to an eight-month high, which might restrict the Reserve Bank of Australia from raising rates further. Unemployment recorded a 5.1% level, up from 4.9% in the previous month. This hike is the first increase since October.
Gold reaches record highs
Gold reached a record high of 1,814.72 US Dollars per ounce during the week, as the largest economy in the world saw its AAA rating cut, spurring demand for the safety of the precious metal. Investors remain jittery over the outlook for the ability of the US and Eurozone to solve their debt and deficit shortfalls. The metal erased its gains towards the end of the week as equities rebounded after the dovish statement of the FOMC. Investors remain buyers of Gold during risk-off sessions.

Dinar at 0.27250
The USDKWD opened at 0.27265 on Sunday morning.

By: National Bank of Kuwait

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