G8 Meeting, US Empire Fed Data Fuel Dollar Losses

A combination of weak US manufacturing sector data, a lack of commentary on currencies at the G8 meeting over the weekend, and a surge in European inflation has sparked volatility across the forex markets this morning. With our top 3 traders focusing primarily on USD/JPY and EUR/USD, the significant moves in the US dollar could make or break who stays high on the leaderboard.

For the fifth consecutive day, we have the same contestant in the number one spot as this trader ended Friday with a currency portfolio balance of $277,671.42. His most recent gains were on the back of a few long USD/JPY positions, which he entered last Wednesday just below 107. At the time of writing, contestant number 1 was still holding on to these positions. USD/JPY is currently trading near 108, and while this trader’s holdings are still profitable, we’ve seen the pair back down from resistance at the 200 SMA at 108.26. Indeed, the US dollar remains very weak on Monday morning on a combination of a few factors. First, the G8 meeting over the weekend in Japan failed to yield significant commentary on currencies, as the attending finance ministers instead focuses on inflation. This was a major chance for government officials to help stem the US dollar’s declines, and instead, their silence has only worsened the situation.

Also weighing on the US dollar is news that the New York Federal Reserve's gauge of manufacturing activity fell more than expected in June to -8.7 from -3.2 on the back of negative readings in the components measuring new orders, shipments, and unfilled orders, suggesting that activity in the manufacturing sector continues to decline. A further breakdown of the report reflects a surge in input prices, which is unsurprising given the gains we've seen in commodity prices in recent months. However, the prices paid component actually eased slightly, indicating that producers may be having difficulty passing down rising costs to consumers. Meanwhile, the employment index showed that the "number of employees" barely managed to remain positive at 1.16, while the "average workweek" tumbled to -2.33 from 1.09, which signals that instead of letting go workers outright, manufacturing firms are cutting back on their hours worked. Overall, the Empire Fed reports highlights the weaknesses in the sector, and suggests that additional downside risks loom for the US economy, which will likely prevent the Federal Reserve from raising rates at the end of the month despite mounting consumer price pressures.Meanwhile, contestant number 2 – who ended Friday with a portfolio balance of $208,922.99 – cracked the $200K mark by catching the plunge in EUR/USD during European trading on Friday, and by buying the pair shortly after to benefit from the rebound over the course of the New York trading session. Indeed, these moves made contestant number 2 over $35,000 in profits in a matter of hours. Can he do it again on Monday? Contestant number 2 bought EUR/USD again this morning as the pair started to break above 1.5500. However, the pair has already rallied nearly 150 points from the morning’s low of 1.5344, so he may actually be a little late to the game. Nevertheless, as we mentioned above, the combination of the outcome of the G8 meeting and the disappointing Empire Fed data do not bode well for the greenback. Furthermore, the final reading of the Euro-zone Consumer Price Index for the month of May unexpectedly hit a fresh 16-year high of 3.7%. The data underpins European Central Bank President Jean-Claude Trichet’s hawkish bias and suggesting that the ECB will like raise rates next month, as their primary mandate is to maintain price stability. As we discussed in the Currencies Update on June 6, Mr. Trichet said following the last ECB meeting that some council members actually wanted to raise rates this month and also said during the Q&A session that there was a chance that the central bank would raise rates in July. As a result, there is a lot of bullish support for the euro from a fundamental perspective, leaving upside potential for EUR/USD.

Like contestant number 2, contestant number 3 made his way to the top 3 on the back of profits in EUR/USD. However, this particular contestant prefers to trade on a very short-term basis and has kept positions open for as little as 10 minutes. For the most part this has worked in his favor, but contestant number 3 was on the wrong side of EUR/USD this morning and lost nearly $12,000 on a single trade, suggesting that his portfolio balance may not be high enough to stay on top by Monday’s close.

Congratulations to our top traders and good luck!

Terri Belkas, Currency Analyst of DailyFX.com