Higher-yielding currencies are likely to get a boost next week after a stronger-than-expected US employment report raised hopes about the US economic recovery, prompting a rise in risk tolerance. The dollar may rise against the yen, but the euro and other high-yielding currencies, including emerging market currencies such as the South African rand, should strengthen against the dollar on the increase in risk appetite.
-- Higher yielders likely to gain in aftermath of jobs data
-- Better-than-expected US jobs data ups optimism
-- BoJ yen intervention still a key focus
US employment fell for a third straight month in August, but the decline was far less than expected and private payrolls growth surprised on the upside, easing pressure on the Federal Reserve to prop up growth. The rand rose to a 2-1/2 year high against the dollar on Friday after the US employment report.
No one is forecasting higher rates until 2011 at the earliest. but just signs that the recovery in the world's biggest economy is gaining momentum has investors optimistic. "Unemployment dropping will be one of the reasons for the Fed to raise interest rates," said Dean Malone, a currency director at Compass FX in Dallas, Texas. "The Fed increasing rates will be a signal the US is recovering from the recession."
In Jackson Hole, Wyoming, last month, Fed Chairman Ben Bernanke signalled he would be willing to embark on yet another round of asset purchases should the economy weaken further. His comment rattled currency investors, sent the yen and Swiss franc higher on a flight to safety and, in turn, prompted widespread speculation that the Bank of Japan would intervene to weaken the yen.
But Friday's jobs report, at least for now, has put some of those concerns aside. "This will be short-term relief to currency and equity markets by reducing stress on the Federal Reserve to add more stimulus," said Kathy Lien, director of currency research at GFT in New York.
EURO BUY Indeed, a buy signal on the euro against the dollar was triggered on Friday when the 12-day and 26-day moving average convergence divergence line rose above the 9-day signal line after going below on August 10. The MACD is an indicator of short-term momentum that focuses on exponential moving averages and closing prices.
For the week, the euro gained 0.7 percent against the dollar, the second straight week of gains, and the dollar lost 0.5 percent against the yen, the third straight weekly decline. Investors will closely watch the Japanese yen, which jumped to a 15-year high against the US dollar in recent weeks, placing foreign exchange investors on intervention watch.
A sharp drop in dollar/yen, such as 1 to 2 percent or more in a single day toward the 80 yen level and below, is seen as the most likely scenario that would prompt Japan to buy dollars even if it does so alone. But with the dollar last changing hands at 84.42 yen, Reuters FX Spot Probability Analysis calculates the probability of dollar/yen trading between 80 and 81 yen in one week at less than 1 percent. The probability rises to a still-low 5 percent if the forecast period rises to a month.
"Once you get to these levels, there's always the possibility (of intervention)," said Fabian Eliasson, vice president of currency sales at Mizuho Corporate Bank in New York. But "if anything I would say that if dollar gains seen today persist, the chatter will subside. I think you'd have to approach the all-time low" for more intervention talk.
Option investors are not ruling out the dollar going lower against the yen. Three-month dollar/yen composite risk reversals last traded at -1.9, according to Reuters data on Friday, with a bias to dollar puts and yen calls. While that was slightly less than the -1.95 on Thursday before the jobs data, it still suggests that investors are betting on further losses in the dollar against the yen.
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