market overview

The latest US jobless claims data was better than expected with a decline to 334,000 in the latest week from a revised 358,000 previously which maintained underlying confidence in steady employment growth. There was an overall reluctance to sell the US currency aggressively with most players looking to buy on dips given a bullish longer-term outlook on US fundamentals. Similarly, the latest Philadelphia Fed index much stronger than expected with an increase to 19.8 for July from 12.5, the highest reading for two years. A Moody’s move to putting the US AAA rating back to a stable outlook from negative not having a significant impact. Following Fed Chairman Bernanke’s testimony, the consensus was still that the Federal Reserve would look to taper bond purchases later in 2013 and look to complete the programme during 2014. There was no great conviction, however, given that the Fed is continuing to insist that developments will be datadependent. The most likely outcome is that the FOMC will look to taper bond purchases, potentially in September, but if the data is disappointing there will be only a very limited scaling back of quantitative easing which would limit potential dollar support given the amount of tightening priced in. The Euro found support above 1.3050 as markets were again unable to break narrow ranges with technical support levels holding and it pushed back towards 1.3150 during Friday. There will be further underlying stresses surrounding the Euro-zone peripheral economies. The holiday season in Europe will dampen activity and may make it less likely that market conditions will deteriorate in the short term. The German government will also have a strong incentive to help dampen any turbulence ahead of September elections. Nevertheless, there are still extremely important risks surrounding peripheral economies and the banking sector. There is still a serious risk that these tensions will explode during the next few weeks. The Chinese economy will be watched extremely closely in the short term amid growing fears over a sharp slowdown as credit conditions deteriorate. These concerns will tend to keep the Australian dollar under pressure and will also curb overall demand for Asian currencies. In this environment, there wi