by Darrell Jobman, Editor-in-Chief TraderPlanet.com
EUR/US$
The dollar was unable to hold stronger than 1.57 against the Euro on Friday and drifted weaker during the day with a low around 1.5790. Trading conditions were generally subdued with a reluctance to take on additional positions ahead of the US holiday weekend.
US exiting homes sales data recorded a small decline in sales to an annual rate of 4.89mn in April from a revised 4.94mn the previous month, although this was slightly above expectations.
The data suggest some scope for stabilisation in the market, but there was a further increase in inventories over the month which illustrates that any recovery will be very limited until the number of un-sold homes is reduced.
Despite a late retreat, oil prices were generally firmer during the day and this was a slight negative factor for the US dollar while the drop in stock market prices was also a negative influence on the currency in New York markets.
The Euro-zone PMI index for the manufacturing sector weakened to 50.5 in May from 50.7 while the services-sector index dipped sharply to 50.6 from 52.0. The data suggests that the economy, especially outside Germany, has stalled and this will be a negative factor for the Euro with economic fears liable to increase. The firm ECB stance will provide short-term protection for the currency.
Yen
The latest Bank of Japan minutes continued to warn over downside risks to the economy. Overall Japanese bond yields were still higher due to global inflation fears which is liable to unsettle equity markets and may discourage aggressive interest in carry trades which could, in turn, trigger renewed market volatility.
The dollar was holding just above the 104.0 level in Asian trading on Friday in cautious trading while the yen was still generally weak against the Euro.
There is still evidence of increased yen selling by retail accounts in Japan, but these pressures are being offset by an increase in Japanese bond yields. As Wall Street weakened again on Friday, the yen strengthened back towards the 103.0 level against the US currency with markets looking to test dollar support levels below this level.
Sterling
Sterling was unable to sustain a position stronger than 0.7940 against the Euro on Friday and gradually weakened towards the 0.7970 area over the day.
The first-quarter UK GDP increase was confirmed at 0.4% in the revised release. Consumer spending was revised higher, but there were downward adjustments to exports and imports while business investment contracted over the quarter and this is not a positive long-term factor for the UK economy or currency.
MPC member Sentence was generally downbeat over economic prospects as he forecasted a significant slowdown with the possibility of recession.
Sterling will also tend to be unsettled if there is a sustained downturn in stock market prices, but these pressures should be offset to some extent by investment inflows while yield considerations will remain positive.
Swiss Franc
The Swiss currency found support around 1.0335 against the dollar on Friday and strengthened back towards 1.0220 in US trading. The franc also reversed early losses against the Euro and strengthened to highs around 1.6140 in New York.
The franc moves were again influenced strongly by degrees of risk aversion and the Swiss currency gained support from a renewed downturn on Wall Street.
National Bank Chairman Roth stated that the franc moves against the dollar had not reflected fundamentals which illustrates concern that the Swiss currency has strengthened too far. The overall comments from Roth suggested that the bank would look to maintain a steady policy in the short term, although it was willing to support the banking sector if necessary.
Source: VantagePoint Intermarket Analysis Software
Australian dollar
The overall market tone remained corrective in local trading on Friday, but the Australian dollar was able to resist further losses with support near 0.9550 against the US dollar and consolidation around 0.9580.
The near-term currency moves are likely to remain influenced strongly by trends in commodity prices and risk appetite. Higher gold prices helped the Australian currency regain the 0.96 level, but the currency was still hampered by weaker stock-market trends.
Markets will be on alert for any protests over the currency’s value by government and Reserve Bank officials. It is also likely that the central bank will look to buy US dollars to replenish reserves as part of a long-term strategy.
