EUR/US$

The Euro was unable to hold above the 1.40 level in Asia on Friday and weakened significantly in European trading. Risk appetite was generally weaker which curbed immediate demand for the Euro and also triggered defensive demand for the US currency.

The Euro was also undermined by renewed fears over the outlook for Eastern Europe and the regional banking sector, although confidence was underpinned to some extent by a better than expected reading for French industrial production.

The US University of Michigan consumer confidence data was weaker than expected with a decline to 64.6 in July from a revised 70.8 the previous month. The decline will reinforce fears that the economy will not be able to sustain any improvement as rising unemployment saps confidence and spending. The retail sales data will be watched closely next week for further evidence on spending levels.

The US trade deficit was narrower than expected with a dip to US$26.0bn from a revised US$28.8bn the previous month. Imports continued to decline while there was a small increase in exports which pushed the deficit to the lowest level for nine years.

The narrower trade deficit will provide some degree of support to second-quarter GDP while the deficit decline will also lessen the need for capital inflows.

The dollar was unable to sustain gains beyond 1.39 in US trading and dipped to 1.3965 as markets were still unable to break major technical levels.

Source: VantagePoint Intermarket Analysis Software

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Yen

The Japanese wholesale prices data was weaker than expected with a decline of 6.6% in the year to May which reinforced the underlying deflation fears. The data will also maintain pressure for the Bank of Japan and Finance Ministry to combat sources of downward pressure on prices. In this environment, there will be strong reservations over the allowing sharp yen gains and there is the potential for further verbal intervention to limit currency advances.

The yen will still gain some very important support from unease over global economic trends and a lack of risk appetite. The yen continued to fluctuate around the 93 level against the dollar in Asian trading on Friday with an apparent lack of appetite for Japanese funds investing overseas significant in supporting the yen.

As risk appetite remained weaker, the yen strengthened to a high of 91.80 against the dollar and 127.80 against the Euro in New York. There was a retreat later in US trading, but the yen still secured its largest weekly gain against the dollar since October.

Sterling

Sterling was unable to hold above the 1.63 level against the dollar on Friday and weakened to lows near 1.6150 before stabilising. The UK currency also lost ground against the Euro with a retreat back through the 0.86 level.

There was a 0.2% decline in producer prices for June while import prices rose, although the market impact was limited as prices still fell sharply over the year.

The UK currency was unsettled by the general increase in risk aversion and near-term trends will remain correlated strongly with trends in risk appetite. The latest inflation data will also be watched closely on Tuesday.

Swiss franc

The dollar found support below the 1.08 level against the franc on Friday, but was again unable to sustain a move above the 1.09 level. The Euro was also unable to sustain gains against the Euro.

National Bank chairman Roth again warned against franc strength in comments on Friday and the tone of the remarks continue to suggest that the bank will resist strongly any renewed franc appreciation.

In this context, there is the potential for intervention to sell the franc against the dollar and Euro. The franc will still tend to gain some defensive support when risk appetite weakens and volatility is liable to increase.

Source: VantagePoint Intermarket Analysis Software

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Australian dollar

The Australian dollar has still been under-performing on the crosses and was unable to make any headway above the 0.7850 level. There was a renewed retreat to just below 0.78 in local trading on Friday with evidence of significant selling against the yen undermining the currency.

Caution towards risk is still liable to prevail in the short term and the Australian currency weakened to lows below the 0.7750 level in early New York before securing a tentative correction. The currency will still find it difficult to gain any significant recovery unless there is renewed confidence in the global economy.