EUR/USD
The Euro was capped below 1.33 against the dollar on Friday and drifted weaker to re-test support below 1.32, but the US currency still found it difficult to take full advantage. The latest speculative position data recorded a rise in short Euro positions as sentiment deteriorated and a gradual decline in liquidity may increase volatility.
The US economic data provided some degree of support for the US currency during Friday. The trade deficit narrowed to US$38.7bn for October from US$44.6bn the previous month as exports performed strongly and there was a decline in oil imports. The University of Michigan consumer confidence index also rose to 74.4 from 71.6 which was the highest reading for six months.
There was a greater mood of optimism surrounding US growth and the benchmark 10-year Treasury yield rose to a six-month high close to 3.35% which provided some dollar support. The mood of confidence will be sustained if there is a robust reading for retail sales on Tuesday.
The Euro-zone developments will inevitably be an extremely important focus during the week, especially with a pivotal EU summit due to start on Friday. There was a pledge of unity by French and German officials in meetings last week, but markets will still be uneasy over the threat of internal divisions and official comments will be watched very closely.
The Irish parliament will hold a vote on the EU/IMF support package later this week and there is still a substantial fear of contagion with Portugal seen as extremely vulnerable during 2011, especially with a high debt roll-over burden. These fears kept the Euro trapped near 1.32 in Asia on Monday.
Source: VantagePoint Intermarket Analysis Software
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Yen
The dollar was unable to move above the 84 area against the yen on Friday and dipped to test support just below 83.50 as the Chinese central bank tightened commercial bank reserve requirements again. The latest Chinese consumer inflation reading was higher than expected at 5.1% compared with 4.4% the previous month which maintained expectations of a further monetary tightening by the authorities and this provided some yen support as risk appetite was restrained.
The US dollar was still gaining some degree of support on yield grounds following stronger than expected US data with firm buying support on retreats.
There was exporter selling above the 84 level which tended to toughen resistance levels, bit the US currency was again pushing higher in Asian trading on Monday.
Sterling
Sterling hit resistance close to 1.5850 against the dollar on Friday and dipped lower to test support in the 1.5760 area, but ranges were relatively narrow during the session and the UK currency was broadly resilient, supported in part by some bullish analyst projections for 2011. There was also evidence of corporate demand for Sterling against the Euro and the UK currency strengthened to the 0.8350 area.
The latest UK housing-sector data remained weak with the Rightmove group forecasting a further 3.0% decline in asking prices for November. There will be expectations of a further decline in prices during 2011 as tax increases take effect and, although confidence in the UK economy can remain firm in the very short term, this positive stance could be re-assessed very quickly.
In this context, the latest inflation and unemployment data due this week could have a significant impact on sentiment. Fears over the Euro-zone outlook should continue to provide important Sterling protection in the near term.
Swiss franc
The Euro was unable to gain any significant respite against the Swiss currency on Friday and retreated to test support near 1.2950 on Monday. The dollar was also trapped near 0.98 as franc strength on the crosses curbed US buying support.
The franc will continue to gain defensive support from Euro-zone fears, although a key feature of this week is liable to be uncertainty. There will be a EU summit starting on Friday and the latest National Bank policy statement is due on Thursday. There will be a reluctance to take out fresh speculative positions which may also curb franc movement.
Source: VantagePoint Intermarket Analysis Software
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Australian dollar
The Australian dollar was unable to move above the 0.99 level against the US currency on Friday and retreated to the 0.9850 area following a further monetary tightening by China via higher reserve requirements. There was expectations of further Chinese tightening in the near term which curbed any fresh Australian dollar buying support in Asian trading on Monday, although selling pressure was limited.
There will also be expectations of a slowdown in the domestic economy which will tend to curb Australian dollar buying support.
