EUR/USD
The Euro edged lower ahead of the New York open in extremely subdued conditions with an initial decline triggered in part by losses on equity markets. There were no major economic releases within Europe and sentiment was driven by some further concerns surrounding the Portuguese outlook with renewed fears that the country would head towards default and need additional support. There were also further concerns surrounding the Spanish outlook given the burden of private-sector debt. After miniscule buying last week, the ECB bought no peripheral bunds in the latest reporting period.
There was little momentum behind the Euro selling and it gained sharply during the New York session as stop-loss dollar selling accelerated once it moved beyond the 1.32 level with some reports of merger-related buying related to the purchase of Dutch carrier group TNT.
Fed Governor Dudley stated that any move towards additional quantitative easing would depend on how the economy evolves while generally hawkish comments from Regional Fed President Fisher did not have a major impact.
There was general weakness in the US bond market as benchmark yields continued to rise and, for now, this translated into improved risk appetite as stock markets were able to maintain a firm tone in the face of rising yields with optimism surrounding the economic outlook. The dollar was unable to gain any support from rising yields relative to Germany with a sense that markets were still catching up from a sharp narrowing in yield spreads seen at the end of last week.
The NAHB housing index was unchanged at 28 for February and the Euro challenged highs above the 1.3250 level before drifting slightly weaker in Asia on Tuesday.
Source: VantagePoint Intermarket Analysis Software
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Yen
The dollar found solid support on dips to the 83 area against the yen on Monday and secured a firmer tone in New York as it challenged the 83.50 area. The impact of rising US Treasury yields had a bigger impact on the dollar against the yen which helped push the Japanese currency weaker. There was also significant activity on the crosses as the Euro moved above the 110 level.
There was evidence of exporter selling at higher levels which was important in dampening the dollar’s ascent, especially with corporates keen to act ahead of Tuesday’s market holiday in Japan.
Ranges were narrow during Tuesday with the yen gaining some protection from a more cautious stance on the Asian economic outlook with a reluctance to extend dollar positions.
Sterling
Sterling found support above 1.58 against the dollar on Monday and after initially being trapped in narrow ranges, there was a renewed push higher during the New York session with a peak above the 1.59 level. Although Sterling was unable to sustain gains through 0.83 against the Euro, it was still able to advance to 13-month highs on a trade-weighted basis.
There was evidence of importer Sterling selling above the Sterling/Euro rate of 1.20 which had some impact in curbing UK currency gains. There was still a degree of optimism surrounding the UK economic outlook which provided background support ahead of Wednesday’s budget presentation by the Chancellor. The Office of Budget Responsibility (OBR) was set to raise its growth forecast which helped lessen fears over a renewed slide into recession and also underpinned Sterling.
Swiss franc
The dollar initially consolidated just below 0.92 against the franc on Monday before being subjected to heavy selling during the New York session. A break below support in the 0.9160 area triggered stop-loss selling and a sharp dip to the 0.91 area. The Euro was trapped within narrow ranges around 1.2060 as it re-visited the area seen before last Thursday’s National Bank meeting.
With expectations that all major economic areas will look to block currency gains, there was continuing speculation that the franc could see capital inflows with investors still seeing the franc as an attractive destination despite the minimum Euro level.
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Australian dollar
The Australian dollar was initially unable to hold above the 1.06 level against the US currency on Monday and dipped to lows near 1.0560 before reversing and rallying back to the 1.0630 area. The currency gained support from generally robust risk appetite as equity markets held firm.
The Reserve Bank minutes confirmed a more optimistic tone by the central bank with reduced downside economic risks. Benefit for the Australian dollar was short-lived as a warning from the BHP Chairman that the Chinese economy was slowing was important in pushing the currency weaker as Asian equity markets came under pressure.
