by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The Euro was unable to push back above the 1.58 level against the US dollar on Tuesday and dipped sharply to near 1.56 in early US trading.
The US PMI index for the manufacturing sector rose slightly to 48.6 in March from 48.3 the previous month. The report still indicates a contraction and there will be some concerns over a further drop in the orders component, but there will be some relief that the expected deterioration was averted.
Wall Street rallied strongly while there was greater optimism that a majority of credit-related write-downs had been completed. In this environment, there was reduced confidence that interest rates would be cut aggressively again at the next Fed meeting.
The dollar pushed to test levels below 1.56 after the PMI report before stabilising near this level. There are still a series of key events over the next few days with Fed Chairman Bernanke due to speak on Wednesday while there services-sector PMI index will be released on Thursday and volatile trading is liable to continue.
There were no major Euro-zone data releases during the day, but there was a drop in German retail sales of 1.6% for February which will reinforce consumer-related fears. There will also be further unease over divergence within the major Euro-zone economies.
The dollar again struggled to break above the 100 level in Asian trading on Tuesday.
The Japanese Tankan index weakened more than expected with the headline figure for business confidence weakening to a four-year low of 11 for the April quarter from 19 previously. Most sectors of the report were weak and there will be particular concern over the downgrading of capital spending plans to a six-year low as this suggests that underlying confidence and demand has been damaged.
Markets are again considering the possibility that Japan will be forced to cut interest rates later this year which will reinforce the lack of yield support for the yen.
Overseas capital flows will continue to be an important market influence and capital flows out of Japan are likely to remain higher at the start of the fiscal year.
There was some increased degree of confidence in US trading as Wall Street rallied strongly with the dollar pushing sharply higher to a peak above 102.0.
Sterling found support close to 0.7960 against the Euro on Tuesday and strengthened to a high near 0.7870 before settling just stronger than the 0.79 level. The UK currency will gain some support if there is a sustained recovery in risk appetite, especially if immediate fears over the financial sector ease, but there will still be caution.
The March PMI index for the manufacturing sector was little changed at 51.3 which will lessen fears over a further serious deterioration, but will not spark a significant recovery in confidence. The strong prices reading will maintain Bank of England unease over inflation trends.
MPC member Sentance has been appointed for another term and this is likely to provide some degree of support to the UK currency as he adopted a generally tough stance over the past year.
The dollar found further support on initial dips towards 0.9930 on Tuesday and pushed strongly to highs above 1.01 in US trading. The franc also weakened to lows beyond the 1.58 level against the Euro.
There was unease over the Swiss financial markets with the Swiss Banking Commission warning that the banks must withstand the crisis. Any evidence that US banking sector problems are easing at the same time as Swiss difficulties are increasing would be a very significant negative factor for the franc, especially given the importance of the financial sector.
The Swiss PMI index for March also weakened sharply to 55.3 from 60.5 the previous month which will reinforce expectations of a sharp economic slowdown.
Source: VantagePoint Software, Market Technologies, LLC
The Australian dollar was drifting just below the 0.91 level in early Europe on Tuesday. As expected, the Reserve Bank left interest rates on hold at 7.25% following the latest policy meeting. The bank statement suggested that it was more confident that interest rates had peaked and this undermined the local currency on speculation over eventual cuts in rates.
The Australian dollar will gain some support if there are increased capital flows from Japan at the start of the fiscal year, but there were still net losses against the US currency during Tuesday with commodity prices also generally lower.