by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The Euro retained a firm stance in early European trading on Tuesday challenging levels near 1.5880, but the currency was on weaker ground over the remainder of the day as the economic data was generally dollar supportive.
The New York manufacturing index recovered strongly to a figure of +0.6 in April from -22.2 the previous month. Although the data series is very erratic on a monthly view, the sharp improvement will boost confidence that rising US exports will provide a cushion to the manufacturing economy. Headline producer prices also rose a stronger than expected at 1.1% for March and there will be increased speculation over a more cautious Fed policy at the late-April FOMC meeting.
The February TICS report recorded net long-term US capital inflows of US$72.5bn for the month after revised US$57.1bn previously. There was a drop in Chinese bond holdings, but overall bond inflows were robust while there were small net inflows into equities. The solid reading will provide some background support to the US currency and there will be some additional backing on valuation grounds.
In the Euro-zone, the German ZEW index weakened significantly to -40.7 in April from -32.0 previously as companies were increasingly concerned over the inflation and growth outlook. There have also been increased protests from European companies with Airbus Industries warning that the position was severe.
If there is evidence of sustained deterioration within the Euro-zone, confidence will weaken and there will also be stronger protests against Euro strength.
There were reports that regional sovereign wealth funds were increasing their purchases of overseas assets which fuelled wider interest in carry trades and undermined the yen on Tuesday. In particular, there was speculation that the Singapore fund would invest further funds into Swiss bank UBS.
The Japanese currency was still vulnerable against the Euro which was also helping to support the dollar against the yen. After finding support below 101.0, the US currency pushed to highs around 101.60 in US trading as the US capital flows report eased fears over credit risks.
The latest RICS survey reported that the number of agents reporting a decline in house prices increased to 78.5% in March from 64.1% the previous month which was the weakest survey since the series began in 1978.
The latest BRC retail sales report recorded a decline in like-for-like sales of 1.6% in March which was the weakest for three years and intensified growth fears. The data helped weaken Sterling back through the 0.80 level against the Euro.
Reports of stake building in BP from a Chinese fund will offer some degree of UK currency support. Nevertheless, overall economic fears will increase after the data and Sterling dipped to record lows against the Euro. A firmer dollar also pushed Sterling to lows around 1.96.
UK consumer inflation held steady at 2.5% in March with the core figure also unchanged at 1.2% compared with market expectations of a small increase in both rates. This will tend to erode near-term Sterling support on expectations that the Bank of England will have greater scope to cut interest rates. The bank, however, is likely to remain cautious given the increase in overall inflationary pressures.
The dollar again found support below parity against the franc on Tuesday and rallied to highs around 1.0080 in US trading. The franc also weakened to lows near 1.59 against the Euro.
Market conditions remained tense, but credit-related fears eased to some extent which undermined the franc. The stronger than expected US data also boosted optimism that the US could secure a recovery and this reduced short-term defensive franc demand.
Markets will continue to monitor results from the US investment banks very closely in the short term and worse than expected results would trigger fresh defensive demand for the Swiss currency.
The Australian dollar pushed back to test resistance levels around 0.93 in local trading on Tuesday. Minutes from the March Reserve Bank of Australia meeting tended to concentrate more on the inflation risks within the economy which maintained some speculation that interest rates could still increase. Nevertheless, this looks unlikely given the domestic risks and currency support is liable to fade.
The Australian dollar has also drawn support from high commodity prices over the past 24 hours. This trend may continue in the very short term, although it could reverse rapidly on global volatility. The Australian dollar weakened back to near 0.9250 in New York trading.