by Darrell Jobman, Editor-in-Chief TraderPlanet.com
EUR/US$
The dollar pushed to highs of 1.5625 against the Euro in early Europe on Monday, but was unable to sustain the gains and weakened back to test support levels around 1.5730 before consolidating close to 1.57.
There were no significant data releases with markets still considering the implications of Friday’s employment report. Despite the weak headline data, there is less confidence that the Federal Reserve will look to cut interest rates aggressively further in the short term with markets also looking at inflation pressures. There will also be caution ahead of Tuesday’s FOMC minutes from March’s meeting for any evidence of internal divisions as well as future policy hints. Any suggestions that the Fed will be reluctant to cut again in the near term would provide some dollar support.
German industrial production rose slightly for February with a 6.1% annual increase for the year which did not have a significant impact. The ECB is maintaining its tough stance on inflation and interest rates which will provide background Euro support.
There will be further caution ahead of the G7 meetings at the end of this week. Speculation over a tougher stance against further dollar losses will tend to underpin the US currency to some extent over the next few days. The German Finance Ministry, however, stated that it was not in favour of intervention to support the US currency which will limit any near-term positive dollar impact.
Yen
The dollar found support close to the 101.50 level against the yen in Asian trading on Monday and strengthened to highs around 102.85 in Europe.
After initial hesitation, the Nikkei index rallied to a five-week high on Monday as risk tolerances remained slightly stronger and there was also evidence of steady capital flows from Japan in the early part of the fiscal year. These two factors combined were a negative influence for the Japanese currency with some reversal of recent speculative yen buying also evident as measures of risk appetite strengthened to a six-month high.
Government and opposition representatives are still working to resolve the Bank of Japan governor dispute and both sides were edging towards a deal for Shirakawa’s appointment to be made permanent. A solution would provide some yen relief, but unease over the economy will continue to unsettle the yen. The bank is unlikely to cut interest rates at this week’s meeting.
Sterling
Sterling was unable to hold above the 1.99 level on Monday and retreated towards 1.9850 in New York. The UK currency also tested levels beyond the 0.79 level against the Euro.
Sterling has gained some support from an improvement in risk appetite and gains in the local stock market, but this is being over-shadowed by a lack of confidence in the economy.
There will be further speculation over an interest rate cut at this week’s Bank of England meeting. Expectations of a 0.25% reduction in rates should have a measured impact, but speculation of a 0.50% rate cut would be more damaging. The shadow MPC committee of academic economists voted by a 6-3 majority for 0.25% rate cut at their weekend meeting, reinforcing expectations of an official cut this week.
Swiss Franc
The Swiss franc weakened to lows around 1.0150 against the dollar on Monday and also retreated to a five-week low near 1.5950 against the Euro before consolidating later in US trade.
Overall risk tolerances were higher during Monday and this eroded near-term support for the Swiss currency on defensive grounds with an easing of credit fears particularly important.
Seasonally-adjusted unemployment held at 2.5% for March which will not have a significant impact while National Bank President Roth voiced optimism that inflation would fall in the second quarter. Overall, markets are still less confident over a cut for June which will provide some franc support.
Source: VantagePointSoftware, Market Technologies, LLC
Australian dollar
The Australian dollar retained a firm tone on Monday despite weaker than expected trade data. The trade deficit rose sharply to AUD3.2bn for March from AUD2.5bn as exports dipped sharply. There will be unease over the trade situation, but the impact will be measured while commodity prices hold firm and there was a recovery in prices on Monday.
The overall improvement in risk tolerances will also provide some degree of backing with capital inflows from Japan. There will be further speculation that the domestic economy will slow and that interest rates have peaked. The Australian dollar found support below 0.92 against the US dollar and strengthened to highs above 0.9250.
