by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The Euro pushed to highs around 1.3720 against the dollar on Tuesday and, after fluctuating around the 1.37 level, the Euro weakened later in US trading. A renewed decline on Wall Street and selling on the crosses pushed the Euro weaker against the US currency.
The US data was mixed on Tuesday and failed to provide clear direction. The Chicago PMI index was weaker than expected with a drop to 53.4 in July from 60.2 the previous month, but consumer confidence rose strongly to a six-year high of 112.6 from 105.3 in June which will maintain confidence in near-term employment trends.
The core PCE deflator was lower than expected with a 0.1% June increase, but the annual rate was in line with expectations at 1.9% as the previous months’ data was revised higher. The prices data overall will encourage the Fed to maintain a steady policy in the short term.
German unemployment fell by 45,000 in July which will reinforce short-term confidence in the Euro-zone economy. The provisional Euro-zone inflation estimate fell to 1.8% from 1.9% the previous month while business confidence edged weaker. Reports from the ECB indicate that the central bank is still looking to increase interest rates at either the September or October meeting and, while these expectations remain intact, the Euro should be able to resist heavy losses.
The yen fluctuated either side of the 119.0 level against the dollar for much of Tuesday. The yen secured a firmer tone in US trade with gains to 118.60 as a drop on Wall Street encouraged a renewed reduction in carry trades.
Risk aversion levels will continue to be a very important short-term factor for the yen and underlying stresses are liable to stay at elevated levels. Volatility levels are also likely to remain higher in the short term with shifts in global stock markets continuing to have a powerful influence on the Japanese currency.
The domestic influences were limited with a fall in the unemployment rate to a 9-year low of 3.7% in June from 3.8% offering some yen support. The firm labour-market data increased the potential for an August Bank of Japan interest rate increase.
Sterling secured gains against the dollar and Euro for much of Tuesday with a further technical recovery from heavy losses late last week. Sterling was also supported by a revival in carry trade interest as global stock markets rallied. Sensitivity to carry trades remained high and the UK currency weakened to 2.0315 against the dollar in US trading from a high of 2.0375 as high-yield currencies fell.
The CBI retail survey held steady for July with realised sales of +18 from +16 the previous month, but retailers were less confident over future spending trends. Consumer confidence also weakened to -6 from -3 the previous month which will maintain expectations of slower consumer spending growth.
The PMI manufacturing survey will be watched closely on Wednesday and a weak reading would increase speculation over a damaging impact from Sterling strength. There would also be speculation over an extended Bank of England pause on interest rate increases.
The franc weakened to lows around 1.6520 against the Euro on Tuesday before pushing strongly back to 1.6460 in New York as there was renewed selling pressure on high-yield currencies. The franc strengthened to near 1.20 against the US currency with dollar rallies quickly attracting selling pressure.
The Swiss franc was undermined initially by a recovery in stock markets and by an improvement in global credit conditions, but there will still be concerns over an underlying increase in risk aversion. There is still the potential for an on-going shift into more defensive assets, especially if there is a forced liquidation of margin positions.
The Australian dollar strengthened back to challenge levels above the 0.86 level in local trading on Tuesday. The domestic data offered support with a strong 1.8% increase in private-sector credit in June while there was a strong 7.5% increase in building approvals.
The firm data will reinforce expectations that the Reserve Bank will move to increase interest rates and there will be increased speculation over a move at next week’s meeting, especially if there is a strong retail sales report on Wednesday. Global risk conditions will also remain very important and the Australian dollar will gain support if risk aversion and credit fears ease further. The Australian currency failed to sustain a move above 0.86 and dipped sharply to 0.8525 in US trading.