by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The Euro was unable to push back above the 1.37 level against the dollar on Friday and weakened to lows below 1.3650 as the ECB again provided additional liquidity to the money markets. This undermined Euro confidence due to fears that further credit-related losses would be revealed by European financial institutions. The Euro attempted to stabilise around 1.3680 later in US trading.
The Euro-zone economic data was weaker than expected with French industrial production falling 0.5% in June to give an annual decline of 0.8%. The Italian GDP data was disappointing with second-quarter growth held to 0.1%. The combination of weaker data and continuing financial stresses has continued to create uncertainty over a September ECB interest rate increase. Last week, markets were certain that rates would be increased and the doubts now present will continue to unsettle the Euro in the short term.
There was no major US economic data on Friday, although a stronger than expected 1.5% increase in import prices will maintain underlying inflation concerns. The data will be watched very closely next week with the retail sales figure due on Monday. A weak set of data would increase pressure on the Federal Reserve to cut interest rates within the next few months.
Global credit stresses and levels of risk aversion will remain dominant in the short term. Following sharp losses in stock markets this week, there will be the potential for some correction and this would lessen immediate yen demand. There is likely to be further institutional dollar buying below the 118.0 level which will make it difficult for the yen to extend near-term gains and the dollar pushed back above 117.50 later in US trading.
Nevertheless, the underlying tone towards carry trades is likely to remain much more cautious which will provide important yen protection.
There will be reduced expectations of an August Bank of Japan interest rate increase which will curb yen support if carry trades stabilise, but the extent of global credit fears is likely to remain dominant in the short term.
Sterling held ground against the Euro on Friday and also attempted to rebound from lows below 2.0170 against the dollar.
Global risk conditions remained dominant and a further shift away from aggressive carry trade positions undermined the UK currency, especially when European stock markets fell. There was evidence of some stabilisation in US trade, but sentiment remained very fragile.
There were no significant UK developments on Friday with the levels of risk aversion remaining dominant. The economic data will, however, be watched very closely next week with important UK releases on inflation and growth. A strong set of inflation readings would reinforce expectations of an increase in interest rates while an inflation fall and weaker growth would increase pressure for an extended Bank of England pause.
The Swiss franc strengthened to near 1.6300 against the Euro on Friday before correcting back to 1.6350 as stock markets attempted to stabilise. The franc was confined to relatively narrow ranges against the dollar as cross trading dominated.
Levels of risk aversion will remain dominant in the short term and any recovery in global equity markets would continue to ease immediate upward pressure on the franc.
Markets overall are still likely to be more defensive which will limit any selling pressure on the Swiss currency.
The Australian currency weakened to lows near 0.84 in local trading on Friday as Asian stock markets weakened. Global liquidity issues will remain dominant in the short term and the Australian dollar will remain vulnerable to selling pressure if market stresses continue. There should still be yield support which will help protect the currency, especially if there is a recovery in risk appetite, and the Australian dollar edged stronger in US trading.
The Reserve Bank of Australia’s monetary policy statement will be watched closely on Monday and any switch to a more neutral policy stance would tend to undermine the Australian dollar.