by Darrell Jobman, Editor-in-Chief TraderPlanet.com
Commentaryfor Monday, August 11, 2008
The Euro tested lows near 1.4920 against the dollar in Asian tradingon Monday. The currency then rallied sharply to a high of 1.5080, but was unable to sustain the gains and tested fresh six-month lows below 1.49 in New York. The dollar gained support from a fresh drop in oil and gold prices during the day while US sentiment remained stronger.
There were no US data releases on Monday and the trade data on Tuesday will probably not have a major impact with markets focussed on growth and inflation prospects. The level of oil imports will be watched closely in the data, but the potential dollar impact will be lessened by the fact that crude prices have weakened sharply over the past month.
The growth-orientated releases later in the week should be more important for sentiment with markets still uneasy over the risk of a further deterioration in US financial and economic conditions which will tend to limit aggressive dollar buying.
Overall confidence in the Euro-zone economy will remain weak in the short term with increased fears over recession. ECB officials will remain on alert over inflation with bankmember Liebscher stating that there was no room for complacency. In the near term, markets will be focussing more on the growth risks and the latest French industrial production data recorded a further monthly decline.
The dollar again struggled to hold support above the 110.0 region in Asian trade on Monday while the Japanese currency strengthened further to highs beyond 164.0 against the Euro.
There will be further mixed influences on the Japanese currency in the near term. The drop incommodity priceswill tend to improve global risk appetite and this will tend to undermine near-term defensive demand for the yen. Overall, however, there has also been an unwinding of aggressive long positions in commodity currenciesand this will tend to underpin the yen with the risk of a further reduction in carry-trade positions.
A lack of confidence in the European economy will also tend to stem yen selling pressure on the main crosses with erratic conditions liable to persist. After correcting back to 165.50, the yen re-tested 164.0 against the Euro later in New York.
Sterling remained on the defensive against the dollar on Monday and dipped to the lowest level for close to 23 months with a trough below the 1.91 level. The UK currency hit tough resistance close to the 0.78 level against the Euro, although selling pressure was contained as the Euro remained under pressure.
UK input producer prices fell 0.6% in July compared with expectations of a further monthly increase while output prices rose 0.4%. The data suggests that underlying pressure from commodity price rises is starting to moderate and this trend should continue given the decline in oil prices, although the annual increase in input prices was still above 30%.
Any slowdown in consumer inflation on Tuesday would tend to weaken the currency sharply with increased speculation that the Bank of England will move towards lower interest rates.
Overall, there is still likely to be strong upward pressure on inflation as consumer prices will react with a lag.
The UK goods trade deficit widened to GBP7.7bn in June from GBP7.4bn the previous month with a record non-EU shortfall. Major economic fears were also sustained following a downbeat CBI regional survey which will hurt Sterling sentiment.
The Swiss currency fluctuated around the 1.62 region against the Euro during Monday with a marginally weaker bias in US trading. The dollar initially corrected sharply weaker to 1.0740 against the franc, but then strengthened to a fresh 6-month peak around 1.0880 in New York.
Trends in carry trades will be watched closely as any aggressive unwinding of short yen positions could have a positive influence on the franc in global markets given that it has been used as a funding currency. The evidence, so far, suggest that the franc will struggle to gain strong support, although volatility levels will remain high.
Source: VantagePoint Intermarket Analysis Software
Domestically, the Reserve Bank effectively confirmed that it now had a bias towards an easier policy in the latest monetary report, although the impact was muted as market expectations has already shifted following the Reserve Bank meeting last week.
The Australian currency found some support below the 0.8850 level against the US currency and pushed to a high of 0.8950, but corrections were still limited. A renewed decline in metals prices pushed the Australian currency to lows below 0.88 in US trading.