by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The Euro was unable to sustain a brief move back above the 1.37 level against the dollar on Monday and, after weakening to 1.3650, the Euro weakened further in US trading with lows near 1.36. The Euro was again undermined by weakness on the major crosses with further selling pressure against the yen.
The ECB has continued to inject liquidity into European markets with an addition of US$64.9bn on Monday. Although the injection was lower than on Friday, the ECB move still had a negative Euro impact with further speculation that a major Euro-zone bank is in serious trouble. In addition, markets are less confident over a September ECB interest rate increase with markets indicating the chances of an increase had dipped to near 50%.
The latest IMM positioning data recorded a drop in long Euro positions and there is likely to have been a further reduction since the data was compiled, but there was still a high net long position which will maintain the risk of a further Euro correction.
The US retail sales report was close to expectations with a 0.3% headline increase while underlying sales rose 0.4% over the month. There will be some relief that the data did not suggest a deterioration in conditions, but confidence in the economy will remain fragile. The inflation data on Tuesday and Wednesday will be important and low readings would increase speculation that the Fed will have scope to respond with lower interest rates if credit stresses fail to improve.
The yen strengthened to levels beyond 118.0 against the dollar on Monday, but was again unable to hold the gains and weakened to lows around 118.50 in US trade.
Global credit stresses and levels of risk aversion will remain dominant in the short term. Following sharp losses in stock markets, there will be the potential for some further correction which would lessen immediate yen demand. There is also likely to be further institutional dollar buying below the 118.0 level.
Second-quarter Japanese GDP was weaker than expected with a 0.1% increase and there will be reduced expectations of an August Bank of Japan interest rate increase which will curb yen support if risk conditions stabilise. There is still likely to be greater caution over carry trades which will offer important yen protection.
Sterling weakened to five-week lows below 2.01 against the dollar on Monday before a tentative recovery to 2.0120 and managed to regain some ground against the Euro.
There will be further pressure to curb carry trades in the short term and any further Sterling selling against the yen would increase wider downward pressure on the UK currency.
UK producer prices rose 0.2% in July with core output prices rising 0.2% while there was a 0.5% drop in input prices . The data should ease inflation concerns slightly, but the consumer inflation data will be more important on Tuesday. Markets are expecting a small decline in the annual inflation rate due to lower energy prices.
The Bank of England is already under greater pressure to postpone a further increase in interest rates and a lower than expected inflation reading would increase pressure for an increase to be postponed. A strong reading would tend to put downward pressure on the stock market.
The Swiss currency fluctuated either side of 1.64 against the Euro on Monday and had a general weaker tone in US trading as Wall Street rallied. The Swiss currency also weakened to lows around 1.2060 against the dollar.
The latest IMM date recorded that speculative short franc positions had dropped back below the 3,000 contract level which will tend to lessen the risk of an unwinding of short-franc positions and rapid Swiss currency gains.
The Australian dollar hit selling pressure above the 0.85 level against the US dollar on Monday and weakened to lows around 0.84 before a tentative recovery in US trading.
The Reserve Bank of Australia increased the 2007 inflation forecast in the latest monthly report with the core inflation forecast now at 3.0% from 2.5% previously which is at the top of the central bank’s target range. This will maintain the Reserve Bank’s tightening bias and provide Australian currency support. Risk aversion levels will still tend to dominate in the short term and, although the currency will gain some support if equity markets stabilise, there is likely to be a much more cautious stance.