byDarrell Jobman, Editor-in-Chief TraderPlanet.com
The Euro remained under pressure during Tuesday with the currency unable to hold above the 1.36 level against the dollar. The Euro was unable to secure any recovery in US trading and weakened to lows near 1.3530, the lowest level since the beginning of July. Equity markets have weakened again and there is likely to be a further pressure to repay dollar-denominated loans. The general reduction in risk appetite will tend to support the US dollar.
The US trade deficit fell to US$58.1bn in June from a downwardly-revised US$59.2bn the previous month. There was an increase in imports, but the principal feature was a strong 2.6% increase in exports to record levels The lower deficit will help underpin dollar confidence directly and will also tend to increase second-quarter GDP estimates which will boost sentiment.
Producer prices rose 0.6% in July with an underlying 0.1% monthly increase which should not have an important impact on interest rate expectations. The consumer inflation data will be watched closely on Wednesday and a low core reading would increase speculation over a Federal Reserve interest rate cut. Housing fears will continue to unsettle the dollar ahead of Thursday’s data.
Euro-zone data has remained generally weaker with a provisional 0.3% GDP increase for the second quarter which will maintain expectations of a slowdown in the Euro-zone economy. Markets have cut the chances of a September interest rate increase to around 50%.
The yen found support close to 118.50 against the dollar and strengthened to highs around 117.70. The yen challenged the 160.0 level against the Euro during the day and the yen broke through this level later in US trading as the Japanese currency again challenged 117.60 against the dollar.
There were no significant domestic developments with markets still focussed firmly on global trends. Risk aversion spiked higher in early US trading on fears of further fund losses which helped support the yen. There is liable to be a further underlying shift away from carry trades which will trigger a further reduction in existing short yen positions.
There is still likely to be strong dollar demand below the 118.0 level which will provide important US currency support.
Sterling was unable to make any headway against the dollar in early Europe on Tuesday and weakened sharply to six-week lows after the UK inflation data. Sterling will attract initial buying support close to the 2.00 level while a sustained dip below this level would further damage sentiment.
Consumer prices fell sharply by 0.6% in July with the annual inflation rate dropping to 1.9% from 2.4% as food prices fell while the core inflation rate fell to 1.7% from 2.0%. The headline inflation rate fell below the 2.0% target level for the first time in 18 months. There is likely to have been discounting earlier than usual in the season, but the inflation drop will certainly increase pressure for the Bank of England to postpone any further increase in interest rates.
The latest RICS housing-market survey suggested a deterioration in the sector, although the position was still under reasonable control. Given the extent of market overvaluation, there will be the threat of a much more serious deterioration in confidence which would cause substantial Sterling damage.
The Swiss currency found support close to 1.6430 against the Euro, but struggled to sustain gains much beyond the 1.64 level. General US currency strength pushed the franc to lows beyond 1.21 against the dollar before some stabilisation.
Degrees of risk aversion are liable to remain dominant in the short term and the franc drew immediate support from rumours of further fund losses. Volatile trading is liable to persist in the short term and an underlying shift into defensive assets is likely to continue which will support the franc.
The Australian dollar lost support close to the 0.84 level against the US currency and weakened to lows around 0.8370 in local trading. Although ranges were narrower than in previous days, the currency was unable to regain significant ground and weakened further to 0.8345 in US trading.
There was a dip in Australian business confidence for the month, but global market issues remained dominant and risk aversion issues are liable to remain dominant. Underlying levels of risk aversion remained high with further pressure to reduce carry trades, especially after Asian markets edged weaker. In this environment, the Australian dollar will remain vulnerable to further selling pressure, especially if there is a sustained reduction in carry trades.