by Darrell Jobman, Editor-in-Chief

Commentaryfor Thursday, August 14, 2008


The dollar was confined to narrow ranges during much of Thursday as consolidationpressures continued following recent rapid gains.

The latest German data recorded a 0.5% GDP decline for the second quarter after a revised 1.3% advance previously, although this was slightly better than expected. There was a reported 0.3% decline in French GDP which ensured a 0.2% contraction for the Euro-zone as a whole, the first quarterly decline since the Euro area was created.

The ECB downgraded its GDP growth forecasts in the latest monthly survey, although it held firm on the need to control inflationwhich limited the immediate currency impact. Euro-zone inflation for July was revised down slightly to 4.0% from the flash 4.1% estimate while the core rate was at 1.7%.

US consumer pricesrose by a further 0.8% for July after a 1.0% increase the previous month with the annual rateat 5.6%. The core increase was also higher than expected at 0.3% for the second successive month which will maintain inflation fears with the annual increase at 2.5% compared with an unofficial target range of 1.0-2.0%.

The market impact was limited as there was also a focus on the latest jobless claims data which remained at elevated levels. Initial claims were 450,000 in the latest week while continuing claims rose to the highest level for four years.

The dollar initially weakened following the data with growth concerns persisting. The Euro was unable to break above 1.4950 and dipped sharply to lows below 1.48 in New York as crude prices dipped sharply with global growth fears also still a key dollar support factor.

Source: VantagePoint Intermarket Analysis Software


The latest capital account data recorded strong net inflows into Japan in the latest week and there will also be speculation over capital repatriation. There are US Treasury coupon payments of over US$35bn due over the remainder of this week which will tend to put upward pressure on the Japanese currency.

There will also be further speculation of a forced closing of long positions in the Australian and New Zealand dollarswhich could trigger sharp yen gains. The Japanese currency regained some ground against the Euro on Thursday with little change against the dollar at close to 109.50, although ranges were narrower than the previous day.

Wider US currency gains allowed the US currency to probe levels near 110.0 in US trading, but it failed to hold the gains and the yen recovered ground against the Euro.


Following the sharp decline the previous day, Sterling secured a correction against the major currencies during Thursday. From lows near 1.8615, Sterling recovered to 1.8750 against the dollar and 0.7940 against the Euro.

Overall sentiment towards the economy and currency remained very fragile, although there was no fresh data to steer direction.

Markets will need to remain on high alert for any comments from Bank of Englandofficials in the short term. In particular, it will be important to see whether there are any comments protesting against the market interpretation of the central bank’s report. If there is no tough rhetoric then markets will continue to price in interest ratecuts for late 2008.

The UK currency dipped back to below 1.87 against the dollar in US trading, but extended the recovery against the Euro as the US currency gained ground.

Swiss Franc

The US currency edged stronger to 1.0880 in early Europe on Friday as Swiss consumer confidence weakened very sharply for the third quarter. There was a decline to -17 in the third quarter from +4 previously.

The consumer sentiment data will reinforce the expectations of a sharp slowdown in growth, especially as the economy is now more dependent on consumer spendinggiven the weakness in key export markets.

A rally on Wall Streetand decline inoil priceshelped curb franc demand and it weakened to a fresh 6-month high of 1.0980 against the dollar before consolidatingaround 1.0940.

Source: VantagePoint Intermarket Analysis Software

Australian dollar

Commodity pricesinitially rallied strongly on Thursday following recent heavy losses which provided some degree of support to the Australian dollar.

Domestically, there were further expectations that there would be a cut in interest rates within the next few months. There has also been further speculation over an underlying reduction in Australian dollar positions funded through the Japanese currency which has undermined confidence.

After strengthening to near 0.88 against the US dollar, the Australian dollar edged lower again in New York with a move to 0.87 as the US currency rallied strongly and gold prices declined again.