by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar was unable to strengthen through the 1.3650 level on Thursday and weakened back to test the 1.37 level in New York. Volatility levels were slightly lower and the US currency received less support from defensive inflows as risk appetite strengthened slightly.
As expected, the ECB left interest rates at 4.0% at the latest council meeting. The bank called a press conference after the meeting and ECB President Trichet stated that the bank would need to maintain strong vigilance on inflation. The decision to hold a press briefing and the ECB comments will reinforce expectations that the ECB will increase interest rates to 4.25% in September.
There was little in the way of US economic data, but jobless claims were again lower than expected at 307,000 in the latest week. This figure should underpin confidence in the Friday payroll report, although there will still be unease following yesterday’s weaker than expected ADP report.
Given the existing growth doubts and fears surrounding the housing sector, the dollar will be vulnerable in the event of a weak employment report, especially if the monthly increase is below 80,000. The impact should be measured given that markets are already close to pricing in an interest rate cut by the end of 2007 and, given lower expectations, the US currency is now in a better position to gain ground on a strong report.
Despite further volatility, the yen has had a weaker bias over the past 24 hours as market stresses have eased slightly. The yen fell back to lows around 119.35 against the dollar and also weakened beyond 163.0 against the Euro.
Risk aversion eased slightly during the day as stock markets managed to show greater stability. The absence of any further major credit-related difficulties also curbed the flow of safe-haven funds into the yen.
There has been some evidence of capital repatriation back to Japan, although the latest capital account data also pointed to a selling of Japanese assets. The net impact is likely to be slightly positive for the Japanese currency given a strong current account position. The degree of retail yen selling interest will remain an important factor in curbing currency gains and there is the potential for further Japanese institutional dollar buying below the 118.0 level.
Sterling resisted a further test of support towards 2.02 against the dollar on Thursday and strengthened to highs around 2.0370 in US trade. The UK currency edged slightly stronger against the Euro and drew support from a tentative revival in carry trade interest.
As expected, the Bank of England left interest rates on hold at 5.75% following the latest MPC meeting. With rates unchanged, there was no statement from the bank and the vote split will not be known until the minutes are released in two weeks time.
In the short term, expectations of a further interest rate increase will support Sterling. The CIPS data will be watched closely on Friday, especially after the strong manufacturing release on Wednesday, and another strong reading would increase speculation over a September interest rate increase.
The Swiss currency weakened back towards 1.65 against the Euro on Thursday while it was also unable to gain any traction against the dollar. Franc demand was undermined by the easing of underlying market stresses as credit conditions stabilised.
The Swiss PMI index remained at a high level with an increase to 63.0 in July from 62.8 in June which will maintain optimism over Swiss growth prospects.
The Swiss inflation data will be watched closely on Friday and there should be a monthly fall in prices on seasonal grounds. This would not have a significant impact on the National Bank as annual inflation would be unchanged.
The Australian currency found support below the 0.85 level against the dollar on Thursday and strengthened to near 0.86 in US trading as there was a renewed appetite for high-yield currencies.
There have been no significant domestic developments with the Australian dollar still gaining support from expectations that the Reserve Bank will increase interest rates at next week’s meeting. Moves in global asset prices and degrees of risk aversion will continue to have a strong influence on the Australian dollar. There will be greater caution over high-yield assets and carry trades which will curb Australian currency support and volatility is liable to remain at elevated levels.