by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The Euro pushed above the 1.35 level against the dollar in early Europe on Monday and, despite strengthening back towards 1.3460 in US trading, the dollar was unable to make any significant headway.
US leading indicators rose 0.4% in July after a 0.3% drop in June, which failed to have a significant impact and there are few data influences over the next 48 hours. Expectations that the Fed will cut interest rates will continue in the short term with markets putting the chances of a 0.50% interest rate increase at the September FOMC meeting at around 60%. Expectations of lower interest rates and deteriorating growth will continue to sap short-term dollar strength.
Underlying credit stresses maintained some defensive dollar demand and there were rumours of further losses within European banks. The more measured tone for global stock markets was still a net negative factor for the US currency, especially as yield support has declined.
On Monday, the German Bundesbank stated that monetary policy is still expansionary and this will increase speculation that the bank will look to resist downward pressure on Euro interest rate expectations. The ECB will also want to keep its policy options open as much as possible. The German ZEW index will be watched closely on Tuesday and a big drop would undermine the Euro, especially as the figure will not capture the most recent market turbulence.
High volatility persisted with a 114.20-115.50 dollar/yen range over the past 24 hours. The US currency attempted to regain the 115.0 level later in US trading as Wall Street rallied while the Euro fluctuated around the 155.0 level.
Market conditions were slightly calmer in Asia on Monday as Tokyo stock prices rallied, but there will still be some pressure to curb carry trades with Japanese investors scaling back high-yield currency positions. Exporter selling will also tend to increase above the 115.0 level.
Comments from Japanese finance officials will continue to be monitored very closely this week with Finance Minister Omi stating that markets were being watched very closely.
Central bank intervention will remain a threat if the yen strengthens through 110.0 against the dollar.
Sterling was unable to hold a brief move above 1.99 against the dollar on Monday and settled close to 1.9880 as there was firm support on dips towards the 1.98 level. There is still evidence of underlying caution towards carry trades which will limit Sterling recovery efforts.
The latest Rightmove index recorded a 0.6% increase in house prices for August to give a 12.8% annual increase. There was a slowdown in underlying growth even though re-mortgaging activity was a key influence in boosting total lending. The UK housing data will continue to be watched very closely in the short term.
Comments from the Bank of England will be watched very closely in the short term and Sterling will gain some support if there is renewed speculation over a further interest rate increase.
The Swiss currency found support close to 1.63 against the Euro on Monday and strengthened back to 1.6250 in US trading. The franc was held close to 1.2060 against the dollar for much of the day.
Despite expectations of a slowdown in second-half growth, National Bank President Roth took a generally firm stance on credit markets and interest rates in weekend comments. The remarks suggested the bank will be very reluctant to rule out an interest rate increase at the September meeting. Producer prices rose 0.1% in July to give an annual 2.8% increase which should not have a major monetary policy impact.
Any sustained easing of credit stresses would tend to ease upward pressure on the franc, but it is significant that the currency was able to resist losses on Monday despite stronger global stock markets.
The Australian dollar pushed to highs above 0.8050 against the US dollar on Monday despite encountering selling pressure above the 0.80 level. A sustained recovery in equity and credit markets after the Fed discount rate cut would provide important relief to high-yield currencies and underpin the Australian dollar, but caution will continue to be a key market influence.
Confidencein the Australian dollar will remain fragile in the short term with caution over carry trades and the threat of a repatriation of funds back to Japan. With little in the way of domestic economic data due in the short term comments from the central bank will remain under close scrutiny.