by Darrell Jobman, Editor-in-Chief

Commentaryfor Tuesday, August 19, 2008


The dollar retained a firm tone in early Europe on Tuesday and strengthened to fresh 7-month highs near 1.4625 against the Euro.

The German ZEW index recovered to -55.5 in August from -63.9 previously which will provide some slight degree of relief over the outlook, although underlying fears will persist, especially as the index for current conditions was significantly weaker than expected.

There was a significant decline in US housing starts and permits for July following an increase the previous month which had been distorted by changes in building regulations. Housing starts dipped to an annual rate of 0.97mn while permits dipped to 0.94mn. Both sets of indicators suggest that activity remains at a depressed level, although there is the potential for a base to form.

Producer prices rose 1.2% in July after a 1.8% increase the previous month while core prices rose 0.7% over the month. The increase in underlying prices will maintain inflation concerns, although the impact will be lessened by the fact that commodity prices have fallen since the data was compiled.

The comments from regional Fed President Fisher were slightly more dovish than expected which will continue to dampen any expectations of a near-term Fed tightening despite his stated preference for an early move to increase interest rates.

There were renewed gains for commodity prices in US trading and this pushed the US currency weaker with a slide back to 1.4780 against the Euro as pressure for a dollar correction was also a significant feature.

Source: VantagePoint Intermarket Analysis Software


As expected, the Bank of Japan left interest rates on hold at 0.5% by a unanimous vote at the latest policy meeting. The bank also lowered its assessment of the economy for the second successive month with a downgrading of the export outlook and expectations of weak domestic growth. Fears over a Japanese recession will therefore persist in the short term.

Asian stock markets weakened to a two-year low on Tuesday and a general reduction in carry trades continued to provide some underlying support to the yen with a reduction in positions funded through the Japanese currency.

The Euro retreated to lows near 161.0 against the yen as the Japanese capital account remained firm. The dollar edged lower in US trading while the Euro recovered back above 162.0 against the yen as commodity prices gained ground.


The UK currency dipped to lows near 1.8530 in Europe on Tuesday, but resisted a further serious attack on the 1.85 level and pushed back above 1.8650 in US trading as the dollar retreated. The UK currency generally drifted weaker to 0.7915 against the Euro.

Overall sentiment towards the UK economy remains weak with further expectations of a sharp deterioration in conditions. In comments on Tuesday, MPC member Besley warned over the growth and inflation outlook, but also stated that inflation could fall back to below the 2.0% level by the end of 2009.

The comments were slightly less tough than expected and Besley’s vote at the August MPC meeting will be watched closely. If he did not dissent again and call for higher interest rates, then expectations of lower rates will continue to build which will keep Sterling on the defensive.

Swiss Franc

The dollar again attacked levels above the 1.10 level against the franc on Tuesday. The US currency peaked at 1.1030, but failed to hold the gains and retreated to 1.0920 in New York. The Euro found some further support below 1.61 against the franc.

Equity markets remained on the defensive during Tuesday and this provided some net franc support during the day, although buying support was still relatively limited.

National Bank Chairman Roth maintained his view on the economy which maintained expectations that the bank would leave policy on hold at the September meeting.

Source: VantagePoint Intermarket Analysis Software

Australian dollar

The trend for a weaker Australian dollar continued in local trading on Tuesday with the currency dipping to lows around 0.8625. The Reserve Bank minutes confirmed that the bank had shifted to an easier policy bias and the minutes also suggested that an interest rate cut could be sanctioned earlier than expected given the tightening in domestic financial conditions.

There was also a fresh decline in commodity prices which eroded currency support with the risk of a further closing of carry trades. There was, however, a reversal in trends in New York as commodity prices rallied and the currency pushed back to 0.87 against the US currency.