by Darrell Jobman, Editor-in-Chief TraderPlanet.com
Daily currency analysis for Wednesday, August 20, 2008
The US financial sector remained a focus as unease surrounding the mortgage-servicescompanies continued. There was some rebound later in US trading which helped underpin the US currency, although market conditionswere choppy with Wall Streetstruggling to hold gains.
There were no significant US economic releases on Wednesday, but the data will be watched closely on Thursday with the latest jobless claims and Philadelphia Fed manufacturing survey. There will be renewed doubts over the US economy if the data is significantly worse than expected.
The Euro-zone PMIdata will also be very important for Euro sentiment on Thursday. The German ZEW survey suggested some stabilization in confidence earlier this week and sentiment towards the Euro area may also stabilise if there is a any recovery in the monthly data. In contrast, another slide in the main indices would increase fears that the economic area is sliding towards recessionwhich would further damage the Euro. The German EconomicsMinistry took a generally downbeat stance on second-half economic prospects in commentary on Wednesday.
The US currency again tested levels below 1.47 in New York. Crude oil pricesreversed early gains following a much higher than expected increase in inventories which helped support the dollar, but it was again unable to sustain the gains.
The Japanese all-industries index fell 0.9% for June which reinforced fears over the economy, although it was close to expectations which limited the impact. The yen will remain vulnerable to some significant selling pressure if there is a recovery in high-yield currencies such as the Australian dollar.
Overall confidence in the financial sector has weakened again and this should limit the scope for yen selling with underlying caution over carry trades still an important factor. There is still the potential for reduced capital outflows from Japan which will support the yen, especially ifcommodity pricesare subjected to renewed selling pressure.
The US dollarstruggled to hold gains above the 110.0 level against the yen and the Japanese currency strengthened to 161.50 against the Euro as commodityprices fell.
The UK currency drifted weaker on Wednesday ahead of the central bankminutes with selling pressure above 1.8650 against the dollar.
According to the minutes, the bank of Englandvoted by a 7-2 vote for unchanged interest ratesin August. Blanchflower voted for a cut while Besley voted for an increase, the same outcome as the previous month. The bank did voice increased fears over the growth outlook with a statement that there had been a deterioration over the past month.
There was some discussion of a rate cut which will curb Sterling support, although all outcomes were considered which illustrates the difficulties faced by the bank.
The latest CBI industrial orders survey weakened further to -13 in August from -8 previously and output expectations were at 7-year lows which reinforced negative sentiment towards the UK economy. The retail sales data will be watched very closely on Thursday with the data liable to trigger volatile Sterling trading, especially given the risk of an erratic figure.
The dollar found further support close to 1.09 against the franc and strengthened to re-challenge resistance above 1.10. The Swiss currency also had a weaker tone against the Euro with lows beyond 1.62.
There was a temporary recovery in US financial stockswhich undermined near-term demand for the Swiss currency, but the dollar still struggled to hold above the 1.10 level.
There will be further underlying fears over the domestic economy which will limit Swiss currency support, especially if there is evidence of renewed stresses within the financial sector.
The Australian currencypushed to 0.8750 against the US dollarin local trading on Wednesday and held a firmer tone, but was unable to extend the gains and drifted back towards 0.87.
The currency is still being hampered by expectations of lower interest ratesover the next few months and underlying sentiment towards the economy and currency will remain weaker. Recoveries are also liable to attract a fresh reduction in carry trades which will tend to stifle Australian currency gains.