by Darrell Jobman, Editor-in-Chief TraderPlanet.com
EUR/US$
The dollar was unable to strengthen through 1.3550 against the Euro on Friday and weakened steadily to lows around 1.3680 even though the US economic data was stronger than expected. Overall risk aversion lifted during the day which put downward pressure on the US dollar and yen.
US new home sales rose 2.8% in July to an annual rate of 870,000. There was an increase in the median price, but average prices fell while there was a small decline in inventories over the month. The data will help ease immediate fears over the housing sector, but the existing sales data will be watched closely on Monday. There will still be concerns over an underlying deterioration in the sector as sub-prime turmoil undermines the wider market due to tighter lending standards.
Elsewhere, durable goods orders rose a strong 5.9% in July, the largest increase for 10 months, with an underlying 3.7% increase over the month.
ECB sources on Friday stated that references this week to the August 2nd policy statement, when the ECB referred to the need for strong vigilance, was designed to keep policy options open for the September meeting rather than signal an interest rate increase. This will maintain uncertainty over the September outcome and ECB comments will continue to be watched closely with ECB chairman due to speak on Monday.
If European credit market conditions improve, there will be speculation that rates will be increased in October at the latest even if rates are held steady in September with the bank very reluctant to abandon an interest rate tightening.
Yen
The yen strengthened in late Asian trading on Friday with an advance to 115.50 against the dollar, but failed to hold the gains and weakened back beyond 116.0 level as risk tolerances continued to fluctuate. The yen weakened back to 159.0 against the Euro.
The stronger than expected US data provided no support to the yen, especially as the data helped trigger a general recovery in stock markets. This combination helped support carry trades with renewed interest in high-yield currencies which also put downward pressure on the Japanese currency. There will, however, still be significant caution over underlying credit stresses which will limit selling pressure.
The corporate services prices index rose 1.6% in the year to July which was the fastest increase for 15 years. The acceleration will tend to increase pressure for a Bank of Japan monetary policy tightening over the next few months.
Sterling
Sterling weakened back to below the 2.00 level against the dollar in early Europe on Friday before strengthening to highs of 2.0130 as the US dollar came under widespread selling pressure with the UK currency drifting weaker against the Euro.
Second-quarter UK GDP was unrevised at 0.8% to give annual growth of 3.0%. The breakdown of the data was less favourable for the economy with growth dependent on consumer spending. A quarterly downturn in investment and exports will maintain concerns over the sustainability of growth given that the consumer sector is overstretched.
Markets will be looking much more closely at forward-looking data to determine whether the market stresses will undermine the housing sector and wider economy. The latest Hometrack price survey indicated that prices were unchanged in August with the annual increase slowing to 5.4% from 5.9% previously.
Swiss franc
The Swiss currency was able to hold ground against the Euro for much of Friday even though there was a strengthening in global stock markets. The franc weakened in late Europe as there were fresh gains for high-yield currencies while the Swiss currency also hit resistance close to 1.20 against the US dollar.
The Swiss currency will tend to weaken if there is a sustained improvement in risk conditions, but underlying demand for the franc is still likely to remain strong which will limit losses.
Australian dollar
The Australian dollar has remained firm over the past 24 hours with a peak close to 0.8250 in local trading before a retreat back towards 0.82 in early Europe on Friday. The Australian currency was able to consolidate above the 0.82 level with renewed gains to 0.8265 in US trading as high-yield currencies strengthened.
The domestic trading incentives remained limited with global risk conditions still dominant. The domestic data will be watched more closely over the following week, although risk conditions will still dominate with the currency gaining ground if there is a sustained improvement in credit conditions.
