by Darrell Jobman, Editor-in-Chief TraderPlanet.com
Commentaryfor Friday, August 22, 2008
The eurowas unable to hold above the 1.49 level in Asian tradingon Friday and edged slightly lower in early Europe.
The Euro-zone current account remained in deficit for June with a shortfall of EUR8.2bn after a revised EUR5.5bn deficit the previous month. There were net inflows of portfolio capital during the month, but direct investmentrecorded a further net deficit. These outflows will be important for medium term currency trendsand will be a negative influence on the Euro.
Elsewhere, Euro-zone industrial orders fell 0.3% in June which was slightly better than expected, although the previous estimate was revised sharply lower to show a monthly decline of 5.4%.
The data releases unsettled the Euro, although a renewed decline in oil priceswas more important in pushing the US currency back towards 1.48 in early US trading.
There were no US data releases over the day and comments from Fed Chairman Bernanke were watched closely. Bernanke took a generally cautious approach to US prospects with comments that the economy was softening while unemployment was rising. He was optimistic that inflationwould moderate and expressed relief over stabilisation in the dollar.
There was no major shift in interest rateexpectations, but the US currency was still able to trade higher as oil prices weakened further and Wall Streetadvanced strongly. The dollar strengthened to 1.4770 as oil recorded the sharpest daily decline for 16 years.
TheBank of Japan minutes reinforced economic unease on Friday, but did not have a majorcurrency marketimpact as they were from the July meeting.
The global market trendswill be watched very closely in the short term and will also tend to have a mixed impact on the Japanese currency. A recovery in commoditiesand high-yield currencies would revive interest in carry trades which would also weaken the yen.
In contrast, overall fears surrounding the global economywill continue to underpin yen demand. The net result is likely to be significant yen buying on any major retreat as positions are cut.
The dollar edged stronger on Friday as the yen hit underlying selling pressure, but struggled to hold above 110.0 as there was a further unwinding of carry trades.
Sterling was subjected to renewed selling in early Europe on Friday with a retreat back below the 1.87 level against the US currency.
UK second-quarter GDP was revised down to 0.0% from an original estimate of 0.2% as private consumption estimates were revised down and this was the weakest quarterly result since 1992. The data will further undermine confidence in the economy and will certainly reinforce recession fears, especially as the estimates for services growth were also lower than expected in the three months to June.
In response, Sterling weakened further to below 1.86 against the dollar and near 0.7980 against the Euro.
European recessionfears will continue to provide some degree of Sterling protection in the short term, but overall UK confidence will remain weaker given the economic stresses. The UK currency dipped to a two-year low against the dollar in US trading with a test of support close to 1.85.
The dollar found support just above the 1.0850 level against the franc on Friday and pushed to highs near 1.0980 in US trading. The franc also weakened against the Euro with a move to near 1.6240.
The KOF institute warned that the economy would slow further in the second half of 2008 which unsettled the franc to some extent.
International trends have dominated the Australian dollar trends over the past 24 hours. Following the rally on Thursday, the Australian currency hit further resistance above the 0.88 level in local trading on Friday.
Given the extent of gold’s advance and the weaker US currency, the Australian dollar’s gains were still measured and there will be an underlying lack of confidence in the currency. There will be further expectations that the Reserve Bank of Australia will look to cut interest rates as soon as possible which will maintain the threat of carry-trade liquidation.
As commodity priceswere subjected to fresh selling pressure, the Australian dollar weaken to lows near 0.8650 in New York.