by Darrell Jobman, Editor-in-Chief TraderPlanet.com
Commentaryfor Wenesday, August 27, 2008
EUR/US$
The Euro strengthened in Asian trading on Wednesday and pushed to a high of 1.4775 against the dollar ahead of the US open.
There were robust comments from ECB officials during the day which provided initial Euro support. Council member Weber, for example, stated thatinterest ratecut speculation is premature. Fellow member Bini-Smaghi commented that cutting interest rates would push inflation higher and Liebscher warned that vigilance is now more crucial than ever.
Market confidence in the Euro-zone economy is still liable to remain very fragile in the short term as recession fears persist. The provisional August German inflation data was also weaker than expected with a 0.3% decline for the month which cut the annual rate to 3.3% and will reinforce expectations that the inflation rate has peaked.
The Euro was unable to sustain the advance and retreated to 1.47 during New York trading. The US durable goods data was again stronger than expected with a headline 1.3% increase for July while there was a 0.7% underlying increase for the month. Although computer equipment orders fell sharply, the overall tone will boost confidence in the industrial sector which should also underpin sentiment towards the dollar.
Comments from regional Fed President Lockhart continued to suggest that rates would be left on hold in the short term. There will still be underlying unease over housing and financial trends which will tend to stem dollar support. The revised GDP and jobless claims data will be watched closely on Thursday for further evidence on the economy.
Yen
There was a recovery in commodity prices in Asian trading on Wednesday which stemmed immediate selling pressure on high-yield currencies and may also curb an unwinding of carry trades. The Japanese currency initially retained a firm tone against the Euro and also strengthened to test levels around 109.0 against the dollar.
The US currency was unsettled by a further failure to hold above the 110.0 level against the Japanese currency. The fundamental balance of payments strength will also provide some significant underlying yen protection.
There is still solid interest in selling the yen on rallies and it weakened again later on Wednesday. The yen was also again unable to break the 160.0 level against the Euro and weakened towards 161.50 in US trading. Conflicting yen pressures are liable to maintain choppy trading conditions in the short term.
Sterling
Sterling staged a limited recovery in European trading on Wednesday, but was then subjected to renewed selling pressure later in the day. The UK currency failed to reach 1.85 against the dollar and retreated to test fresh 2-year lows below 1.8300. Sterling also weakened to 0.8025 against the Euro, the lowest level since May, as the trade-weighted index dipped to a fresh 12-year low.
Overall sentiment towards the UK economy remains very weak due to underlying recession speculation and this is contributing to further Sterling selling.
The latest Nationwide houseindex will be watched closely on Thursday and another sharp decline in prices would reinforce negative sentiment. Nevertheless, a further monthly decline will have been discounted and there may be scope for a Sterling correction.
Swiss Franc
The dollar weakened to 1.0915 against the franc on Wednesday, but found support close to this level and strengthened back to the 1.10 level in US trading where it continued to hit tough resistance. The franc weakened to 1.6160 against the Euro, but recovered from intra-day lows.
There was some easing of pressure on high-yield currencies which tended to lessen immediate demand for the Swiss currency, although there was still a mood of underlying caution.
The latest Swiss industrial survey reported that demand had weakened, although this was from a strong level which should limit the impact. Unease over the Swiss economy will tend to stifle franc support.
Source: VantagePoint Intermarket Analysis Software
Australian dollar
The trend for higher commodity prices continued in local trading on Wednesday which provided further support to the Australian dollar. Domestically, there was a reported decline in construction activity for the second quarter, but this had a limited impact as a significant deterioration has already been priced in.
There will still be unease over the domestic economy which will limit currency support, although commodity prices and carry trades will tend to dominate near-term currency moves. The Australian dollar pushed back to 0.86 against the US currency on Wednesday, but failed to sustain the advance and retreated back towards 0.8550.
