by Darrell Jobman, Editor-in-Chief TraderPlanet.com
EUR/US$
The dollar was subjected to erratic trading on Wednesday, but failed to break major technical levels with the US currency unable to strengthen through 1.4650 while there was firm support near 1.4750.
Following the Federal Reserve interest ratecut yesterday, the Fed and other major banks announced plans to inject extra liquidity into markets to help ease the deteriorating credit position. The Fed will accept a wider range of collateral and look to allocate funding to a wider range of banks in order to push market rates back towards the official rate. The move will tend to ease immediate pressure for a further cut in interest rates to support economic conditions which should also provide some dollar support.
Nervousness over the state of the economy will continue, however, and the latest retail sales data will be watched closely on Thursday to assess underlying demand conditions. A weak set of data would increase fears over an underlying deterioration in consumer spending and the economy.
The US trade deficit edged higher to US$57.8bn in October from a revised US$57.1bn the previous month with both imports and exports rising slightly over the month. The underlying deficit is still improving as the headline figure was inflated by rising oil imports and the net dollar impact should be broadly neutral.
The Euro-zone industrial data was slightly stronger than expected with a 0.4% increase for October which will provide some immediate relief. The impact will still be limited given underlying speculation over a wider slowdown in growth and weakness in the housing sector.
Yen
The Japanese currency was unable to sustain gains through the 111.0 level against the dollar on Wednesday and drifted lower in European trading.
The yen then weakened sharply in US trade following the global central banks’ announcement of additional liquidity injections. The move increased confidence that credit-related fears would ease and this triggered renewed demand for high-yield currencies which undermined near-term yen demand.
Support may be weaker in the very short term, although erratic trading conditions will tend to persist, especially with year-end considerations an increasing focus. The yen will also gain strongly if the liquidity measures announced today fail to have a sustained impact in easing credit stresses.
The domestic data was generally favourable as the current account surplus rose to JPY2.23trn for October while wholesale price inflation rose to 2.3%, the highest rate for 12 months. Degrees of risk aversion will still dominate short-term currency moves.
Sterling
Sterling found support below the 2.04 level against the dollar on Wednesday and pushed towards 2.0450. The UK currency spiked higher after the announcement of additional central bank measures, but failed to hold gains above the 2.05 level.
The UK currency settled close to 0.7180 against the Euro. High-yield currency demand may remain stronger in the very short term, but conditions will remain erratic.
The latest labour-market data recorded a slowdown in headline earnings growth to 4.0% from 4.1% previously. Despite a further 11,000 drop in unemployment, the data will ease immediate fears over inflation pressure from labour conditions. This may give the Bank of Englandslightly greater flexibility to respond with a further interest rate cut early in 2008 if there is evidence of a sharp growth slowdown.
The housing data will be watched closely tonight and a further deterioration in conditions would increase speculation over a further near-term cut in interest rates which would unsettle Sterling.
Swiss franc
The Swiss franc failed to sustain a recovery on Wednesday and dropped to fresh December lows in US trading. The franc weakened to beyond 1.67 against the Euro and also hit a low close to 1.14 against the dollar.
The National Bank interest rate decision will be watched closely on Thursday. Expectations are for rates to be left on hold, but the franc weakness this week could prove decisive in triggering a further rate increase to 3.0% by the central bank which would underpin the Swiss currency.
Source: VantagePoint Software, Market Technologies, LLC
Australian dollar
The Australian currency was able to resist further losses in local trading on Wednesday and pushed back towards 0.8800 as regional stock marketsattempted to stabilise. The domestic influences were limited with a modest increase in consumer confidence providing some degree of support.
Risk conditions will tend to dominate and trading conditions are liable to be increasingly erratic. The Australian dollar strengthened to highs around 0.89 after the central banks liquidity moves as carry trades strengthened sharply before weakening back towards 0.8820 later in US trading.
