by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The Euro edged above the 1.44 level against the dollar on Monday, but narrow ranges dominated and the dollar attempted to regain the 1.44 level in very thin US trading.
Following the possible US$5bn Temasek stake in Merrill Lynch, there has been further speculation over sovereign wealth fund investment into the US investment banks. These capital flows will help underpin confidence in US markets as it should tend to ease fears over the risk of banking failures. It will also provide support to the US balance of payments which will help underpin the dollar.
Trading activity will be very low over the next two days and will also be at subdued levels over the remainder of this week which should dampen the potential for market moves.
There is scope for further position adjustment ahead of the year-end and this may provide some dollar support, especially with some speculation that the US currency hit an important low in November. The potential impact will be limited by the fact that short speculative dollar positions have already fallen to the lowest level since June.
The yen was little changed at close to 114.0 in Asian trading on Monday with very low trading volumes as Japanese markets were officially closed. The Japanese currency edged weaker in Europe with lows around 114.30 while there were losses to 164.60 against the Euro.
The yen was undermined by strong gains for global stock markets while an announcement of fresh direct investment into the US banking sector also eased immediate credit fears. The Japanese currency will tend to weaken slightly if global stock markets extend the seasonal gains this week, although the underlying credit-related fears should still act to limit yen selling pressure.
Sterling remained under pressure on Monday with a drop to fresh four-month lows below the 1.98 level against the US dollar. The UK currency also weakened to fresh record lows againsttheEurowith a slide to 0.7285 during the day.
On Monday, the latest Hometrack survey recorded a further 0.3% drop inhouse pricesfor December, cutting the annual increase to 3.0%,the lowest increase for over two years. Overall confidence in the economy is liable to deteriorate further in the short term which will tend to keep Sterling on the defensive with expectations of a further Bank of Englandinterest rate cut at the January MPC meeting.
Position adjustment will also be important and there is liable to be a further paring back of long Sterling positions ahead of the year-end period while institutional weightings in Sterling are also liable to be cut.
The Swiss currency weakened to near 1.6670 against the Euro on Monday and the franc was also unable to sustain a move through 1.1550 against the US dollar.
The near-term Swiss franc moves will remain correlated strongly with levels of risk tolerances and the currency will tend to weaken if there are further short-term gains for global stock markets.
Underlying fears over credit-related stresses next year should still provide short-term franc protection from aggressive selling pressure.
The Australian dollar retained a firm tone in local trading on Monday with a challenge on the 0.87 level. Carry trades have remained in favour as global stock markets have rallied while immediate pressure for yen gains has subsided which will help support the Australian dollar.
Near-term yield support will continue from the level of interest rates. There will still be unease over a sharp slowdown in global growth which will limit the potential for further strong Australian dollar gains, especially with commodity risks liable to increase.