by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar weakened further on Friday, testing the 1.47 level against the Euro in European trading. After a temporary respite, the dollar again tested levels beyond 1.47 after the US housing data. Trading conditions were choppy as liquidity levels dwindled ahead of the weekend while year-end positioning also contributed to higher volatility. There was some evidence of institutional Euro buying before the end of December.
The Chicago PMI index was stronger than expected with an increase to 56.6 in December from 52.9 the previous month, although the employment component was subdued.
The US housing data was significantly weaker than expected with a further 9.0% drop in new home sales to 647,000 in November from a revised 711,000 previously. Inventories as a proportion of sales increased slightly further even though the number of homes for sale fell while prices held firm. The data will reinforce fears that the depth of the housing downturn will have a more damaging impact on the wider economy while pressure for lower interest rateswill continue. Markets have priced in a 90% chance that rates will be cut again in January.
The provisional German consumer inflation data for December recorded a 0.5% increase which cut the annual inflation rate to 2.8% from 3.1% previously and compared with expectations of a 3.0% annual rate. The ECB will still be uneasy over underlying inflation trends and will maintain a vigilant stance.
The trend for a yen recovery accelerated in Asia on Friday with a move to highs around 112.85 against the US currency as risk aversion triggered by the Pakistan situation was enhanced by lower regional stock markets. The yen consolidated close to 112.90 in New York trading as underlying demand was still being met with selling pressure.
The Japanese consumer inflation data was higher than expected with core prices rising 0.4% in the year to November as energy prices rose strongly. Headline unemployment also fell to 3.8% from 4.0% previously, but the jobs/applicants ratio fell to 0.99 which was the lowest in two years and suggests a weaker labour market.
Given the growth doubts, the inflation data did not increase speculation over a further near-term increase in interest rates as the Bank of Japan, in line with other G7 central banks, has to confront the dilemma of higher inflationary pressure while growth is tending to weaken.
Sterling pushed to test levels above 2.00 against the dollar on Friday for the first time since December 19, but the UK currency was unable to sustain the gains and weakened back to 1.9915 in New York trade. The UK currency also weakened against the Euro for the seventh successive session with fresh record lows around 0.7385.
The latest Nationwide house price index recorded a 0.5% decline for December with year-on-year growth falling to 4.8% which was slightly weaker than market expectations. There will still be fears over a prolonged and serious downturn in the housing sector which will damage underlying Sterling support, especially with some concerns that the labour market is starting to weaken.
Institutional weightings at the beginning of 2008 will be watched closely to assess whether there is a further exodus from the UK currency or whether there will be increased demand on valuation grounds.
The Swiss currency strengthened on Friday with gains to near 1.1260 as the US currency remained under selling pressure. The franc also strengthened to test levels beyond 1.66 against the Euro with highs around 1.6580.
The Swiss currency was able to draw some further support from defensive demand with the geo-political tensions surrounding Pakistan still having some positive impact on the currency.
The Swiss KOF leading index edged slightly lower to 1.98 in December from 2.02 the previous month, but this is still a solid reading for the index and will maintain underlying confidence in the Swiss economy.
The Australian dollar has continued to be supported by expectations of higher interest rates, although the overall influences have been mixed. The Australian dollar was unsettled to some extent by higher levels of risk aversion as Asianstock marketsfell following the assassination of Pakistan opposition leader Bhutto.