by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar strengthened sharply to highs around 1.4530 against the Euro on Thursday, but was unable to sustain the gains and weakened back to lows of 1.4650 in New York as choppy trading conditions persisted.
The US data did not have a significant impact with jobless clams falling to 338,000 in the latest week from a revised 353,000 previously. The four-week moving averagemoved higher, however, which cast some doubts on the accuracy of Wednesday’s ADP employment report. There will be caution surrounding Friday’s payroll report and a figure below 100,000 will would tend to unsettle the US currency. Elsewhere, mortgage delinquencies rose for the third quarter, although the focus was on the Treasury’s proposals to freeze debt payments for sub-prime borrowers which underpinned Wall Street.
As expected, the ECB left interest rates on hold at 4.0% following the latest council meeting. In his press conference after the decision, President Trichet was generally more hawkish than had been expected. He repeated the phrase that the ECB would act in a firm and timely manner and, although he expressed concerns that growth risks were to the downside, he also repeated that inflation risks were to the upside.
A very important factor was that Trichet stated that there had been some calls for rates to be increased at the meeting. With these comments, the ECB chief was looking to severely dampen market expectations that rates could be cut and this will provide some significant Euro support. The German factory orders data was also stronger than expected with a 4.0% monthly increase.
The yen continued to drift generally weaker on Thursday with lows beyond 111.40 against the dollar while the Japanese currency also lost ground against the Euro.
Risk tolerances remained generally stronger with optimism that central bank actions to cut interest rates would help underpin stock markets and cushion the global economy. The yen drifted weaker as Wall Street pushed higher over the day.
The latest weekly capital account data recorded strong inflows in the latest week, helped in part by repatriation to Japan, and the net capital flows should help stem yen losses.
Sterling dipped in early Europe on Thursday before edging stronger with consolidation ahead of the interest rate decision.
Following the two-day meeting, the Bank of England announced that interest rates would be cut to 5.50% from 5.75%, the first reduction for two years. In the statement following the cut, the bank stated concerns that credit conditions were undermining growth prospects, although the bank was still uneasy over near-term inflation trends. Sterling weakened to lows below 2.02 against the dollar before recovering back to 2.0270 as the US unit came under pressure. The UK currency weakened back to beyond 0.72 against the Euro.
Markets continued to price in further rate cuts for the first quarter of 2008 on expectations that the economy will continue to slow. Markets will now look at evidence on consumer spending and housing tends over the next few weeks to assess whether there will need to be a further cut in January. The Libor market reaction will also be watched closely on Friday to assess underlying stresses.
Industrial production rose 0.4% in October while there was a 0.3% increase in manufacturing output which will not have a major impact.
The Swiss currency weakened to lows around 1.1350 against the dollar on Thursday before regaining 1.13 as the US currency slipped. The franc continued to fluctuate around the 1.65 level with overall net losses as global stock prices rallied.
A slight easing of risk aversion will tend to curb immediate franc demand, although underlying caution is still likely to prevail which will prevent strong selling pressure on the Swiss currency.
Domestically, the seasonally-adjusted unemployment rate held steady at 2.6% for November and confidence in the economy should remain firm.
The Australian dollar found support below the 0.87 level against the US dollar on Thursday and edged higher to 0.8770 in US trading with the currency gaining support from wider US currency weakness.
The domestic influences were limited with the Australian currency gaining support from a general improvement in global risk conditions. Firm US employment evidence and a rally in stock markets helped underpin the Australian currency while it was also pulled higher by gains in the New Zealand dollar. Overall caution is liable to persist which will limit the scope for currency gains.