by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The Euro strengthened to highs near 1.4580 against the dollar on Monday, but was unable to sustain the gains and weakened back to test lows below 1.45. Neither currency was able to break any major technical levels during the day with the Euro consolidating just above 1.45.
ECB President Trichet attempted to play down the prospects of an early interest rate cut in comments over the weekend. He stated that there had been no calls for a rate cut at the recent meeting while bank member Weber also reiterated that there were still important inflation concerns. The remarks provided some Euro support, although underling risk factors were also very important.
Risk aversion remained generally high on Monday with the I-Traxx crossover index, for example, rising to the highest level on record. This triggered some additional defensive demand for the US dollar during the day and also tended to weaken the Euro.
There were specific fears surrounding the European banking sector which undermined the Euro. A series of bank results are due later in the week and fresh debt write-downs would undermine confidence.
There were no major US developments with markets waiting for the retail sales data on Wednesday and Bernanke’s testimony on Thursday. Weak data would test the dollar’s resilience to bad economic news, especially given the importance of consumer spending.
Japanese markets were closed for a holiday on Monday which stifled activity. The latest speculative IMM data continued to indicate a sizeable long yen position which will limit the scope for renewed gains for the Japanese currency.
At the weekend G7 meetings, there were no major comments on exchange rates with members concentrating on the global credit risks. The lack of comment will tend to undermine near-term yen support to some extent, although the impact should be measured with markets also focussing on the global economic conditions.
The dollar was again unable to sustain gains above the 107.30 level against the yen and dipped to lows near 106.20 as the Japanese currency secured fresh support before recovering to 106.80.
Levels of risk aversion remained high which provided important yen support, especially with unease over the European financial sector.
Sterling dipped to lows near 1.94 against the dollar and beyond 0.75 against the Euro in early Europe on Monday.
The producer prices data was much stronger than expected with output prices rising 1.0% for January while input prices rose 2.6% over the month with an annual increase of close to 20%. The strong data, in isolation, will reinforce Bank of England unease over inflation trends. If there is a rise in the consumer inflation rate and more serious inflation warnings in the quarterly inflation report, inflation fears will be amplified and the Bank of England will continue to oppose rapid cuts in interest rates.
Sterling recovered after the PPI data with gains to 0.7440 against the Euro while the UK currency also challenged levels above 1.95 against the dollar.
The monthly visible trade deficit for December was slightly above expectations at GBP7.6bn from a revised GBP7.9bn the previous month. The data did not have a major impact, but was not positive influence for the UK currency. The deficit is at worrying levels and there were declines in both exports and imports.
The Swiss franc strengthened to 1.5950 against the Euro on Monday, but was again unable to sustain the gains and weakened back towards 1.60 in US trading. The US dollar also recovered to highs near 1.1050 against the dollar as technical levels were tested.
Risk aversion remained generally high during the day and this will provide important support to the Swiss currency. The franc has, however, found it difficult to sustain the gains even though fears remained at elevated levels and this suggests that underlying franc demand may have eased to some extent.
The local currency pushed higher on Monday following the Reserve Bank monetary statement. The central bank stated that Australia continues to face inflationary pressures and this will reinforce expectations that there will be further interest rate increases. Yield support will, therefore, remain strong in the short term and the Australian dollar challenged levels above the 0.90 level.
The Australian currency will still be vulnerable due to concerns over the global economy and this will curb buying support, especially if commodity prices weaken.