by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The Euro found support close to the 1.45 level against the dollar and pushed higher over the day.The latest German ZEW survey recorded a slight recovery to -39.5 in February from -41.6 the previous month. Although underlying concerns will continue, especially in view of persistent weakness in the retail sector, the ZEW data eased immediate fears and helped support the Euro.
US investor Buffett announced that he had formulated a pan to help underpin the US bond insurers by effectively taking on some of their liabilities. Although the plans had not been accepted at this stage, risk aversion levels eased and this lessened short-term defensive demand for the US currency. With the Euro also firmer, the dollar retreated to lows beyond 1.46 before consolidating around 1.4585.
The latest US retail sales data will be watched closely on Wednesday for further evidence on economic trends. A weak set of data would reinforce recession fears, although markets will be wary of a counter-intuitive response as poor data would also increase global risk aversion which would tend to support the dollar.
Underlying levels of risk aversion remained high in Asia which provided yen support, especially with unease over the European financial sector. There was, however, evidence that low-yield currencies were being sold on rallies and fear tended to ease in US trading as equity markets attempted to rally.
The potential Buffett support package for the US bond insurers also boosted risk tolerances which undermined near-term demand for the Japanese currency. The yen weakened back to beyond the 107.0 level against the dollar even though the US currency was generally weak.
There will be some caution ahead of the Bank of Japan policy meeting on Friday. No change in interest rates is likely, but the comments on the economy will be watched closely.
The latest BRC retail sales survey recorded an annual like-for-like increase of 2.6% for January which was the highest for five months after 0.3% previously. Heavy discounting boosted sales initially and demand faded later in the month, but the data will provide some immediate relief over spending trends. The data helped provide a firm tone to Sterling in Asian trading on Tuesday with a move to 1.95.
Consumer prices fell 0.7% in January and this held the annual inflation rate to 2.2% from 2.1% the previous month and compared with expectations of a 2.3% rate. The core consumer inflation rate also fell to 1.3% from 1.4% previously. The core retail prices index was higher than expected at 3.4% with a headline rate of 4.1% and there will still be important underlying inflation fears.
The Bank of England inflation report will be watched closely on Wednesday for further evidence on the bank’s expectations. Expectations of sharply higher inflation would dampen expectations of further near-term interest rate cuts.
Despite initial selling, Sterling proved resilient during the day as equity prices rallied and pushed to new highs above 1.96 against the dollar. The UK currency also recovered to 0.7440 against the Euro.
The Swiss franc secured a slight advance against the dollar during Tuesday, although movement was subdued as the franc moves were dampened by weakness on the major crosses. The franc settled close to 1.10 against the US currency in New York.
Overall risk aversion eased during the day which curbed short-term demand for the Swiss currency and the franc edged weaker to 1.6070 against the Euro.
A credible plan to support US bond insurers would tend to weaken the franc, although major caution will continue.
The Australian dollar has consolidated above the 0.90 level against the US dollar over the past 24 hours. The currency is still gaining support on yield grounds, especially as markets are expecting the Reserve Bank to increase interest rates again at the March meeting.
The economic data is continuing to show some signs of stress with a significant decline in business confidence according to the latest NAB survey. The Australian dollar will also be vulnerable if there are increased fears over the global economy. These fears will tend to increase if equity markets weaken sharply with volatility liable to increase.