by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar drifted close to the 1.46 level against the dollar ahead of the US retail sales release on Wednesday. The US currency pushed to highs around 1.4530 in New York before weakening back to around 1.4580 as there were conflicting pressures on the currency.
Headline retail sales rose 0.3% in January compared to expectations of a small decline while there was also a 0.3% underlying increase in sales for the month. Gasoline sales were strong, but there was further weakness in building materials sales. The data will help ease immediate fears over recession conditions and may dampen expectations of further aggressive Fed action to support the economy.
In this context, comments from Fed Chairman Bernanke will be watched very closely on Thursday for further evidence on the Fed’s attitude towards monetary policy.
Although positive economic news should provide some dollar support, the data will also help ease risk aversion to some extent. This will tend to lessen defensive demand and will, therefore, have a mixed impact on the US currency.
Euro-zone industrial production fell 0.2% in December with the year-on-year increase dropping to 1.3%. The slowdown will reinforce expectations of a sharp slowdown in growth and will also tend to keep the Euro on the defensive.
The yen strengthened slightly to near 107.00 against the dollar in early Europe on Wednesday with some buying against the Australian dollar.
The Japanese data recorded the same unsettling mix recorded in most major economies with weaker growth and higher inflation. Consumer confidence fell to a four-year low while wholesale inflation was at a 27-year high in the latest releases. Sentiment towards the Japanese economy will remain fragile, but the yen will still make headway if there is a renewed increase in credit fears.
Risk tolerances as a whole, however, improved over Wednesday and this pushed the Japanese currency weaker. The stronger than expected US retail sales data also helped support risk appetite and the yen tested levels beyond 108.25 against the dollar.
The UK currency drifted slightly weaker in Asian trading on Wednesday, but held above 1.9550 against the dollar.
The RICS house price index recorded a further decline to -54.7% in January from -49.1% previously which was the weakest figure since 1992 and underlying components in the report were also depressed.
There was a further 10,800 decline in the jobless claimant count for January which will provide some relief over employment trends and help support sentiment, although the impact should be limited.
In its quarterly report, the Bank of England warned that inflation was set to rise sharply to around the 3.0% level over the next few months. The report also stated that inflation was likely to be above the 2.0% target on a two-year view if interest rates were reduced in line with market expectations. This implies that the bank will want to cut rates more cautiously than the 0.75% of cuts priced in to the futures markets for the remainder of 2008.
The bank, however, was generally downbeat over growth prospects with a warning that the economy was set to slow. Concerns over the economic outlook will limit any Sterling support from any adjustment in interest rate expectations. This will be particularly important if near-term housing evidence remains depressed as there will be speculation that the bank will have to move more aggressively to underpin growth.
The UK currency was generally stronger over the day with highs around 1.9650 against the dollar and 0.7415 against the Euro.
The Swiss franc weakened to near 1.6150 against the Euro on Wednesday and also dipped to lows near 1.11 against the US dollar on widespread selling.
Short-term franc demand was undermined by an improvement in risk aversion even though equity market gains were subdued. There was greater confidence that global central banks would be able to avoid recession.
Reduced confidence in aggressive interest rate cuts by European central banks also lessened immediate demand for the Swiss currency, but choppy trading conditions are liable to persist.
The Australian dollar was unable to make a challenge on the 0.91 level against the US dollar on Tuesday and drifted slightly weaker. Domestically, there was a decline in consumer confidence, but the Australian dollar yield support will remain strong which will provide support.
The international risk factors will continue to be a key influence and fears over a more debilitating downturn will limit Australian dollar buying support. The currency weakened significantly to test support levels below 0.8950 in US trading even though risk tolerances were generally stronger.