EUR/US$
The dollar found support close to the 1.3460 level against the Euro on Thursday and strengthened to highs around 1.3415, but was unable to break Euro support close to this level and retreated to 1.3435. The dollar will be at risk of fresh selling pressure if it is again unable to break resistance levels within the next few days.
The US durable goods data recorded a 0.6% increase in orders for April with a solid underlying 1.5% increase for the month. Jobless claims rose to 311,000 in the latest week from a revised 296,000 the previous week which suggests the labour market overall is little changed.
US new home sales were much stronger than expected with a rise to an annual rate of 981,000 in April from a revised 844,000, the biggest monthly increase for 14 years. There was a sharp drop in inventories which will maintain optimism over a recovery, but there was a sharp reported fall in prices. The reduction in prices will increase fears that builders are having to resort to discounting to maintain sales and this will limit any beneficial dollar impact. Markets will look at the existing home sales data on Friday for further evidence on underlying trends with the dollar aiming to take advantage of improved yield spreads if there is a firm reading.
The German IFO index was unchanged at 108.6 in May with companies still optimistic over future trends. Confidence in the Euro-zone economy will remain firm, but the Euro is still vulnerable to an unwinding of positions given the series of interest rate increases already priced in.
Yen
The yen strengthened to 121.25 against the dollar before a retreat back towards 121.50 with the Japanese currency retaining a firmer tone against the Euro.
Warnings from former Fed Chairman Greenspan on Wednesday that the Chinese market is liable to fall sharply did not have a significant impact in Asia. Overall interest in carry trades will persist in the short term, but the underlying situation is still precarious with the risk of a rapid unwinding in carry trades if stock prices fall sharply. Wall Street fell on Thursday and China may, therefore, face a more serious test of confidence on Friday.
The latest capital account data recorded only limited capital outflows from Japan while there were further strong inflows from overseas. The net data recorded a surplus and this will continue to provide some yen protection as it suggests that yen selling is being led by speculative rather than investment funds.
The trade surplus for April was lower than expected at JPY0.93trn, although this did represent an annual increase of over 50%. The overall export performance was strong, notably within Asia, but shipments to the US were weaker. The slowdown in exports to the US will create some caution over letting the yen appreciate strongly against the dollar.
Sterling
Sterling retained a firm tone against the Euro on Thursday with highs near 0.6760. There was further resistance just below 1.99 against the dollar and the UK currency retreated to 1.9850 even though Sterling held generally firm.
The headline CBI survey was little changed in May with a slightly stronger reading for orders. The prices component was strong in the survey which will reinforce fears that companies are able to pass on cost increases. This will ensure that the Bank of England remains on inflation alert.
There was a reported decline in business investment for the first quarter which is a potentially negative factor, but further evidence will be required on growth trends before there is a significant reversal in Sterling sentiment.
Swiss franc
The Swiss franc tested the 1.65 level against the Euro in early Europe on Thursday and, despite a temporary retreat, was testing this level again in US trade. The Swiss currency resisted a drop through 1.23 against the dollar.
Carry trades will remain an important underlying influence on the Swiss currency. The franc will tend to gain support if there is a significant retreat in global equity prices and a wider increase in risk aversion. The Chinese stock market is likely to remain an important short-term focus given its important influence on wider carry trades.
Underlying speculation over a 0.5% National Bank interest rate increase in June will continue to offer important short-term protection.
Australian dollar
The Australian dollar was unable to strengthen above the 0.8240 level and retreated to lows just below 0.82 in US trade on Thursday. There were no significant domestic developments with overseas trends still dominant.
Former Fed Chairman Greenspan’s warnings over the Chinese stock market failed to have a significant impact on Thursday and global interest in carry trades will remain very strong. There is still the potential threat of a sharp reversal in trends. The Australian currency will also be hampered by narrowing interest rate differentials, especially if base metals fall further.
