by Darrell Jobman, Editor-in-Chief TraderPlanet
The dollar failed to sustain an advance seen in early Europe on Tuesday and dipped to lows around 1.4920 after the US data. The Euro was also unable to sustain the gains and weakened back to 1.4830 in US trading as the Euro came under significant pressure on the crosses.
US retail sales data recorded a 0.4% decline in December after a revised 1.0% increase the previous month while underlying sales also fell by 0.4% over the month. The data will reinforce expectations of a significant slowdown in consumer spending and maintain recession fears, although the impact should be measured as a weak December figure was highly likely after a very robust figure for November.
Elsewhere, producer prices fell 0.1% for the month with a core 0.2% rise while the New York Empire index fell to 9.0 in January from 9.8 previously. The 2007producer price index was still at a 25-year high and there will be further inflation concerns if there is an elevated CPI reading on Wednesday. Markets will still be expecting an aggressive stance from the US Federal Reserve on interest rates, although much of this easing should be priced in.
Unease over the financial sector was reinforced by Citigroup’s US$18bn in debt write-offs while the main US stock market indices weakened sharply.
The German ZEW index weakened further to -41.6 in January from -37.2 in December which will reinforce expectations that the Euro-zone economy is slowing significantly. ECB member Weber stated that there were upside inflation risks, but he also stated that the growth risks were tilted to the downside and the overall comments were not as strong as has been seen over the past few weeks.
This caution, allied with cautious comments from Trichet on Monday, will increase speculation that the ECB will be unable to increase interest rates.
The Japanese currency strengthened back to 107.40 in early Europe on Tuesday as defensive currency demand increased.
Weaker stock markets will reinforce short-term fears over growth and financial market conditions which will help support the yen. There were also some reports of capital repatriation following the Nikkei drop below the 14,000 level.
The yen pushed to a high of 106.65 after the US data as Wall Street dipped sharply before settling close to the 107.0 level.
Bank of Japan Governor Fukui stated on Tuesday that the Japanese economy was slowing while the sub-prime fears appeared to have increased. The central bank comments and its downgrading of the overall economic assessment will reinforce a lack of confidence in the Japanese economy. International risk conditions are still liable to dominate in the short term.
Sterling found support close to the 0.76 level against the Euro and strengthened to 0.7540 in US trade as the Euro was subjected to profit taking. The UK currency also pushed to highs near 1.9740 against the dollar before drifting lower to 1.9650.
Headline UK consumer inflation was unchanged at 2.1% in December compared with expectations of a small decline to 2.0% while the core rate was unchanged at 1.4%. The inflation data should not have a major impact on interest rate expectations with markets still expecting that the bank will have scope to lower interest rates in February as growth risks take priority.
Sterling will also be influenced by levels of risk aversion with the UK currency tending to weaken when equity markets are subjected to downward pressure.
The franc continued to make strong headway on Tuesday, strengthening to five-month highs against the Euro beyond 1.62. The Swiss currency also strengthened to all-time highs against the dollar in early New York.
The franc continued to gain support on defensive grounds as there was further evidence of carry trade unwinding. The sharp falls on most global stock markets also pushed the Swiss currency stronger.
National Bank member Jordan warned that the Swiss economy would be affected by the credit difficulties and the remarks helped trigger a slight correction weaker for the franc.
The Australian dollar probed resistance levels above the 0.90 level in local trading on Tuesday. There were no significant domestic developments with the Australian currency still supported by underlying yield considerations while high gold prices also provided support.
The local economy has been very resilient over the past few months, but there will still be major Australian dollar risks from a deterioration in the global economic conditions. These fears were increased by a drop in global stocks and metals prices in New York with the Australian dollar weakening quickly to 0.8880 in US trade.