by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The Euro was unable to regain the 1.46 level in early Asian trading on Monday and weakened sharply to lows near 1.4450 in mid session. The Euro was unable to secure more than a limited corrective recovery and fell for the fifth successive day. Volume was light in North American trading with US markets closed for the Martin Luther King holiday.
European equity markets were subjected to heavy selling pressure on Monday with average losses of over 5% and this provided strong support to the dollar on defensive grounds. The net impact of an unwinding of carry trades was also positive for the US currency as short positions were reduced.
There has been a significant shift in confidence in the Euro-zone economy over the past few days with increased fears that US conditions will help trigger a sharp slowdown in Europe. ECB member Wellink stated on Monday that the economy may slow by more than expected which reinforced reduced confidence in the Euro-zone economy, although financial markets were the main focus.
There will continue to be serious fears over the US economy which will certainly curb underlying enthusiasm for the US dollar, with the dollar dependent to a considerable extent on defensive support. Any rally in global stock markets would also tend to weaken the dollar.
The yen retained a strong tone in Asian trading on Monday and strengthened to test highs beyond 106.0 against the dollar which was the weakest dollar level since 2005. The Japanese currency also gained increased support against the Euro with a move to 5-month highs beyond 153.0 in volatile trading.
The Nikkei index weakened sharply on Monday which will increase the potential for capital repatriation flows back to Japan and these flows will also continue to underpin the yen. Elevated risk aversion in global markets should continue to support the currency in the near term as fear remains the dominant market factor.
The attitude of Japanese investors will continue to have an important yen impact. Underlying caution over the global economy should provide firm support as yen moves remain correlated with trends in international stock markets.
Sterling weakened against the dollar on Monday with lows near the 1.9430 level which was a fresh 10-month low for the UK currency. Sterling proved resilient against the Euro as the Euro suffered sharp losses with gains towards 0.7430.
The latest Rightmove house-price survey recorded a further 0.8% drop in asking prices for January, although there were some signs that the market was attempting to stabilise in early 2008. The weak mortgage approvals data and higher than expected government borrowing will reinforce negative sentiment towards the economy.
The consumer spending and housing evidence will maintain pressure for the Bank of England to cut interest rates again in the near term and this will undermine Sterling support. The stronger money-supply growth for December will cause some inflation concerns within the bank, but a rate cut is still likely to be sanctioned given the growth fears.
Conditions will be volatile given fluctuating confidence in the major economies with increased Euro-zone fears providing some further net support to Sterling.
The franc continued to gain firm support on Monday with gains to beyond 1.60 against the Euro. The Swiss currency also resisted selling pressure against the dollar, although it did retreat towards 1.11 in late Europe.
Levels of risk aversion remained the dominant market influence with the Swiss currency gaining strong support as global equity markets weakened sharply. While negative sentiment persists, the franc will continue to gain firm support.
The Australian dollar weakened further in local trading with lows near 0.8730. The currency was undermined to some extent by a lower than expected 0.6% increase for fourth-quarter producer prices, although the consumer inflation data on Wednesday will be much more important for interest rate expectations.
The extent of global risk aversion is still the dominant short-term influence and a sharp drop in Asian stock markets pushed the currency weaker. In the current environment of elevated risk aversion, the local currency will struggle to make much headway. A continued downturn in global stock markets pushed the Australian dollar to lows near 0.86 against the US currency later on Monday.