by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar was unable to make any headway beyond the 1.46 level against the Euro on Thursday and weakened steadily to lows around 1.4775.
The US data was mixed and did not have a major impact in isolation. Jobless claims were again lower than expected at 301,000 in the latest week from a revised 302,000 previously. Existing home sales fell by 2.2% to an annual rate of 4.89mn, although prices were little changed and inventories fell back to below 10 months supply.
Risk aversion eased during the day as stock markets rallied strongly and this removed an important defensive prop for the US currency as capital inflows diminished. The easing of tensions also allowed a greater focus on the dramatic loss of dollar yield support. Although futures markets moved to reduce expectations of a further 0.75% rate cut next week, markets are still expecting a further reduction in rates by the Fed.
The German IFO index rose slightly to 103.4 in January from 103.0 the previous month which will ease immediate economic fears to some extent, although underlying confidence will remain fragile. The fraud at French bank SocGen did not have a significant Euro impact.
ECB comments will continue to be watched very closely in the short term. On Thursday, bank member Weber stated that the bank would maintain a tough stance on inflation which dampened immediate expectations that the bank would look to cut rates. Comments were, however, still mixed as the Spanish Finance Minister suggested that there was a debate within the bank over whether rates should be cut.
The yen was unable to make a further challenge on 105.0 resistance against the dollar and gradually weakened over the day with lows near 107.0 in US trading.
A recovery in stock markets dampened immediate demand for the Japanese currency. Any credible support package for the US bond insurance companies would improve market confidence which would also dampen yen buying.
Comments from Japanese officials will continue to be monitored very closely and there were no significant protests against yen levels on Thursday. A high degree of market uncertainty should still also curb heavy selling pressure on the Japanese currency.
The trade surplus fell 20% in the year to November while the monthly business confidence index fell to a two-year low which is a negative factor for the economy and currency, but attention is likely to remain fixed on global growth and stock market trends.
Sterling edged marginally stronger against the Euro on Thursday and strengthened steadily against the dollar with highs near 1.9780, which was the strongest level for a week. An easing of risk aversion helped support he UK currency, but sentiment was still fragile.
The latest BBA mortgage approvals data recorded a decline to 42,100 in December from a revised 43,900 the previous month. The drop to a 10-year low is consistent with a sharp slowdown in the housing sector which will maintain a lack of confidence in the economy.
Despite the inflation warnings, there is a strong probability that the Bank of England will cut interest rates in February, but markets will be concerned that inflation fears will prevent the bank from cutting rates fast enough to prevent a serious deterioration in the economy.
The Swiss currency eased against the Euro on Thursday with a move back to just beyond 1.60. The franc was able to resist losses against the dollar and was challenging levels close to record highs around 1.0850 in New York.
Immediate demand for the Swiss currency was lessened by the sharp recovery in European stock markets and reduced speculation over a near-term interest rate cut by the ECB.
National Bank President Roth stated that he was still generally optimistic over the economic prospects, while he also stated that there was no urgent need to act on interest rates. There was no suggestion that rates were likely to be reduced in the short term.
Source: VantagePoint Software, Market Technologies, LLC
The Australian dollar pushed to highs near 0.8750 and was holding above the 0.87 level in early Europe on Thursday. There were no significant domestic developments and markets were still pricing in a 60% chance that the Reserve Bank will increase interest rates in February. The bank is, however, in a very difficult position as a rate hike would be dangerous in current circumstances.
Global risk conditions will remain very important for Australian dollar and a recovery in markets allowed gains to just above 0.88 in US trade. Overall volatility levels are liable to remain higher in the short term.