by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar found support close to 1.4775 against the Euro in Asian trading on Friday and strengthened to around 1.47 ahead of the US open. There were no data releases during the day and there was some consolidation after wild swings during the current week. The Euro edged weaker to 1.4675 in New York as Wall Street drifted lower.
Although markets are still expecting another reduction at the scheduled Fed meeting next week, there was some further slight adjustment of interest rate expectations during Friday. Markets are not expecting a further 0.75% reduction in rates and the chances of a further 0.50% cut fell to below 50%.
There is the possibility that expectations will shift slightly further next week which will provide some dollar support and the impact could be magnified by the Wall Street reaction. Reduced expectations of further rate cuts would tend to weaken US stocks which would provide some defensive dollar support. Trading conditions will, however, remain choppy in the short term as uncertainty will remain a key feature and the dollar’s yield support is still weaker.
There were further tough comments from ECB member Weber on Friday which will tend to provide some support to the Euro with the ECB stating that there was no discussion of a rate cut at the last ECB meeting. There is, however, the growing risk of divisions within the bank’s council as economic performances are liable to diverge.
Global stock markets continued to rally in Asian trading on Friday and this helped push the yen weaker to around 107.50 in early Europe. A sustained dollar move above 107.30 would improve the technical outlook for the US currency, but the dollar was struggling to hold this level in US trading.
As well as the global stock market trends, the US bond insurance companies remained an important background influence. Further suggestions that one of the leading companies, Ambac, could be taken over reduced market fears over a contagion effect and this dampened yen buying. Confidence will still be fragile in the short term and any fresh contagion would strengthen the yen again.
The Japanese core consumer prices index rose 0.8% in the year to December which was above expectations, but the market impact was limited as the Bank of Japan is not considering an interest rate increase at this stage. Global levels of risk aversion will tend to remain the dominant short-term focus for the Japanese currency.
Sterling retained a firmer tone in global markets on Friday. The UK currency advanced to highs near 1.9850 against the Euro and strengthened towards 0.74 against the Euro before drifting weaker later in New York.
There were no significant domestic developments during the day with the recovery in risk appetite providing some support to the UK currency.
A substantial UK deterioration has also already been priced in while there have been increased concerns over the US and Euro-zone conditions. In this environment, the relative UK prospects have improved slightly. Underlying confidence in the UK economy and currency will still be fragile which will curb buying support.
The Swiss franc weakened back to lows beyond 1.61 and 1.0950 against the Euro and dollar respectively in Europe on Friday. Risk tolerances improved and this helped lessen immediate demand for the Swiss currency. The franc was also still technically overbought after the recent strong gains.
The franc moves are likely to remain dominated by degrees of risk aversion in the short term and the currency pared losses as Wall Street drifted lower after early gains.
National Bank President Roth stated that the recent franc gains were welcome and a natural result of rising risk aversion. The bank’s stance will provide some underlying currency support.
Source: VantagePoint Software, Market Technologies, LLC
The Australian currency pushed to highs around 0.8850 in local trading on Friday. The Australian dollar is still gaining support from speculation that the Reserve Bank will increase interest rates in February.
Risk tolerances will remain a crucial factor in the short term and the Australian dollar will gain further support if there is a sustained rally in stock market prices, although this is by no means certain with high volatility liable to continue. The sensitively to equity markets was illustrated by a retreat back to 0.88 in New York as stock markets drifted weaker.