by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar was unable to break resistance levels close to 1.4660 against the Euro on Monday and weakened back to lows around 1.4790 in early US trade. The US currency struggled to find positive trends amid a continuing lack of yield support.
US new home sales fell further in December to an annual rate of 604,000 from a revised 634,000 the previous month which was a fresh 15-year low for sales. Prices were lower for the month while there was a small increase in inventories. This combination will increase fears that the housing sector has not bottomed out which will undermine confidence.
In this environment, markets will continue to expect further interest rate cuts from the US Federal Reserve at this week’s meeting, especially if there are no hints from Fed officials to discourage such market speculation. Markets on Monday, increased the chances of a 0.50% rate cut to around 75%.
Euro-zone money supply growth slowed to an annual rate of 11.5% in December from 12.3% previously which may provide some degree of relief within the ECB, although the growth rate is still very high in historic terms.
In comments on Monday, Bank of Franc Governor Noyer stated that the US sub-prime difficulties would slow the European economy. The Euro will be vulnerable to more sustained selling pressure if the Euro-zone data deteriorates further. Global growth doubts will continue to provide some dollar protection.
After finding support on Friday as Wall Street weakened, the Japanese currency advanced in Asian trading on Monday. The yen gained support from renewed selling pressure in regional stock markets with the Nikkei index falling by around 4.0%. The yen also gained support on the major crosses as risk tolerances remained lower.
The impact was magnified by a sharp fall in Chinese equity prices which fuelled unease over global economic trends. There has been a further unwinding of carry trades while there has also been further evidence that hedge funds are moving into the yen. The Japanese currency was, however, unable to strengthen through the 106.0 level and weakened in Europe as stock markets rallied.
Comments from Japanese officials will be watched very closely if the yen pushes towards the 105.0 high against the dollar seen last week, although the overall evidence suggests that yen buying support is slightly weaker at this stage.
Sterling dipped sharply in Asian trading on Monday, but found support around 1.9730 against the dollar and regained the 1.98 level as dollar sentiment remained weak The UK currency was unable to hold levels to near 0.74 against the Euro.
Underlying concerns over the UK property sector and economy were illustrated by a further 0.3% drop in house prices according to the latest Hometrack survey. This was the fourth consecutive decline and cut the annual increase to a 20-month low of 2.3%.
There was also a negative economic survey from accountancy firm Deloitte while MPC member Blanchflower reiterated his call for a further cut in interest rates to offset restrictive conditions. His opinion will come as no surprise given that he voted for a cut at January’s meeting, but there will be a risk that overall confidence will deteriorate further with the Bank of England under pressure to cut rates more aggressively.
The dollar was unable to sustain gains above 1.0950 against the franc on Monday and weakened to test support levels below the 1.09 level in US trading as the dollar was subjected to wider selling pressure. The franc found good support weaker than 1.61 against the Euro.
Global growth fears remained an important market focus and the lack of confidence in major economies provided support to the Swiss currency.
The trade and consumption indicators should not have a major impact on Tuesday, although evidence of weak demand and faltering exports would be negative for the franc.
The Australian dollar drifted back towards 0.88 in local trading on Monday, although selling pressure was contained. The Australian currency came under pressure as stock prices fell sharply, although the currency was more resilient than seen in the first half of last week.
The domestic influences were limited with the Australian dollar still gaining support from speculation over a February interest rate increase. While fears over global growth conditions persist, the currency will still find it difficult to make much headway.