by Darrell Jobman, Editor-in-Chief TraderPlanet.com
EUR/US$
The dollar weakened to lows around 1.3830 against the dollar before a recovery back to 1.3760 in early US trading. The US currency was unable to sustain the gains and weakened back to 1.3810 after Fed Chairman Bernanke’s testimony.
US consumer prices rose 0.2% in June compared with expectations of a 0.1% rise. There was a 0.2% increase in core prices with an annual 2.2% increase. The data suggests steady core price increases, but there will be concerns that renewed increases in energy prices will renew upward pressure on underlying inflation.
Housing starts rose slightly in June to an annual rate of 1.47mn. There was, however, a 7.5% monthly drop in permits to 1.41mn from 1.52mn previously and the permits weakness will maintain fears that the underlying slowdown in housing will persist. There will also be further market fears over the impact of sub-prime mortgage defaults, especially if there are further hedge-fund difficulties.
Fed Chairman Bernanke maintained a similar stance to that seen in recent speeches with inflation still the pre-dominant risk. The Fed revised 2007 and 2008 GDP forecasts slightly lower, but was still confident over firmer growth next year. Bernanke stated that sub-prime conditions have eroded significantly and that the situation was liable to get worse before its gets better. Overall, Bernanke’s comments were slightly weaker than expected and dollar sentiment will remain fragile despite the firm capital inflows data reported on Tuesday.
Yen
The yen was confined to familiar ranges on Wednesday, unable to strengthen through the 121.50 level against the dollar, but finding support close to 122.20.
Levels of risk aversion will continue to have an important impact on the Japanese yen. There has been an increase in credit spreads for mortgage-related instruments while emerging-market spreads have also widened out slightly this week. These trends will tend to lessen near-term demand for carry trades and help protect the Japanese currency from aggressive selling. There will also be the possibility of a more serious escalation in risk aversion which would be likely to trigger more rapid yen gains.
The Bank of Japan minutes from June’s meeting retained the commitment to a gradual tightening of monetary policy. The minutes stated that falling energy prices would help contain inflationary pressure. Since then, oil prices have reversed course which will strengthen the case for a further rate increase.
Sterling
Sterling pushed to highs near 2.0550 against the US dollar in early Europe on Wednesday and, after retreating to 2.0460, the UK currency pushed back to 2.0540 later in US trading. The UK currency edged slightly stronger against the Euro.
The Bank of England voted 6-3 in favour of a July interest rate increase which was in line with expectations. There were no overt calls for a 0.5% increase in rates while the overall tone of the minutes suggested that the MPC would be cautious in pushing for another early increase in rates.
The May earnings data recorded a decline in the annual rate to 3.5% from 4.1% as high bonus increases came out of the annual calculation while the underlying increase also fell to 3.5% from 3.6%. There was a further significant drop in unemployment, but the earnings moderation will offer encouragement to the Bank of England. The net impact should be to lower expectations of a further short-term central bank tightening which will curb Sterling buying.
Swiss franc
The dollar weakened to lows near 1.1960 against the Swiss franc on Wednesday before a recovery back to 1.2040 with the US currency settling close to 1.20. The franc found support close to 1.6580 against the Euro in choppy trading.
Short-term Swiss currency moves will remain strongly correlated with levels of risk aversion, illustrated by the renewed gains on Wednesday as hedge-fund concerns returned. Sustained declines in European stock markets also underpinned the Swiss franc.
The monthly trade data will be released on Thursday and the export performance should be strong which will help support the franc.
Australian dollar
The Australian dollar pushed to highs around 0.8790 against the US currency on Wednesday, a fresh 18-year high for the local currency. The Australian dollar was able to sustain the bulk of the gains in US trading.
Reserve Bank Governor Stevens stated that he was not surprised that the Australian dollar was strong and this helped reinforce positive international sentiment towards the currency.
The Australian dollar was also boosted by a renewed decline in the US currency, especially in Asian trading on Wednesday. Optimism over high-yield currencies will continue in the short term, but a sustained increase in risk aversion would still trigger a sharp correction.
