by Darrell Jobman, Editor-in-Chief TaderPlanet.com
The US currency is still being unsettled by sub-prime concerns and sentiment will remain very fragile ahead of the housing data later this week. There is, however, some evidence of increased commercial demand for the US currency which will help underpin the dollar if confidence in the economy stabilises on solid data.
Investors will assess the degree of US Treasury tolerance towards the dollar depreciation and any absence of supportive comments would reinforce speculation that the authorities will condone a weaker US currency. Markets will also still need to be on alert for exchange rate protests from European officials with the French trade minister issuing a mild warning over Euro strength during Monday.
There will also be property concerns surrounding the Euro-zone economy. The downgrading of some European sub-prime mortgage related bonds will also undermine confidence in the Euro to some extent.
The latest IMM data indicated that long Euro positions remain close to the 100,000 level which could magnify the extent of any Euro correction weaker.
Yen volatility increased in Asian trading on Monday with temporary lows near 122.0 before a sharp recovery to 120.90 in choppy trading. The yen settled close to 121.20 in US trading as Wall Street advanced with yen movements still influenced strongly by movements in global stock markets.
As far as Japanese interest rates are concerned, the governing coalition is still behind in opinion polls for the July 29 Upper-House elections. This will raise some speculation that the Bank of Japan will come under pressure not to increase interest rates in August. Global asset price trends are still liable to remain the dominant influence in the short term.
The latest data indicated that the number of short IMM speculative positions remained very high at above 125,000 contracts which will maintain the risk of yen corrections stronger.
Sterling pushed to highs just above the 2.06 level against the dollar in early Europe on Monday before consolidating close to 2.0575 later in US trading. The UK currency strengthened to 0.6705 against the Euro as sentiment remained strong.
The latest Rightmove house-price index recorded a 0.3% increase in July, the slowest increase for 2007, with the annual increase slowing to 10.2% from 13.2% previously. The underlying slowdown in the consumer and housing sectors is likely to continue in the short term. At this stage, markets are still looking for UK interest rates to increase to at least 6.0% which will tend to support the UK currency.
Nevertheless, peak rate expectations are liable to be scaled back within the next few weeks which would increase the risk of a sharp adjustment in Sterling given that the recent gains have increasingly been led by speculative demand.
The Swiss currency lost support close to 1.66 against the Euro on Monday and dipped to lows around 1.6650. The franc also weakened to lows around 1.2070 against the dollar.
There was some recovery in risk appetite during the day which undermined the Swiss currency. Wall Street managed to rally following merger-related announcements and this helped underpin global markets, especially as oil prices retreated.
There is no significant Swiss data until the Friday KOF leading indicator, but markets will need to be on high alert for protests against currency weakness from Swiss National Bank officials.
The overall trend has been for further Australian dollar appreciation, especially as the US currency has remained under pressure. The Australian strengthened to 0.8830 in early Europe on Monday with a peak close to 0.8840 later in US trade. Second-quarter producer prices rose slightly more than expected with a 1.0% increase, although the Wednesday consumer prices data will be crucial for near-term interest rate expectations.
The Australian dollar will continue to gain near-term support from high metals prices particularly while interest in high-yield currencies continues. Rising risk aversion will still represent an important risk to the currency, especially with speculative long Australian dollar positions at elevated levels.