by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar found support around 1.3635 against the Euro on Tuesday and strengthened to 1.3590 in early US trade. The US currency was unable to break the 1.3580 level and weakened back to 1.3610 in US trade. Market conditions were more subdued with no major data releases and caution ahead of the Wednesday US market holiday.
US pending home sales fell 3.5% in May to give a 13.3% year-on-year decline and this will maintain unease over underlying housing-sector trends. The data continues to suggest that there will be a prolonged downturn in sales as mortgage defaults undermine activity.
There will also be caution ahead of the Friday payroll report given uncertainty over the economy’s direction.
The Euro-zone unemployment rate fell to 7.0% in May from 7.1% the previous month, maintaining generally favourable data. Exchange rate policy will need to be watched closely with the risk of tensions between the ECB and French President Sarkozy. The ECB has rejected calls from Sarkozy that the bank should take a more pro-active stance and weaken the currency to boost exports.
The yen held broadly steady against the dollar, resisting a challenge on the 123.0 level. The Japanese currency weakened to record lows against the Euro before securing a weak correction.
Bank of Japan board member Nishimura stated that the bank should not wait long before raising interest rates and this will reinforce expectations that the bank will increase rates at the August meeting. BOJ member Muto also took a firmer stance on monetary policy in comments on Tuesday. Shinohara has been confirmed as the new top international finance official and there will be further speculation that Japan will be more opposed to currency weakness.
There is a string of European bond redemptions this week and, although there will be expectations that funds will be reinvested overseas, the net flows should provide some yen support. On a short-term view, the Japanese investors will still look to sell the yen on significant rallies.
Sterling resisted further losses against the Euro on Tuesday and also held firm at around 2.0165 against the US dollar.
Interest rate considerations will remain the dominant short-term influence with the UK currency gaining support from expectations that the Bank of England will increase interest rates on Thursday. There was evidence of a tight labour market and there is a greater than 50% chance that the bank will increase rates this week. There is, however, certainly a significant possibility that rates will not be increased and the UK currency will be vulnerable to a sharp downturn if the bank keeps rates on hold.
Sterling buying momentum is liable to fade given the fact that a rate increase has already been priced in with markets reluctant to extend positioning further in favour of the currency. There are also liable to be warnings over sub-prime lending from UK regulators.
The Swiss franc was unable to hold gains beyond 1.65 against the Euro and weakened to lows around 1.6550 after the inflation data. The Swiss currency also weakened back to 1.2160 against the dollar.
Swiss consumer prices rose 0.1% in June with the annual inflation rate rising to 0.6% from 0.5%. The National Bank will still be concerned over the inflation outlook, but the latest data will curb expectations of a more aggressive policy stance by the bank and the need for an interest rate increase before September. The central bank will still be very vigilant and will oppose renewed Swiss franc weakness.
The Swiss currency should gain support on economic risk aversion as global credit conditions gradually tighten. Any evidence of increased stresses within the Euro-zone property sector would provide important franc support.
The Australian dollar was unable to make a fresh challenge on the 0.86 level against the US dollar and weakened to 0.8550, but resisted a more substantial correction.
The Tuesday Australian data was weaker than expected with a 0.7% drop in retail sales for May while the April data was revised to record a 0.3% monthly decline. The weaker than expected sales data dampened expectations of a near-term increase in interest rates and pushed the currency to lows around 0.8550. Doubts over the economic performance will be increased by the 5.6% drop in building approvals for May. There will still be strong short-term interest in buying the currency on dips.