by Darrell Jobman, Editor-in-Chief TraderPlanet.com
EUR/US$
The dollar pushed to 11-week highs near 1.3260 against the Euro on Wednesday. Subsequently, the dollar retreated and consolidated near 1.33 despite firm US figures.
The US retail sales data was stronger than expected with a 1.4% monthly increase for May after a revised 0.1% dip in April while there was a 1.3% underlying increase. Sales were elevated by strong gasoline sales, but underlying demand was also still firm.
The Fed’s Beige Book reported that commercial real-estate was generally strengthening, but there was still weakness in the residential sector. The evidence of tight labour markets was offset by the fact that pricing pressures were contained.
There was high volatility in US Treasury markets on Wednesday with a sharp initial increase in yields to near 5.3% for 10-year bonds reversed later in US trading. Yields have still increased strongly over the past few weeks which will provide significant dollar support, especially as spreads over German bunds remain higher.
Higher interest rates will also cause renewed stresses in the US housing sector which is likely to curb strong dollar buying support. There is also the potential for central bank US currency selling at elevated levels which will toughen dollar resistance levels.
Yen
The yen remained under some pressure on Wednesday on yield plays and dipped to near 122.60 against the dollar in US trade, the weakest since December 2002. The yen was also unable to sustain gains beyond 162.0 against the Euro.
In its semi-annual report, the US Treasury declined to call China a currency manipulator, although the report did call strongly on China to amend its exchange rate policies and allow faster yuan appreciation. The immediate market impact was limited and the yen was undermined by reported Far East central bank buying of US Treasuries.
The Japanese current account surplus rose to JPY1.99trn in April, an annual increase of over 50%, which reinforces the fact that the yen will gain strongly if there is a drop in capital outflows from Japan.
Sterling
Sterling weakened after the Wednesday UK data, but found support below the 1.97 level against the dollar and pushed back to 1.9730 in US trade. The UK currency held firm against the Euro.
Headline earnings growth fell sharply to 4.0% in April from 4.5% the previous month while the underlying earnings figure dipped slightly to 3.6% from 3.7%. The level of unemployment on the official measure continued to fall which suggests the labour market is still firm The subdued earnings data, however, will dampen expectations that further aggressive interest rates will be required to curb earnings growth and inflation.
There is likely to be reduced speculation over a rise in interest rates to the 6.0% level which will tend to undermine the UK currency given the tightening already priced in. The effect will be magnified if there is a weak retail sales report on Thursday.
Global carry trades will still need to be watched closely. Although Sterling has proved resilient so far, overall volatility levels are liable to increase with the currency vulnerable on a sustained decline in global stock markets.
Swiss franc
The Swiss currency was unable to make significant headway against the Euro on Wednesday, trapped weaker than 1.65, and also weakened to lows beyond 1.2460 against the dollar before a modest recovery.
The National Bank will announce its latest interest rate decision on Thursday and the most likely outcome is a further 0.25% increase to 2.50%. The Swiss currency will weaken if the bank hints that rates will not be increased again in September, while the franc will gain support if there is a very tough statement or a 0.5% rate increase.
The inflation forecasts will also be watched closely and a higher forecast for 2007 would tend to support the currency as it would suggest further tightening. Given the recent franc weakness, the bank is likely to maintain a firm policy stance.
Australian dollar
The Australian dollar was trading close to 0.84 against the dollar in local trading on Wednesday. The currency dipped to near 0.8350 in early US trade before a recovery to around 0.84.
Comments from Reserve Bank Governor Stevens will be watched closely on Thursday. Suggestions that rates will increase again will support the Australian dollar, but it will be difficult to secure strong buying given the rise in US yields and the chances of an Australian rate increase already priced in. Any sustained decline in global stock markets would also tend to be a negative influence on the Australian dollar.
