by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar found support close to 1.3440 against the dollar and strengthened to highs around 1.3385 after the German data. The US currency failed to hold the gains and retreated back to 1.3425 later in US trading.
US housing starts fell 2.1% in May from the previous month to an annual rate of 1.47mn while permits rose to 1.50mn over the month. The data suggests the potential for stabilisation in the housing sector as inventories have been reduced. In this context, the rise in permits is an encouraging sign, but there is little scope for a sharp recovery given the underlying stresses. The short-term impact on interest rates and the dollar should be limited.
The German ZEW index fell to 20.3 in June from 24.0 the previous month, the first decline recorded for the current year. The current conditions component edged higher, but there will be some speculation that the German economy is starting to slow. The IFO survey will, therefore, be watched closely on Friday for further Euro-zone evidence.
There is no major US economic data until Thursday and this will reinforce the potential impact of cross trading and carry trades. Market interest in buying carry trades on significant retreats will lessen the potential for dollar gains.
The yen found some support weaker than 123.50 against the dollar and strengthened back to 123.35 in US trade, although the yen was still struggling to make any significant headway. There were no significant domestic economic developments with markets still focussed strongly on carry trades.
Japanese Finance Minister Omi warned stated that the authorities were watching the currency markets closely which was a stronger statement than usual, although there is no evidence that they will consider more aggressive measures such as intervention. Markets will still need to be on alert for a more concerted and co-ordinated approach from G8 officials to curb excessive risk taking via stronger warnings over the threat of a market reversal.
Carry trades will tend to remain dominant in the short term and markets will continue to look to invest in high-yield securities which will tend to undermine the yen. The underlying complacency over risk conditions is still a highly dangerous market factor with the potential threat of a sharp correction and a reversal in carry trades.
Sterling resisted a decline below the 1.98 level against the dollar during Tuesday and strengthened to 1.9890 in US trade with Sterling also edging stronger against the Euro.
The Bank of England minutes from June’s meeting will be watched closely on Wednesday to assess the possibility of a further near-term increase in interest rates. Sterling will gain some support if there was a split decision with at least two votes for an immediate rate increase as this would increase the potential for a July rate increase.
A more measured stance over inflation would curb speculation over a further near-term advance and would undermine Sterling, especially given the rate increases already priced in. Given the expectations of a tough stance, Sterling will find it difficult to secure strong progress after the minutes.
The Swiss currency found support near 1.6660 against the Euro on Tuesday and strengthened back to 1.6625, although the recovery was generally unconvincing. The franc held close to 1.24 against the dollar.
Carry trades remained the dominant market factor and, while interest in carry trades remains so strong, there will be further interest in selling the franc on any significant rallies.
There is the potential for more aggressive warnings over currency weakness from National Bank officials which will tend to curb selling aggressive franc selling.
The Swiss currency will need an increase in risk aversion to sustain gains and volatility levels are liable to increase further in the short term.
The Australian dollar resisted a further challenge on levels around 0.84 against the US currency and strengthened to highs around 0.8465 in US trading.
The global interest in carry trades and yen selling will remain very important in the short term with further Australian dollar buying support from Japanese investors. There will be the threat of rising market volatility as global capital flows are liable to be increasingly unstable.
Expectations over a further rise in domestic interest rates will also remain slightly lower which will curb buying support.