by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar weakened to 1.3470 against the dollar on Tuesday and, despite a temporary move back to 1.3445, the US currency was unable to sustain any headway.
US existing home sales edged weaker to an annual rate of 5.99mn in May from an upwardly-revised 6.01mn the previous month. Inventories also rose further over the month to the highest level sine 1992 while prices increased. This confirms the impression seen last month that sellers are resisting lower prices which is hampering any recovery in sales. The new-homes data released on Tuesday is likely to record a more favourable selling rate and reduced inventories, but with lower prices.
The immediate impact on interest rate expectations and the dollar should be limited with markets remaining cautious ahead of Thursday’s FOMC interest rate decision. Overall yield spreads are still providing support, but confidence in the currency has deteriorated which is curbing dollar buying.
The latest IMM data recorded a drop in long speculative Euro positions and the Euro is therefore less vulnerable to a closing of long positions which will make it difficult for the dollar to secure strong gains. German consumer confidence also strengthened to a 6-month high.
The yen found support close to 124.0 against the dollar and strengthened back to 123.30, but was unable to hold the gains while the yen also surrendered gains against the Euro.
The Japanese currency gained some initial support from a BIS report which stated that yen gains was anomalous and went against the economic evidence. The BIS also warned that the yen would recover strongly if sentiment shifted.
A lack of official protests against yen weakness will tend to reinforce market determination to sell the Japanese currency while tough warnings against carry trades would create greater caution over yen selling.
Former cabinet member Takenaka stated that the bank may increases rates by 0.50% if the LDP wins the July upper-house elections. This is the first possible sign of a more aggressive policy stance by the authorities, but markets will want to see a tougher stance from the central bank before curbing yen selling. The Japanese authorities are also likely to exert influence on funds behind the scenes and deter aggressive carry trades.
Sterling pushed to highs just above the 2.00 level against the dollar on Monday. The UK currency also strengthened to the highest level on a trade-weighted basis since the middle of February before drifting slightly lower in US trading.
There were no significant domestic developments with Sterling still gaining support from expectations of a July interest rate increase by the Bank of England.
Global carry trades will continue to have a very important influence and the UK currency will be in a stronger position to gain ground if there is continued interest in buying high-yield currencies. Renewed declines in global stock markets would tend to undermine the UK currency.
The Swiss currency strengthened to 1.6520 against the Euro on Monday, but was unable to hold the gains and weakened back to 1.6550 as Wall Street stabilised. The franc also pushed to highs around 1.2270 against the dollar.
The Swiss growth data will be monitored closely over the next two days and a further increase in the KOF leading index would offer support to the Swiss currency on expectations that interest rates will continue to increase.
Global carry trades will remain a very important influence and there is likely to be a continuing reluctance to sell the franc aggressively, especially as Wall Street weakened after initial gains on Monday.
The Australian dollar has remained firm and was challenging resistance levels close to 0.85 against the US dollar in local trading on Monday. The direct domestic influences have remained of limited importance.
There will still be further speculation over a flow of funds from Japan in search of high yields and this will continue to support the local currency with markets looking for an interest rate increase later in 2007.
There will, however, be further concerns over a potential tightening of credit conditions which will make it difficult for the currency to extend gains, especially if metals prices weaken. In this context, the Australian dollar weakened back to 0.8465 in US trading.