by Darrell Jobman, Editor-in-Chief TraderPlanet.com
EUR/US$
The US currency was unable to sustain a move through 1.3440 against the Euro on Tuesday and drifted back to 1.3470 as narrow ranges persisted.
US new home sales fell 1.6% in May to 0.92mn from a downwardly-revised 0.93mn the previous month. Inventories were little changed while prices held firm officially, although there is evidence of wider discounting.
Consumer confidence weakened to 103.9 in June from 108.0 as optimism over present conditions and expectations both faltered. The decline hints at some possible weakness in the labour market which will unsettle the dollar. There was, however, a recovery in the Richmond Fed manufacturing index and the wider impact should be limited at this stage.
The Wednesday durable goods orders data is unlikely to have a major impact on the markets ahead of the Thursday’s Federal Reserve meeting. US bond yields have weakened slightly while market speculation over a 2007 interest rate cut has revived which will stifle dollar rally attempts.
Yen
The yen strengthened to 112.85 against the dollar on Tuesday, but failed to hold the gains with a retreat back to 113.35 while the yen was unable to strengthen through 165.0 against the yen.
The Japanese currency gained some support from the weaker trend in global stock markets which curbed enthusiasm for carry trades as risk aversion levels rose.
Japanese Finance Minister Omi has warned over the dangers of one-way bets in the currency markets and there is some evidence that the Japanese authorities are attempting to cool enthusiasm over carry trades to lessen the risk of a rapid unwinding of these positions. There was also a warning from Korean officials that carry trades were at risk of unwinding.
Top Finance official Watanabe has been replaced by Shinohara and his departure will reinforce speculation that the Japanese Finance Ministry is starting to consider a tougher stance on currencies.
The yen will strengthen sharply if there is actual intervention to weaken the yen, although this looks unlikely at this stage, especially as officials will not want to destabilise markets. Steady warnings over risks should curb yen selling, especially given the weight of existing speculative short yen positions.
Sterling
Sterling was again unable to hold above the 2.00 level against the dollar on Tuesday, although corrective retreats were limited as sentiment remained firm.
There were no significant domestic developments with Sterling still gaining support from expectations of a July Bank of England interest rate increase. These expectations were reinforced by Deputy Bank Governor Gieve who expressed concerns over the pace of money supply and credit growth.
Markets have discounted an increase in rates to at least 6.0% over the second half of 2007 and the forthcoming UK data may not justify these expectations. Expectations are also liable to be scaled back if global stock markets continue to weaken as there will also be reduced upward pressure on other asset prices including property prices.
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 renewed interest in buying high-yield currencies. Sustained declines in global stock markets would tend to undermine the UK currency and the overall risks suggest there will be greater caution over carry trades which will limit Sterling buying.
Swiss franc
The Swiss currency was unable to strengthen through the 1.65 level against the Euro and retreated to 1.6540, but resisted a drop through 1.6550. The franc found support close to 1.23 against the dollar with a move to 1.2275.
The Swiss growth data will be monitored closely over 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. The Tuesday UBS consumption index was weaker than expected which will dampen enthusiasm for the Swiss currency slightly.
Australian dollar
The Australian dollar edged stronger in local trading on Tuesday and strengthened to highs above 0.85 in US trading before a retreat to 0.8465 as metals prices struggled.
There were no major data releases, but there was a reported 10% drop in house sales in the year to May. The Australian dollar was unsettled in US trading by the drop in gold prices and the currency will remain vulnerable to selling pressure if there is a wider drop in commodity prices.
