by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar was unable to make any fresh headway on Monday and weakened to lows near 1.35 against the Euro before consolidating close to 1.3485. The dollar was undermined by the inability to make further progress following the firm economic data last week while Euro buying against the yen also hampered the dollar.
The 0.3% increase in US factory orders was lower than expected, but there was an upward revision to March’s data and the impact was limited. The overall yield considerations should still offer support to the US currency, especially if there is a firm ISM services indicator on Tuesday. Sentiment will be weakened by the fact that the dollar is struggling against high-yield currencies while fears over reserve diversification will also continue which will cap dollar gains.
The Euro is likely to remain supported ahead of the ECB interest rate decision this Wednesday with a very strong probability that rates will be increased by 0.25% to 4.0%. There will also be expectations of a tough ECB stance and further rate increases beyond June which will underpin the Euro. The speculative positioning bias is still weighted heavily towards long Euro positions which will maintain the risk of a corrective retreat.
The yen was slightly weaker than 122.0 against the dollar in Asian trading on Monday and the trade-weighted index fell to a 22-year low as interest in high-yield currencies persisted. The yen found support close to 122.0 against the dollar with limited gains, but it remained on the defensive against the Euro.
There is still strong interest in global carry trades as high-yield currencies advance on optimism over global growth and the persistent interest in carry trades will undermine the yen in the short term. The Japanese currency also failed to gain any significant benefit from a sharp drop in Chinese equity prices. The Japanese economic data suggested firm capital spending data and confidence in the economy should provide some yen protection.
Markets will remain on watch for comments from G8 officials at meetings due to be held on Wednesday. There is the potential for some comments on exchange rates and warnings over excessive risk and one-way bets. A substantial impact looks unlikely, especially with Russia liable to dominate.
The latest IMM data recorded a small decline in short yen positions, but the net number of short contracts was still close to 150,000 which will maintain the risk of a sharp yen correction stronger.
Sterling strengthened to 0.6770 against the Euro on Monday and also pushed to highs around 1.9925 against the dollar.
The shadow MPC of academics narrowly voted for rates to be left on hold at their meeting. With a narrow vote, there will be further speculation that the Bank of England will increase interest rates again at this Thursday’s policy meeting. This speculation will provide Sterling protection ahead of the decision with a reluctance to sell the currency.
The ISM data will be watched closely on Tuesday with the prices index a particular focus following the increase in manufacturing prices reported last week and a firm reading would support Sterling. There will still be expectations of a slowdown in consumer spending and a cooling of the housing market which will curb short-term Sterling demand to some extent
The degree of global interest in carry trades will remain important and Sterling will gain support if there is further interest in selling low-yield currencies. Overall volatility levels are, however, liable to increase given the potential instability in capital flows.
The Swiss currency found support close to 1.6550 against the Euro on Monday and strengthened back to 1.65 in US trade. The franc strengthened to highs around 1.2220 against the dollar in New York trade.
The franc’s performance was more impressive over the day given that low-yield currencies were generally under pressure during the day as risk tolerances remained high. The franc is liable to gain strongly if there is a wider increase in risk aversion.
The currency was supported by comments from National Bank Chairman Roth who stated that franc weakness was only temporary. Verbal intervention is likely to continue in the run up to the June central bank council meeting.
The Australian dollar pushed to highs around 0.8340 in local trading on Monday and retained a firm stance over the remainder of the day as high-yield currencies remained in favour.
The Australian currency has been supported by increased confidence in the global economy which has helped underpin metals prices. The domestic economic indicators have remained firm with high corporate profits and there has also been renewed interest in carry trades. The Australian dollar will remain strong in the very short term, but there are still clear and increasing risks that markets being complacent over carry trades.