by Darrell Jobman, Editor-in-Chief TraderPlanet.com
EUR/US$
The dollar remained under some selling pressure in early European trading on Monday and dipped to lows around 1.5840 before stabilising around 1.58. The US currency secured some buying support in early New York as energy prices corrected lower.
The US data recorded a stronger than expected increase in pending home sales of 6.3% for April after a 1.0% decline the previous month. Although there will still be a high degree of caution, the tentative evidence of firmer demand provided some currency relief.
US yields had already moved higher and the Fed futures contract moved to show over an 80% probability that interest rates would be increased by November. The hardening of yields underpinned the dollar and the currency also gained ground on supportive comments from US officials. Regional Fed President Fisher concentrated on the need to control inflation expectations while New York President Geithner stated that the Fed could not be indifferent to the currency.
Treasury Secretary Paulson also stated that he would not take currency intervention or any other policy tool off the table. The comments from Fed Chairman Bernanke will be watched very closely late on Monday for further evidence on the Fed’s thinking on interest rates and the dollar.
On Monday, ECB President Trichet effectively repeated his comments from last Thursday with a reference that the bank could increase interest rates as soon as July, although it was not a certainty. The firm ECB stance will continue to provide some Euro support. The latest Sentix index recorded an increase in confidence for May, although fears over the Euro-zone economy are still likely to increase.
Yen
The yen strengthened to highs near 104.45 against the dollar in Asian trading, but then retreated back beyond 105.0 as there was renewed yen selling, especially against the Euro as the Japanese currency weakened to a 2008 low.
There was importer dollar buying at lower levels while there was also some recovery in carry trades following reports that US investment bank Lehman Brothers was close to securing US$5bn in additional capital which lessened immediate fears over the financial sector.
The rise in US yields helped push the dollar to highs around 106.30 in New York and choppy trading conditions are liable to continue in the short term. Some degree of resilience for carry trades will tend to limit yen support.
Sterling
Sterling dipped to lows around 0.8030 against the Euro on Monday before strengthening after the UK data releases.
UK input producer prices rose by a further 3.8% in May with a 27.9% annual increase which was the highest rate for over 20 years while there was a very strong increase in output prices.
The big increase in core prices of 1.2% for a 5.9% annual increase will reinforce expectations that the Bank of England will not be able to cut interest rates in the near term. There is also likely to be some speculation that the bank will be forced to consider an increase to stabilise inflation expectations.
The yield trends will provide some Sterling support as bond yields was strongly, although the impact will continue to be substantially weakened by fears over an even steeper economic deterioration. The UK currency recovered to highs near 0.7920 against the Euro while it secured a small net advance against the dollar.
Swiss Franc
The dollar weakened to lows just below 1.02 against the franc on Monday before recovering back to 1.0280 in New York trading. The franc ended little changed against the Euro at around 1.6070 after the Euro was unable to hold above 1.61.
National Bank Chairman Roth was confidence that Switzerland was not facing a house-price bubble, but he warned that the full impact of market turbulence had yet to be felt. The franc was unsettled to some extent during the day by rumours of a negative announcement from UBS.
Immediate Swiss franc demand is liable to be curbed to some extent by the fact that there was no evidence of aggressive carry-trade closure.
Source: VantagePoint Intermarket Analysis Software
Australian dollar
The Australian dollar took advantage of US currency weakness to challenge levels above 0.96 on Monday. There were no significant domestic developments with markets closed for a holiday. The Australian dollar initially held firm as the US currency remained under pressure, but the Australian currency dipped sharply to lows below 0.95 in New York as the US currency rallied and metals prices fell.
The strong relationship between the US currency and commodity prices will tend to magnify Australian dollar moves in the short term with high volatility a feature.
