by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar secured renewed gains in Asian trading on Monday with a peak just stronger than 1.5350 as liquidity remained at reduced levels. The dollar weakened back to beyond 1.54 in New York in a correction from rapid gains over the past few days. European markets were still closed on Monday which stifled activity. Short-term US yields rose strongly during the day which provided some additional backing to the US dollar.
US existing home sales recovered to an annual rate of 5.03mn in February from 4.86mn the previous month and inventories also fell which will increase optimism that a bottom in the market may have been found. There will, however, be further unease over price trends as there was an 8.2% annual drop in median prices over the year. While prices continue to decline, mortgage difficulties will certainly persist and could easily intensify.
There has been some further optimism that the US authorities will take further action to help support the housing sector. The Federal Reserve has denied that it will buy mortgage-baked securities directly, but there will be further expectations of action to boost the mortgage sector and improve liquidity.
There were indications that JP Morgan would increase its offer price for Bear Stearns which also improved overall risk appetite. As commodity prices under pressure, the US currency continued to gain from a covering of short positions. There was also some further speculation over potential G7 action to stabilise currencies through joint intervention which discouraged dollar selling.
The Japanese yen continued to find some support close to the 100 level against the dollar in Asian trading on Monday.
The Nikkei index was unable to sustain gains and there was also persistent unease over domestic developments. The dispute over a new Bank of Japan Governor has not been resolved which undermined yen sentiment to some extent, especially as there has also been increased political friction over tax policy.
Risk tolerances improved further in US trading and this weakened the yen towards the 100.80 level as Wall Street rallied. Greater optimism over the US economy and financial markets helped weaker demand for the yen. There will still be caution given the risk of seasonal capital repatriation over the next week.
Sterling found further support close to 0.78 against the Euro and strengthened to re-test levels around 0.7760 in US trading. The UK currency also found support below the 1.98 level against the dollar.
Although UK markets were closed for a holiday, the Rightmove organisation reported a 0.8% increase in house prices for March which gave an annual increase of 5.0%. The data is for asking prices which may not be realised when properties are actually sold, but the data will ease immediate fears over a rapid deterioration in conditions which will help underpin Sterling.
There will also be further speculation over additional Bank of England support for the housing sector which will provide some backing for financial markets, although the bank will be very reluctant to sanction any purchase of mortgage-backed securities.
The dollar found support below the 1.01 level against the dollar on Monday and pushed to highs around 1.0230. The franc also weakened to near 1.5750 against the Euro before correcting slightly.
Risk aversion remained generally lower on Monday and this triggered a further corrective decline in the Swiss currency following the rapid gains early last week. The franc moves will tend to remain correlated very strongly with degrees of market fear and stock market trends in the short term.
Comments from the National Bank will also be scrutinised closely given fears over a slowdown in the domestic economy with any warnings likely to undermine the franc to some extent, although the impact should be limited.
Commodity prices have continued to have an important impact on the Australian dollar. The local currency found support below the 0.90 level against the dollar and pushed back to 0.9070 in New York as the US currency retreated from its best levels.
The Australian currency continued to gain support from an improvement in risk appetite as global equity markets continued to rally while commodity prices attempted to find a base after rapid selling over the second half of last week.
Although short-term US yields have continued to increase, the Australian dollar still has a powerful yield advantage which will help underpin the currency.