by Darrell Jobman, Editor-in-Chief TraderPlanet.com
After minimal activity on Monday due to market holidays, the dollar hit resistance close to 1.3415 in early Europe on Tuesday. The US currency then wakened sharply to lows near 1.3520 before rebounding to 1.3450 later in US trade. The Euro/dollar rate was influenced by cross trading with the Euro boosted initially by buying against the yen before a reversal in New York.
US consumer confidence increased to 108.0 in May from an upwardly-revised 106.4 the previous month. The increase in confidence in the face of higher gasoline prices and housing difficulties suggests that the labour market is proving to be resilient. The US data over the remainder of the week will remain in close focus. A firm ADP employment release on Wednesday would boost confidence in the Friday employment report and also underpin the dollar.
German Bundesbank head Weber maintained a tough stance on inflation and interest rates in comments on Tuesday. The latest data recorded a drop in long speculative positions, but there is still a high number of long Euro contracts at above 95,000 which will maintain the risk of a correction weaker.
The yen initially gained ground in Asian trading on Tuesday, but failed to hold the gains. The lows weakened to lows of 121.75 against the dollar and record lows around 164.30 against the Euro. The yen recovered later in US trading after China announced measures to increase the stamp tax on share trading to 0.3% from 0.1%. The measure will maintain unease over the risk of a sharp correction in Chinese markets and a reversal in carry trades which would support the yen, especially given the market’s positioning bias.
The Japanese economic data was generally stronger than expected with the unemployment rate falling to 3.8% in April from 4.0% previously, a 9-year low for the headline rate. Household spending rose and the corporate services prices index also increased 1.1% in the year to April which suggests that underlying inflation pressure has increased despite the headline consumer inflation rate remaining low.
The firm data will reinforce expectations that the Bank of Japan will increase interest rates as soon as is realistically possible, potentially at the August council meeting given the political constraints surrounding the July upper-house elections.
Sterling strengthened to highs near 1.9890 in European trading on Tuesday before weakening back to 1.9800 in US trade. The UK currency weakened to 0.6790 against the Euro.
There will some be unease over the degree of support being provided by financial services. This sector recorded annual growth of around 10.0% in the first quarter of 2007 and is also contributing to rises in property prices. If confidence in the financial sector deteriorates, the economy overall is liable to slow sharply which would undermine Sterling.
The latest BBA mortgage applications data recorded a drop to just below 65,000 in April from near 75,000 the previous month. There was a small annual increase, but overall lending was more subdued. Given that markets have priced in an increase in rates to at least 6.0%, Sterling will be very vulnerable if there is sustained evidence of a slowdown in activity.
The Swiss currency continued to edge stronger against the Euro on Tuesday with a move to 1.6480. The Swiss currency also advanced to 1.22 against the dollar before a retreat to 1.2250.
The trade surplus narrowed to CHF0.63bn in April from CHF0.72bn in March, but the overall export performance was still robust and still indicates firm economic growth. The UBS consumption index rose to 2.35 in May from 2.09 in April which continues to suggest a robust economic performance.
The National Bank will increase interest rates in June and there will be further speculation over a 0.5% rise which will underpin the franc.
The Australian dollar weakened to lows around 0.8165 in local trading on Tuesday before a recovery back to 0.8195 as the US dollar weakened again. The domestic retail sales overnight will be watched closely for further evidence on economic growth trends and a firm figure would reinforce expectations that the Reserve Bank will maintain a tightening policy bias.
The improvement in US yields will continue to restrain the Australian currency in the short term and the currency will remain vulnerable to selling of risk aversion rises strongly.