by Darrell Jobman, Editor-in-Chief TraderPlanet.com
There was no significant economic data during the day with US markets partially closed for the Veterans Day holiday. In this environment, global risk tolerances and cross trading tended to dominate. The Euro was undermined by weakness against the yen which also restrained it against the dollar. The US currency benefited from a reduction in higher-risk and commodity-related positions in currencies such as the Canadian and Australian dollars as metals prices fell sharply.
Overall confidence in the US economy will still remain very fragile in the short term which will limit the scope for dollar recoveries, especially with speculation over further Federal Reserve interest rate cuts. There will be a particular focus on Wednesday’s retail sales data and a weak figure would maintain fears over economic trends.
The German Finance Ministry stated that there was no reason for concern over the Euro’s level, but there will still be unease over the Euro-zone economic prospects, especially if the German ZEW index records a further decline on Tuesday.
Dollar/yen volatility rose to a three-month high on Monday and the jump in volatility since Thursday has been the biggest increase since the 1998 LTCM crisis. The yen tested levels beyond 110.0 against the dollar on Monday as Asian stock markets fell sharply. As risk aversion remained at elevated levels, the US currency fell to lows near 109.0 before a tentative recovery as importer dollar demand increased.
The Chinese central bank increases reserve requirements for the ninth time this year on Saturday and there will be further speculation over a yuan revaluation which will help underpin the Japanese currency.
The domestic Japanese data was favourable with wholesale prices rising 2.4% in the year to October while the current account surplus rose strongly to JPY2.88trn for September. Comments on currencies from Finance Ministry officials will be watched very closely in the short term. Senior government official Machimura stated on Monday that a strong yen was favourable for Japan which will dampen immediate speculation over any intervention to restrain the Japanese currency. High volatility is likely to persist and some Finance Ministry efforts to restrain the yen are realistic below 109.0.
The trend for a reduction in carry trades continued on Monday with a sharp retreat from high-yield positions. The UK currency hit lows below 2.06 against the dollar and 35-month lows against the Euro near 0.7060.
Global and UK banking-sector developments will continue to be watched very closely in the short term and any further announcements of debt write-downs would tend to undermine Sterling.
UK input producer prices data recorded a further 1.8% increase for October while output prices were also above expectations with a 0.6% monthly increase. Core prices wee still under reasonable control with a 2.3% increase, but the Bank of England will need greater evidence of weaker growth in the economy to sanction a short-term interest rate cut, especially if there is a high CPI figure on Tuesday.
The dollar found support close to 1.12 against the Swiss franc on Monday, but was unable to regain the 1.13 level as the franc remained strong on the crosses. The currency strengthened to highs beyond 1.6400 against the Euro and held the bulk of the gains as Wall Street weakened again.
The general increase in risk aversion supported the Swiss currency as high-yield and carry trade positions were scaled back.
Emerging market trends will be watched closely in the short term as any stresses would provide further franc support. These tensions would also help underpin the US dollar with a flow of funds back into the US currency.
The Australian dollar dipped to lows near 0.89 against the US dollar in Asian trading on Monday and was unable to sustain a move back to 0.90. The Reserve Bank remained concerned over inflation in its latest report, but also downgraded growth forecasts which unsettled the currency slightly.
Levels of risk aversion will tend to remain dominant in the short term and any further increase in tensions would weaken the local currency as carry trade are reduced. The Australian dollar rallied from levels near 0.88, but was being severely constrained by weak metals prices and a key feature is liable to be a sustained increase in volatility.