by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar weakened on Friday ahead of the US employment data with a drop towards 1.4490. The dollar attempted to rally after the US data, but rallies were met by renewed selling pressure. The Euro tested fresh record levels above the 1.45 level as the US currencyremained under general pressure.
The headline October increase in US non-farm payrolls was 166,000 from a revised 96,000 increase the previous month while the unemployment rate was unchanged at 4.7%. There were further monthly declines in manufacturing and construction employment while there was a steady increase in government jobs. The data should offer some short-term reassurance over the economy, especially as there were fears over a bigger September revision, but underlying confidence is liable to remain weak in the near term.
There have been further concerns over losses in the US banking sector with persistent rumours over increased debt write-downs which is also undermining confidence in the economy and dollar. A spreading of credit-related stresses would still be likely to provide some dollar support as global growth fears are liable to increase.
The German PMI manufacturing index fell to 51.7 in October from 54.9 previously which was the lowest figure for two years and will maintain unease over the threat of a sharp slowdown in the Euro-zone economy.
New IMF director Strauss-Kahn stated that the dollar’s decline was in line with expectations, but there will still be speculation that central banks will move to curb dollar losses through intervention as markets are threatening to become disorderly.
The yen was unable to strengthen below the 114.0 level on Friday and temporarily weakened to beyond 115.0 after the US payroll report. The dollar was unable to hold above the 115.0 level as credit-related fears remained higher which discouraged carry trades.
Stock market influences have remained very important with the yen regaining ground when Wall Street came under strong selling pressure. Risk aversion levels also rose strongly according to the VIX index following broker downgrades of two major US investment banks.
There was still evidence of firm dollar demand on dips towards the 114.0 level with the yen still undermined by the lack of yield support after cautious Bank of Japan remarks this week. Yield considerations will remain an important barrier to yen gains, although China’s monetary policies will also be watched closely given the potential for a further interest rate rise which would provide some yen support.
Sterling hit initial resistance close to 2.0850 against the dollar on Friday, but held above the 2.08 level. The UK currency was unsettled briefly by rumours that Bank of England governor King was set to resign but then pushed back to new 26-year highs in late US trading with a peak near 2.09 as the UK currency regained losses against the Euro.
The latest UK earnings survey reported a drop in annual growth to 3.2% in the year to October from 3.4% which would give the central bank greater scope tolower interest ratesif credit and growth conditions deteriorate.
For now, there are still greater market doubts whether the Bank of England will sanction an early cut in interest rates. Expectations that rates will be left on hold next week is supporting the currency despite the generally weaker economic data flow.
The Swiss currency strengthened to highs around 1.6670 against the Euro on Friday before weakening back to 1.6730 as global stock markets attempted to stabilise. The Swiss currency also tested levels close to 1.15 against the dollar before a limited correction weaker.
Consumer inflation rose to a 15-month high of 1.3% for October which will ensure a continuing National Bank focus on inflation trends, although the data was close to market expectations.
Renewed fears over credit-related difficulties provided support to the Swiss currency during Friday and global debt fears will continue to be a very important underlying factor.
The Australian dollar rebounded to highs above 0.92 in local trading on Friday, although volatility levels remained higher. The Australian currency will continue to attract buying support on dips, especially with expectations of a Reserve Bank interest rate increase next week.
There is still likely to be underlying caution in the short term given that credit-related risk are liable to remain higher. The currency will also be vulnerable if global growth fears increase, especially as there would be a negative impact on commodity prices.