by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar weakened to fresh record lows near 1.4965 against the Euro in Asian trading Friday, but then recovered sharply back to highs under 1.48 before settling close to 1.4825. Trading conditions remained thin and choppy surrounding the Thanksgiving holiday with no major US developments, but confidence in the US financial sector and economy remains depressed.
Official concerns over Euro strength have increased with verbal intervention at higher levels. ECB President Trichet stated on Thursday that he was against rapid and brutal currency moves. Trichet still held back from actually describing the recent currency moves as brutal which is an important distinction and indicates reservations over actively intervening in the markets.
The Euro-zone PMI index for the manufacturing sector rose to 52.6 in November from 51.5 previously, but there was a significant drop in the services-sector index to a two-year low of 53.7 from 55.8 previously while ECB member Ordonez warned that there were greater downside risks to growth.
Airbus industries also warned that the Euro strength was ‘life threatening’ which will reinforce fears over the industrial sector’s prospects. The 1.50 level against the dollar will be an important threshold for the central banks despite an unwillingness to defend specific levels.
Despite a Japanese market holiday, the yen gained further to highs near 107.50 in Asia on Friday, the strongest level since 2005, as the dollar came under general selling pressure before a move back to 108.20 as Wall Street rallied.
The attitude of senior Japanese finance officials will remain under close scrutiny in the short term. If protests against yen gains remained muted, there will be further speculation that the authorities have decided to tolerate a stronger currency.
There will still be resistance to disorderly market moves and intervention may be considered as part of wider moves to stabilise currency markets.
The Japanese currency is still gaining important support from an underlying unwinding of carry trades and credit-related stresses which is leading to a reduction in risk taking. Yen losses are also measured when stock markets gain which continues to suggest underlying demand for the currency.
Sterling was unable to secure more than a limited correction against the Euro and was again testing levels above 0.72 in US trading on Friday. The UK currency pushed to highs above 2.0750 against the dollar before a retreat to lows around 2.0530.
The latest discount widow borrowings data recorded a further net borrowing of GBP1.1bn which took the total since the credit crunch erupted to GBP26.4bn. The vast majority of this lending is to Northern Rock and the fact that the Bank of England has been unable to stem the lending will reinforce a lack of confidence in the UK financial sector. Three-month Libor rates also remain at elevated levels which indicates underlying stresses.
The revised UK GDP data recorded a slowdown to 0.7% from 0.8% previously while services-sector growth also slowed slightly. There was also a sharp drop in BBA mortgage approvals to 44,100 in October for a 37.4% annual decline which was the lowest figure since the current series started in 1997. The data will reinforce expectations of a sharp slowdown in the economy and increase pressure for a near-term cut in UK interest rates which will tend to undermine Sterling.
The Swiss currency has continued to attack trend-line resistance levels against the Euro with a peak near 1.6300, with the franc resisting significant selling as carry trades remain under pressure.
The dollar fell to a new record low around 1.09 against the franc in Asian trading on Friday as risk aversion remained high before recovering back to 1.1020 in choppy trading.
The Swiss currency should continue to gain underlying support from elevated levels of risk aversion as credit tightening continues.
The Australian dollar found support below 0.87 against the US dollar on Friday, but struggled to make much headway even with depressed US sentiment. The currency is still being undermined by elevated levels of risk aversion and fears over the global economy, although metals prices recovered slightly on Friday.
The election result will be watched closely over the weekend and could trigger temporary Australian dollar losses. Levels of risk aversion are still liable to dominate in the short term and a further deterioration in credit conditions would undermine
the local currency next week. Any easing of credit fears would provide some relief to the Australian dollar.