by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar gained some initial support on Monday from indications that US retail sales were stronger than expected over the holiday weekend. Underlying sentiment remained weak which severely curtailed the potential for buying with tough resistance close to 1.48.
Confidence in the US financial sector and economy is likely to remain very fragile. AS well as direct sub-prime fears, markets are expecting further losses at HSBC as the bank absorbs SIV-related funds to prevent forced asset sales. The dollar weakened back towards the lower end of the trading range in New York at around 1.4880 as overall confidence remained weak while yield support remained weak as Wall Street came under fresh selling pressure.
There will be some speculation that inflation fears will deter further Federal Reserve interest rate cuts. Comments from Fed officials will be watched very closely this week and concerted warnings against a further loosening would provide some US currency backing given that a reduction has been priced in fully. Markets, however, will need a lot of convincing that rates are not going to be cut again, especially as financial-sector stresses remain high.
ECB member Wellink stated that the Euro was not an immediate concern, but that a further rise would be worrying and there are likely to be persistent warnings over further Euro levels from ECB officials, especially if there is a push above the 1.50 level. The US attitude to dollar weakness will be watched very closely in the short term as US backing will be crucial for any intervention efforts to be successful.
The dollar pushed back above the 108.0 level against the yen on Monday, but struggled to make any significant headway. A renewed decline on Wall Street allowed the yen to strengthen sharply later in US trading with a dollar dip to fresh 25-month lows around 107.25. Japanese official comments will be watched closely on Tuesday if the yen continued to gain ground.
Short-term yen moves will remain dominated by trends in carry trades. Risk aversion is still running at elevated levels and maintaining pressure for an unwinding of carry trades with investors taking a more defensive stance and increasing yen demand.
The yen gained some support on Monday from speculation that China’s sovereign wealth fund would invest in Japanese equities while China may also raise interest rates again in the short term.
Sterling resisted a further decline through the 2.06 level against the dollar on Monday, but struggled to sustain gains above 2.07 as a high-yield retreat undermined the currency. The Euro continued to hit resistance beyond 0.72 against the UK currency.
The latest Hometrack survey recorded a 0.2% drop in house prices for November which cut the annual increase to 3.6% which was the slowest increase for 16 months.
The data over the past week will reinforce expectations of a sharp slowdown in the housing sector and increase pressure for a near-term cut in UK interest rates which will tend to undermine Sterling.
Comments from Bank of England officials will be watched very closely this week to assess whether there will be majority support for a cut in December. Bank of England member Bean stated on Friday that a tighter policy may be required for a while and two further MPC members are due to speak on Tuesday.
The dollar pushed to highs of 1.1070 against the Swiss franc on Monday, but was unable to hold the gains and weakened back to below 1.10 later in US trading as Wall Street came under selling pressure. The Euro was unable to strengthen back above 1.64 against the Swiss currency.
The franc will continue to gain support from elevated levels of risk aversion, especially with liquidity restraints an increasingly important market issue. Any sharp decline in stock prices would support the Swiss currency.
The Australian strengthened to above 0.88 against the US dollar in local trading on Monday. There was initial relief that there was a decisive general election result with a clear Labour victory in the weekend poll.
The Australian currency also gained support from a robust rally in Asian stock market prices. Underlying risk aversion is still liable to remain at elevated levels which will still be an important barrier to sustained Australian dollar gains and volatility levels are likely to remain high. The Australian currency peaked close to 0.8870 before weakening sharply to below 0.8700 as Wall Street weakened.