by Darrell Jobman, Editor-in-Chief Traderplanet.com
EUR/US$
The dollar was subjected to choppy trading on Tuesday as support and resistance levels were tested. From lows beyond 1.49, the US currency rallied strongly, but drifted weaker again after being unable to break resistance close to 1.48.
The US economic data remained weak with consumer confidence falling to a fresh two-year low at 87.3 for November from a revised 95.2 the previous month. The latest Case-Shiller house priceindex also recorded a 4.9% decline in prices in the year to September, although markets were focussed more on stock market trends.
News that Abu Dhabi would take a US$7.5bn stake in Citigrouphelped ease immediate global risk fears and reminded investors over the potential for capital inflows into US assets on valuation grounds.
Comments from Fed officials will be watched very closely in the short term to assess whether they will shift towards the market expectations of a further rate cut at the December FOMC meeting or take a more robust stance. Governor Evans stated that an overly accommodative policy could create inflation risks.
The German IFO index edged higher to 104.2 in November from 103.9 which will offer some relief over the German economy, but underlying Euro-zone growth fears will persist.
Inflation will also be a significant focus for the Euro-zone economy with the provisional German inflation rate rising to 3.0% in November following a 0.4% increase in prices. This put inflation at its highest level since early 1994 and will reinforce ECB unease over inflation trends, especially if the Euro-zone inflation estimate is higher than expected on Friday.
Yen
Volatility levels remained high on Tuesday and the dollar recovered strongly back to 108.50 in early Europe on Tuesday from lows near 107.25 with the Citigroup injection boosting confidence. Although initially failing to hold above 108.0, the dollar rallied again to 108.80 in New York as Wall Streetextended gains.
Japanese Finance Minister Nukaga commented that he was watching market developments closely, but the warnings over yen strength were mild in historic terms and did not suggest major alarm at this stage over the yen’s level against the dollar.
Despite the recovery on Tuesday, underlying risk aversion is still running at elevated levels. This will maintain pressure for a more defensive stance which will also increase yen demand and should limit losses for the Japanese currency, especially if the dollar fails to regain previous support levels.
The change in investor sentiment is illustrated by the latest IMM positioning data with a net long yen position of over 30,000 contracts which was the strongest net yen position for three years.
Sterling
Sterling retained a corrective stance against the Euro on Tuesday and was able to resist a further attack on support levels close to 0.72. The UK currency struggled to hold above 2.07 against the dollar, but retained a generally resilient tone.
There was no significant UK data releases over the day with markets still on high alert over comments from Bank of England officials. MPC member Sentance stated that there was evidence that the economy was slowing and that this would be useful in curbing inflation pressure. The net balance of the comments suggest that he will have reservations over cutting rates in the very short term which will provide some initial Sterling support.
The comments from MPC members will continue to be monitored very closely on Thursday when they give evidence to the Treasury select committee and a clearer picture on the December decision should then emerge.
Swiss franc
The franc strengthened to 1.0960 against the dollar on Tuesday before weakening back towards 1.1050 in choppy trading.
Immediate risk aversion eased after as global equity markets secured a firmer tone following the injection of funds into Citigroup. As equity markets rallied, the franc weakened back towards 1.64 against the Euro.
The Swiss UBS consumption index strengthened in October which will reinforce near-term confidence in the Swiss economy. Producer prices rose 2.7% in the year to October and should not have significant policy implications.
Source: VantagePoint Software, Market Technologies, LLC
Australian dollar
Choppy trading conditions persisted on Tuesday with a move back towards the 0.88 level against the US currency as the Japanese stock market rallied following the Citgroup news. There were no significant domestic developments and international trends are likely to remain dominant in the short term.
The Australian dollar was hampered by a sharp drop incommodity pricesas gold and metals prices fell during Tuesday. The key feature is likely to be a sustained increase in volatility withstock market gainscushioning the currency in US trade.
