by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar was unable to sustain a brief advance following the US data releases on Friday and dipped to 1.42. Overall dollar confidence remains very fragile on fears over asset reallocations, but the Euro hit further selling pressure close to 1.42 and settled around 1.4175.
US retail sales rose 0.6% in September with a 0.4% underlying increase for the month and the headline data will ease immediate fears over spending trends. Sales were, however, pushed higher by a sharp rise in gasoline sales and underlying components were generally fragile which will ensure that underlying fears over continue.
Headline producer prices rose 1.1% in September as energy prices rose, although the core increase was subdued at 0.1%. The consumer prices data will be watched very closely next week for further evidence on inflation trends as a benign reading would make it much easier for the Fed to consider a further cut in interest rates. Confidence levels remained depressed according to the latest University of Michigan index for October with a dip to 82.0 from 83.4.
The comments from ECB officials have been generally firm over the past 24 hours with further references to inflation risks which suggests the bank will be very reluctant to drop a tightening bias. ECB member Stark also stated that Euro-zone growth had not yet slowed.
ECB member Constancio stated that the dollar was vulnerable due to current account financing needs and this will dampen expectations that ECB officials will press for dollar losses to be curbed at next week’s G7 meetings. There will, however, be the potential for important divisions within policymakers.
The yen has been unable to strengthen back through the 117.0 level against the dollar and again tested support levels above 117.60, although ranges on Friday were relatively narrow.
Japanese wholesale prices fell 0.1% in September to give an annual increase of 1.7%. The subdued reading will not increase pressure for a short-term Bank of Japan interest rate rise which will maintain expectations of low Japanese yields.
The latest capital account data recorded further net weekly outflows as there was increased confidence in allocating funds overseas. The yen moves will tend to remain correlated with global risk aversion levels and there is the threat of increased volatility given that capital flows could prove unstable as risk conditions are reassessed.
Sterling dipped to lows around 2.0250 against the dollar on Friday and also re-tested levels beyond 0.70 against the Euro before a recovery in US trading with a recovery to 2.0350 against the dollar.
The UK currency was again been unsettled by speculation that the Royal Bank of Scotland has been selling Sterling and buying Euros to fund its purchase of Dutch-based banking group ABN Amro.
The UK housing data will remain under close scrutiny in the short term with another price survey due for release over the weekend and there will be further speculation over an underlying slowdown in the UK economy.
Next week will be important for the UK currency with key data releases on inflation and growth while the October Bank of England minutes will also be released and volatility is liable to remain high.
The Swiss currency was unable to regain significant ground against the Euro during Friday, settling close to 1.6790, while the US dollar found solid support close to 1.18 against the franc.
The franc is still being undermined by renewed interest in carry trades and the persistent strength of emerging market currencies.
There have been no clear protests against franc weakness by National Bank officials and this will dent near-term franc demand. There is, however, a growing risk of complacency over global risk conditions which could trigger a rapid franc correction.
The Australian dollar found support close to 0.8950 against the US currency and again challenged levels close to 0.9150 before drifting slightly weaker in US trading.
Underlying confidence in the Australian currency remains firm with futures markets putting the chances of an interest rate increase in November at close to 50%. The Australian dollar will also gain further near-term support from the high level of commodity prices and a general lack of confidence in the US currency.