by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar again found support beyond the 1.42 level against the Euro on Tuesday and tested resistance levels around 1.4150. The US currency was unable to break through these levels, but did exhibit greater resilience than in recent sessions.
The latest US Treasury data recorded a net long-term capital outflow of US$69.3bn for August while there was a total outflow of US$163bn. This was the first net outflow for nine years and illustrated the impact of US credit-market difficulties. The sharp downturn in the US corporate bondmarket weakened the capital account and there was also some distress selling of US assets. The monthly data is liable to have been distorted, but the central bank selling of Treasury bonds will reinforce fears over longer-term diversification away from the dollar.
In remarks this week, Fed Chairman Bernanke has justified the case for a September interest rate cut. His comments also hinted that the Fed was more likely to hold policy steady in October as the economy outside the housing sector had held relatively firm. Bernanke also warned that the dollar weakness would have some impact on inflation.
The NAHB housing index dipped to a record low of 18 in October from 20 while US industrial production rose a subdued 0.1% in September. Any evidence of further housing deterioration in Wednesday’s data, would maintain expectations of a December cut even if the Fed keeps rates at 4.75% in October. The latest consumer prices data will also be important for rate expectations on Wednesday.
Global exchange rate policies will also continue to be monitored closely ahead of the G7 meetings which start on Friday.Speculation over stronger efforts to curb Euro gains will discourage near-term currency buying.
The Euro was also undermined slightly by a downgrading of growth forecasts by the DIW institute while the German ZEW index held steady at -18.1 in October.
The yen strengthened in European trading on Tuesday with gains to 116.50 against the dollar while the Japanese currency also reversed recent losses against the Euro with a test of support close to 165.0.
Japanese Finance Minister officials noted the European concerns about Euro levels. The remarks will increase speculation that G7 members will take a tougher than expected stance and look to cap the Euro against the yen at this weekend’s meetings.
The yen also secured support for the second day running from Wall Street losses. There will still be retail yen selling interest on yield grounds which will make it difficult for the Japanese currency to sustain gains.
Sterling continued to trade erratically against the dollar on Tuesday, although with a net weakening bias as the UK tested levels below 2.03. Sterling also hit selling pressure at levels stronger than 0.6960 against the Euro.
UK consumer prices rose 0.1% in September with the headline rate unchanged at 1.8%. The core inflation rate fell to 1.5% from 1.8%, a 10-month low for the underlying reading. The data may be treated with some caution, but the lower reading for core inflation will reinforce expectations that the Bank of England will cut interest rates over the next few months and this will tend to weaken Sterling.
The Bank of England minutes will be released on Wednesday and will also be important in determining near-term interest rate expectations. Sterling will be vulnerable again if there were votes for lower interest rates at the October meeting.
The Swiss currency has continued to edge stronger against the Euro over the past 24 hours while the dollar has struggled to break convincingly away from support near the 1.18 level.
The retail sales data recorded an increase of 3.8% in the year to August which was slightly below market expectations, although the underlying data was still firm.
The Swiss currency secured some underlying support from a softer bias in global stock markets, although the impact was measured.
There were no major domestic incentives on Tuesday with the Australian dollar unable to sustain moves above the 0.90 level against the US dollar. The currency then dipped sharply in early European trading as the yen gained ground with lows around 0.8825 against the US currency in New York.
The Australian dollar was undermined initially by a renewed increase in credit fears following the downbeat Citigroup comments. The more cautious stance also curbed immediate demand for high-yield currencies. There will still be buying support on dips which will provide an important cushion, especially with commodity prices still high.