by Darrell Jobman, Editor-in-Chief TraderPlanet.com
EUR/US$
The dollar was again unable to make any impression on levels below 1.4160 against the Euro on Wednesday and weakened to lows near 1.4230 after the US data releases. A Euro retreat against the yen in New York as Wall Street weakened sharply allowed a fragile dollar recovery to 1.4185.
The US housing data was weaker than expected with starts falling by a further 10.2% in September with an annual rate of 1.19mn, the lowest rate since 1993, while building permits also weakened sharply to a rate of 1.22mn. There may be some hopes that this will represent a trough for activity, but confidence surrounding housing will inevitably remain very fragile in the short term and housing fears will continue to unsettle the dollar.
Headline consumer pricesrose 0.3% in September compared with expectations of a 0.2% increase while the core increase was in line with expectations at 0.2%. With oil prices remaining at record levels, the Federal Reserve will need to be cautious over monetary policy as a further rate cut at a time of inflation concerns would undermine confidence in longer-term confidence.
The Fed’s Beige Book reported that growth had decelerated in September and early October while companies were more uncertain over prospects. The report also stated that the labour market was generally tight while consumer spending was still solid.
The German Finance Ministry was optimistic over economic developments, but the Euro will continue to be hampered by caution ahead of the weekend G7 meetings.
Source: VantagePoint Software, Market Technologies, LLC
Yen
The yen secured initial support in Asia on Wednesday and tested 116.10 against the dollar. The trend initially reversed as US equity prices opened stronger, but there was then a sharp fall on Wall Street which provided renewed yen support. From lows around 117.20, the Japanese currency strengthened to 116.30 against the dollar and 165.0 against the Euro.
The negative yen impact of record oil prices will tend to be offset by a more defensive global investment stance, especially if Asian equity markets dip sharply again on Thursday. There will still be retail selling interest on yield grounds which will make it difficult for the yen to sustain gains.
There will also be further speculation that G7 members will take a tougher than expected stance at this weekend’s meetings and push for stronger Asian currencies. In this context, there will be further caution over yen selling during the next 48 hours.
Sterling
Sterling found support below the 2.03 level against the dollar on Wednesday and pushed to highs above 2.04. The UK currency suffered renewed losses in US trading as falling equity prices triggered a renewed liquidation of carry trades.
Minutes from the Bank of England’s October meeting reported an 8-1 vote in favour of unchangedinterest rateswith Blanchflower voting for a 0.25% cut. The minutes stated that downside growth risks had increased, but the bank was reluctant to give the wrong signal by cutting rates. The minutes suggest that the bank will respond with lower rates quickly if there is convincing evidence that the economy is slowing significantly, although they would prefer to take a cautious approach.
There was a further 12,800 drop in unemployment for September which will maintain near-term confidence in the labour market. There will still be fears over the housing sector and evidence of significant deterioration would undermine Sterling.
Swiss franc
A recovery in risk appetite undermined the Swiss currency against the Euro in European trading on Wednesday with losses to 1.68, but the franc regained ground in New York as equity prices came under renewed selling pressure. The dollar was again unable to make any significant progress above 1.18 against the franc.
The short-term franc moves will tend to remain dominated by levels of risk aversion. Any stresses in Eastern European currency pegs would also be a very important factor in supporting the Swiss currency.
Australian dollar
The Australian currency weakened back towards 0.8820 in local trading on Wednesday. The domestic leading indicators were firm, but global market conditions tended to dominate and a retreat in Asian equity markets triggered a further drop in carry trades which undermined the Australian dollar.
The Australian currency will secure support from high commodity prices, but doubts over the global economy will pose a threat to the currency, especially as commodity prices could then come under pressure. The Australian dollar recovered strongly to 0.8970 before retreating back to 0.8850 in New York.
