by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar was unable to regain any positive momentum on Tuesday and weakened back to lows around 1.4275 against the Euro. There was a general recovery in risk tolerances during the day, aided by Wall Street gains and solid technology-sector earnings. The easing of risk aversion tended to undermine the US currency as high-yield instruments moved back into favour and there was a reduced flow of defensive funds into US assets.
There will be further fears over the US economic trends and the Richmond Fed index fell sharply to -5 in October from +15 the previous month which will maintain concerns over the industrial trends. The housing data will be watched closely on Wednesday and Thursday with the probability that home sales will remain under pressure at multi-year lows.
Markets are still pricing in over an 80% chance that the Federal Reserve will cut interest rates again next week and poor housing data would reinforce the expectations of a cut. The dollar should, however, be able to resist heavy selling pressure given the rate reductions already priced in. A recovery in sales looks unlikely, but would trigger a significant shift in expectations.
The Euro-zone industrial orders rose 0.3% in September with annual growth slowing to 5.1% and there will be further expectations of a gradual underlying slowdown. A sharp drop in the PMI index on Wednesday would trigger a more serious deterioration in confidence. Market interest rates, however, have continued to edge slightly lower which will lessen the probability of the ECB dropping its tightening bias and this will help underpin the Euro.
Yen moves on Tuesday were again dominated by levels of global risk aversion with the currency undermined by a generally firmer tone in global equity markets. The Japanese currency weakened to lows near 115.0 against the dollar and 164.0 against the Euro.
Uncertainty on Wall Street temporarily helped curb the yen’s losses, but the yen was again on the defensive in late US trade as stock market prices resumed their advance. The domestic influences will remain limited in the short term unless there is a clear suggestion that interest rates will be increased by December.
US Treasury Secretary Paulson has again called for the Chinese yuan to strengthen rapidly and the underlying pressure for Asian currency appreciation should still provide some background yen support.
Sterling secured important support on Tuesday from a recovery in risk appetite with gains to highs just above 2.05 against the dollar as stock markets rallied. The UK currency also pushed to highs around 0.6950 against the Euro.
The CBI industrial survey was significantly weaker than expected with the orders component falling to -6 in October from +6 the previous month. Exports were also negative and business confidence fell to a 20-month low. The survey result will undermine confidence over fourth-quarter growth trends, although the impact was limited.
MPC member Barker stated that the economic risks had shifted to the downside, but she was still concerned over inflation trends and not convinced that the housing sector would weaken sharply. The comments overall will cast doubts on whether there would be support for an early cut in interest rates which will provide some near-term Sterling support.
The Swiss currency drifted weaker to 1.6735 against the Euro on Tuesday, primarily due to a general recovery in risk appetite. The Swiss franc had a firmer tone against the dollar, but was unable to strengthen through the 1.17 level and significantly underperformed the other major European currencies.
Movements in global stock markets will remain very important in the short term with the Swiss currency seeing a significant drop in support when global equity markets advance.
The firmer Australian currency tone was sustained in local trading on Tuesday with a recovery back to 0.8925. Domestically, the key focus will be on the consumer inflation data which will be released on Wednesday as the data will be key for short-term interest rate expectations.
The Australian dollar will gain support from a strong figure while expectations of a near-term rate increase will decline if there is a subdued figure. Wider levels of risk aversion will remain important and the Australian dollar moves will remain correlated closely with stock market moves. In this context, Wall Street gains pushed the local currency towards 0.8980 in New York.