by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar strengthened to highs around 1.4190 against the Euro in early Europe on Wednesday. The US currency was unable to sustain the gains with reports of sovereign bids for the Euro below the 1.42 level and retreated to 1.4260 ahead of the US housing data. The dollar secured some defensive support from a renewed decline on Wall Street, but trading conditions were choppy.
US existing home sales weakened by a further 8.0% in September to an annual rate of 5.04mn which was the lowest figure since the current data series was created in 1999. The data also recorded a drop in prices and higher inventories. The latest evidence suggests some recovery in mortgage conditions, especially at the higher end of the market which may provide some relief from late 2007.
The housing data overall will, however, increase pressure for the Federal Reserve to cut interest rates again next week and markets have now fully discounted a cut to 4.50%. Yield considerations will tend to keep the dollar under pressure in the short term.
The Euro-zone PMI index for the manufacturing sector weakened to 51.5 in October from 53.2, while the services-sector index was stronger. The manufacturing index has fallen sharply over the over the past two months and this has proved to be an accurate leading indicator of the Euro-zone economy over the past few years. The data will increase concerns over the competitive position which, in turn will increase political demands for Euro gains to be capped. There will also be increased pressure on the ECB to consider a cut in rates which will restrain the Euro.
The Japanese currency has continued to fluctuate in line with global stock market moves. The yen strengthened to 114.35 in Asian trading on Wednesday as Asian equity markets edged lower. The yen tested levels below the 114.0 level in New York after the US housing data pushed Wall Street weaker, but was unable to sustain the gains with Euro/yen moves remaining very volatile.
Domestically, the trade surplus increased over the year by more than 60% to JPY1.64trn in September as solid exports were compounded by a surprise fall in imports. The data will tend to support the yen, although a drop in shipments to the US will cause Finance Ministry reservations over strong Japanese currency gains.
The Chinese authorities have allowed the yuan to strengthen through the 7.50 level against the US dollar for the first time since the 2005 float. The underlying pressure for Asian currency appreciation should provide background yen support, particularly if there is a yuan revaluation.
Sterling has been unable to sustain gains above the 2.05 level against the dollar, but resisted pressure for significant losses while the UK currency held close to 0.6950 against the Euro.
Sterling was unsettled initially by poor earnings from Merrill Lynch which increased risk aversion, but the UK currency was able to regain ground and tended to fluctuate in line with global stock market moves.
There were no significant domestic developments and, with no major data over the remainder of this week, international trends may remain dominant. The latestmortgage approvalsdata will, however, be watched closely on Thursday and any sharp drop would increase fears over sharp housing-sector deterioration. There would also be renewed speculation over lower interest rates which would tend to undermine Sterling.
The Swiss currency has struggled to gain any strong traction against the Euro on Wednesday and also failed to strengthen through the 1.17 level against the dollar.
The weaker than expected Euro-zone PMI data will raise doubts over the industrial sector’s prospects and this should provide some net support to the franc, especially as Swiss growth data has remained generally robust.
The headline increase in Australian consumer prices was below expectations with a 0.7% increase for the third quarter which cut the annual inflation rate to 1.9%. The underlying increase, however, was 0.9% with the annual rate close to the 3.0% Reserve Bank ceiling.
The higher than expected core rate increased speculation over a November interest rate increase with markets pricing in a near-90% chance of a hike. This pushed the Australian dollar to near 0.9050 against the US dollar before a retreat back below the 0.90 level. Yield factors will underpin the Australian dollar, but the currency will still be influenced strongly by levels of risk aversion and struggled to regain momentum.