by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar was unable to strengthen back through 1.4250 against the Euro on Thursday. The US currency weakened to near record lows around 1.4345 after the US data and there was further Euro buying support below the 1.43 level.
US new home sales rose by over 4% in September to anannual rateof 770,000. The monthly increase, however, was only due to a sharp downward revision to August’s data and sales overall were still very weak at just below market expectations. A drop in inventories will provide some optimism that sales could be near a trough, but confidence will remain very weak in the short term.
Markets have fully priced in a 0.25% Federal Reserve cut in interest rates next week and are also now putting the chances of a second successive 0.50% rate cut at just above 50%. The dollar will remain vulnerable on yield grounds, although the extent of Fed cuts now priced in will provide important protection. Volatility levels are liable to be high over the next week, especially with persistent unease over underlying credit conditions.
The German IFO index weakened to 103.9 in October from 104.2 the previous month, which was slightly above expectations, while the IFO was generally optimistic over economic trends. The Euro-zone economic doubts will still tend to restrict the potential for Euro gains with increased pressure for the ECB to adopt a more restrained stance on interest rates.
The dollar was unable to sustain gains above 114.50 against the yen on Thursday and weakened to test levels below the 114.0 level in US trade. The dollar was still finding support below this level as Euro/yen volatilities remained high.
Chinese developments will remain important with yuan gains and speculation over a further interest rate increase providing background support to the yen. The Japanese currency also gained some initial support from falls in Asianstock market prices with a sharp dip in Chinese market prices. A generally defensive stance towards regional stock markets will provide support to the Japanese currency with yen moves still correlated strongly with Wall Street trends.
Domestically, the corporate services prices index rose 1.4% in the year to September and there will be some speculation over an interest rate increase before the end of 2007. The immediate impact will be limited unless there is a stronger than expected increase in consumer pricesin which case the yen would secure important support.
Sterling again tested levels above 2.05 against the dollar on Thursday and briefly pushed to a high of 2.0550 before a retreat back to 2.05. The UK drifted weaker against the Euro after being unable to hold levels stronger than 0.6950.
The latest BBAmortgage approvalsdata recorded a drop to 51,700 in the latest month from 61,500 previously which suggests an underlying slowdown in the housing sector even though part of the drop was related to seasonal factors.
The Bank of England warned that the UK commercial and financial sectors were vulnerable to further shocks and the relatively downbeat assessment will trigger speculation over a near-term cut in interest rates which will erode Sterling support. A lack of confidence in the US currency will continue to provide important UK protection in the short term.
The Swiss franc found support weaker than the 1.67 level against the Euro on Thursday and also strengthened to highs beyond 1.1650 against the dollar as the US currency came under renewed selling pressure. Near-term franc moves will continue to be influenced strongly by trends in global stock markets with choppy conditions liable to continue.
National Bank director Hildebrand stated that the economy faces greater risks, but he was still generally optimistic over prospects. Hildebrand also stated that the bank would reconsider interest rate policies if exchange rates posed a risk to price stability.
The Australian dollar has again been subjected to choppy trading, but the net tone has been firm over the past 24 hours. Yield considerations will remain supportive in the short term with further speculation over a November Reserve Bank increase in interest rates compounded by expectations of further US interest rate cuts.
International risk conditions will continue to be watched closely and the underlying credit fears will continue to restrict the potential for Australian dollar gains.US dollarweakness proved to be the key influence on Thursday with the Australian dollar pushing to 0.9070 in US trade.