by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar strengthened through resistance levels in a 1.4180-1.42 band on Tuesday and pushed to highs around 1.4135 in a significant correction from recent heavy losses. There were also greater reservations over the Euro and the dollar settled around 1.4155.
US pending home sales fell by a further 6.5% in August to give a 21.5% annual decline which pushed sales to the lowest level since the series was started in 2001. The data will reinforce fears that the housing sector will remain under severe pressure in the short term and keep the dollar on the defensive.
Consolidation is still likely to be the dominant short-term theme, especially with key employment data due over the remainder of this week. The ADP report will be watched closely on Wednesday, especially as disappointing reports over the past two months have been an important signal of weakness in the monthly payroll report. Evidence of strong takeovers for US companies and net inflows of over US$250bn so far this year will provide some underlying currency support and reinforce the dollar’s attractions on valuation grounds.
The Euro group of finance ministers will look for a stronger statement on the need for currency stability at the October G7 meetings and there will also be pressure for more forceful dollar support by the US administration. In addition, there will be demands for the ECB to take a more moderate stance on policy to curb Euro gains which will ensure caution ahead of Thursday’s rate decision.
Euro Libor rates remained under upward pressure on Tuesday with rates at the highest levels for over six years. The tightness in Euro markets will maintain unease that further credit-related losses will be revealed within the European banks.
The yen was unable to strengthen through the 115.0 level on Tuesday and weakened back to test the 116.0 level with the US currency, in turn, unable to strengthen above this level as markets struggled to break technical barriers.
The yen is still being undermined by improved risk tolerances following the Dow Jones record high on Monday. There was, however, been some evidence of greater caution as commodity prices dipped lower.
The latest data from Japanese investment trusts recorded the lowest net inflows for 12 months during September despite a high number of trust launches. This indicates residual caution by domestic investors and will also provide some short-term yen protection.
Sterling pushed to a 2-week high on a trade-weighted index on Tuesday with gains to 0.6745 against the Euro and a solid performance against the dollar with the UK currency settling just above 2.04.
Reports of a rescue bid for Northern Rock provided some support to Sterling. There were, however, also reports that UK banks were borrowing funds from the Euro-zone as an alternative to Bank of England financing and underlying stresses within the financial sector are liable to persist.
There will also be further concerns over a sharp slowdown in the housing sector In this environment, the UK currency is unlikely to gain strong support ahead of Thursday’s Bank of England meeting, especially given the small possibility that rates will be cut.
The franc remained on the defensive against the Euro on Tuesday with a test of levels beyond 1.6650 before a partial retreat. The US currency pushed back to highs near 1.1770 against the Swiss currency in a continuing correction. Levels of risk tolerances will continue to have an important impact and the franc will find it difficult to make much headway while equity markets remained firm.
The September Swiss annual consumer inflation was 0.7%compared with an expected increase to 0.8%. The benign inflation data will reinforce expectations that the Swiss National Bank will decide to keep interest rates on hold at the December meeting and this will curb near-term franc support.
The Australian dollar was subjected to profit taking in local trading on Tuesday following recent strong gains. The Australian PMI index also weakened for September with a decline to 50.7 from 52.4 the previous month which curbed enthusiasm for the currency.
The Reserve Bank of Australia will announce its latest interest rate decision on Wednesday local time and unchanged rates is the most likely outcome. Any change in rates would trigger a big move for the Australian currency. The latest trade and retail sales data could also trigger currency volatility on Wednesday.