by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar found support close to 1.4150 against the Euro in Asian trading on Monday before strengthening steadily. The US currency pushed to highs around 1.4040 with trading in New York curbed by the Columbus Day holiday.
Last week’s US employment report will trigger some further re-assessment of the near-term economic direction and lower expectations of a further Federal Reserve interest rate cut at the end of October. In this context, the Fed minutes will also be watched closely on Tuesday. Reservations over the scope for further rate reductions would tend to reinforce market doubts whether the Fed will relax policy again. Futures markets have pushed the chances of an October cut to below the 50% level which will provide some dollar support.
Global exchange rate policies will remain an extremely important focus. ECB member Bini-Smaghi reported that there was no need to wait for the G7 meetings to intervene the markets. European Finance Ministers met on Monday, but there was no evidence of a unified stance at this stage with France apparently unable to gain wider support for intervention. There will still be reservations over Euro buying at current levels.
The Euro-zone data was slightly disappointing with the August recovery in manufacturing orders held to 1.2%. The latest data also recorded a further increase in long speculative Euro contracts to near 100,000 which will maintain the threat of a correction weaker.
The yen was unable to sustain a recovery beyond the 117.0 level against the dollar during Monday and weakened to lows around 117.60 before correcting to 117.30. The yen found support weaker than 165.50 against the Euro.
The recovery in risk aversion will maintain the potential for capital outflows from Japan and this will tend to keep the yen on the defensive in the short term, although there will be the clear threat of complacency.
Markets will monitor the EuroGroup talks closely over the next 36 hours for any evidence on concerted pressure for stronger Asian currencies to help ease upward pressure on the Euro.
There will also be some caution over selling the yen aggressively ahead of the Bank of Japan policy meeting on Thursday, especially as the recovery in risk appetite gives the bank a greater opportunity to increase interest rates.
Sterling held firm against the Euro on Monday with gains to 0.6905, primarily reflecting the general Euro correction weaker. The UK currency again hit selling pressure above the 2.04 level against the dollar with a dip to lows around 2.0330.
There was a strong 3.2% increase for input producer prices for September, the highest increase for over 2 years. The output data was subdued, however, which will ease fears over underlying inflationary pressure, especially as the annual increase in core prices was held to 2.2%.
The government’s pre-budget announcement will be delivered on Tuesday. There will be further market expectations of a Bank of England interest rate cut if there is a significant downgrading of growth forecasts.
Markets have started to anticipate a cut by the first quarter of 2008, but a reduction before then has not been priced in and increased speculation of a near-term cut would undermine the UK currency.
The Swiss currency has continued to drift weaker against the Euro on Monday with lows around 1.6680 as risk tolerances remain high. The US currency again challenged levels above 1.18 against the franc in a wider correction from September’s losses with highs around 1.1870.
Confidence in the Swiss economy will remain firm with seasonally-adjusted unemployment dipping to 2.6% for September from 2.7%.
The franc will tend to weaken if risk tolerances remain high, but a deeper correction in commodity prices would provide significant near-term relief.
The Australian dollar has remained strong and challenged levels above 0.90 against the US currency, the strongest level for 23 years, with a peak around 0.9030 in local trading on Monday. Domestic economic optimism should remain firm in the short term.
Demand for commodity currencies will remain robust in the short term and increased confidence in the global economy will tend to encourage carry trades. There is an increasing threat that global and domestic risk conditions will deteriorate again. A substantial amount of favourable news has also been priced in and the Australian dollar weakened to 0.8925 in US trading.