by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar edged stronger on Friday ahead of the US data. The Euro spiked higher after the US sales data, but failed to hold the gain and drifted back towards 1.3850 in a continuing dollar correction from recent sharp losses. With the dollar unable to break resistance levels, is liable to be a dominant theme ahead of Tuesday’s Federal Reserve interest rate decision.
The headline US retail sales data was close to expectations with a 0.3% increase as auto sales rose strongly. The underlying figure was weaker than expected with a 0.4% monthly decline which will maintain fears over a slowdown in consumer spending, although the previous figure was revised up slightly. There was a surprising 2.4% decline in gasoline sales while building material sales also fell.
The 0.2% increase in industrial production after a 0.5% increase previously continues to suggest modest manufacturing growth, while consumer confidence edged slightly higher.
The US current account deficit fell to US$190.8bn for the second quarter after an upwardly-revised US$197.1bn the previous quarter. The underlying deficit is narrowing slightly, but was still 5.5% of GDP which will maintain fears that the deficit is unsustainable in the medium term.
The Euro-zone inflation rate edged down to 1.7% in August from a provisional 1.8% estimate which will dampen expectations of further near-term interest rate increases. The Spanish economy will continue to cause concern, especially as the first half current account deficit rose to EUR50.2bn, and these concerns will restrain the Euro.
The yen strengthened in Asian trading on Friday after reports that UK mortgage company Northern Rock had secured emergency funding from the Bank of England. The yen struggled to hold gains beyond the 115.0 level as there was greater confidence in pushing funds overseas. The yen again failed to hold stronger than the 115.0 level after temporary gains following the US data.
Expectations of an interest rate increase at next week’s Bank of Japan meeting are close to zero which will undermine the yen initially, although the currency impact of any increase would now be much larger.
The Chinese central bank increased interest rates again on Friday with a 27 basis points increase in deposit and lending rates. The tightening in China will continue to provide some support to the Japanese yen, although global risk conditions will tend to dominate.
Sterling weakened sharply in Asian trading on Friday after reports that the Northern Rock mortgage company had secured emergency support from the Bank of England. The UK currency came under further selling pressure as UK markets opened with lows below 2.01 against the dollar. The UK currency also weakened to lows around 0.6905 against the Euro.
The Northern Rock difficulties reinforced fears that tight credit markets would damage the economy and the ITEM forecasting group reported that 2008 GDP growth could be reduced by 1.0%. The Rightmove organisation also reported that house prices fell 2.6% in September, the sharpest drop for five years. Although the data may have been distorted, the drop will fuel expectations that the housing sector is slowing sharply.
There will be further expectations that the Bank of England will not increase interest rtes again and speculation over a rate cut within the next few months will undermine Sterling support.
The easing of money market stresses will provide some relief and Sterling will also still gain support if there is a sustained improvement in risk tolerances.
The dollar avoided a fresh test of support below the 1.1820 level on Friday and strengthened to test levels above 1.19. The franc weakened again towards the 1.65 level against the Euro as risk tolerances improved.
Swiss National Bank President Roth stated that a price stability issue remains essential. He could not say whether monetary policy was accommodative, but stated that policy was appropriate.
Market expectations over further increases in Swiss interest rates have weakened slightly and this will tend to curb Swiss currency demand, although the fundamentals will remain strong.
The Australian dollar has continued to fluctuate around the 0.84 level against the US currency on Friday and settled just above this level in US trading with a slightly firmer bias.
The domestic influences were limited with global trends dominant. The news of emergency funding for UK mortgage company Northern Rock temporarily undermined the Australian currency as risk fears spiked, but it proved resilient. Overall risk tolerances have improved and this has allowed the currency to take greater advantage of improved yield spreads.