by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The US currency managed to resist a serious challenge on the 1.40 level during Wednesday, but was unable to make any strong headway with initial Euro buying below the 1.3950 level. Dollar confidence remained fragile as yield and economic conditions remained in focus.US housing starts fell again in August to an annual rate of 1.33mn while permits also fell to 1.31mn with both data series at 12-year lows.
The data will reinforce fears over a prolonged downturn in the housing sector even though monthly data will remain volatile.There was a headline drop of 0.1% for consumer prices in August with an underlying increase of 0.2% to give a year-on-year increase of 2.1%. The data was marginally weaker than expectations, but the impact will be limited by the fact that oil prices have increased strongly again since the data. Higher energy prices will tend to push up the September consumer prices reading. This month’s inflation data will not further undermine investor confidence in the Federal Reserve’s determination to control inflation .
The risks have, however, risen following the 0.50% interest rate cut and long-term interest rates have increased. Fed Chairman Bernanke will need to take a robust stance on inflation in congressional testimony on Thursday to maintain some degree of confidence in the dollar.
The yen was unable to hold gains beyond 116.0 against the dollar and weakened to 116.30 in early US trading. The yen was undermined by strong gains for global stock markets following the Federal Reserve interest rate cut. Lower volatility levels also helped boost capital outflows from the yen, but the currency regained some ground later in US trading.The Bank of Japan left interest rates on hold at 0.50% following the latest monetary meeting with the second consecutive 8-1 vote as Mizuno voted for an immediate increase. This decision did not have a major impact as it had been widely expected.
Bank Governor Fukui’s remarks following the interest rate decision did not suggest that the bank was looking for a near-term increase in rates. A sustained improvement in risk tolerances would provide a greater opportunity for the bank to tighten, but short-term defensive yen demand will be reduced unless there is a clear signal from the bank that rates will be increased.
Sterling weakened to fresh 1-year trade-weighted lows during Wednesday and also fell to the lowest level since early 2006 against the Euro. After a sharp Sterling slide, US currency vulnerability still provided important Sterling protection with a move back above 2.00 later in US trading.Bank of England MPC minutes from the September meeting recorded a 9-0 vote for unchanged rates. The bank expressed uncertainty over the impact of financial-market turbulence and there were reduced concerns over the inflation outlook. The minutes will certainly reinforce expectations that rates will not be increased again. The retail data will be watched closely on Thursday as consumer spending trends will be very important for central bank policy. The Fed rate cut will also help reinforce expectations that the Bank of England will follow suit in cutting rates during the fourth quarterThe Bank of England has reversed course on Wednesday and announced that it will add liquidity by allowing GBP10bn in asset-backed borrowing from the bank. This reversal will tend to undermine confidence in the bank as it had strongly opposed this measure last week. There will also be fears of political interference which will tend to undermine Sterling confidence.
The dollar again tested support close to 1.18 against the dollar before strengthening to highs above 1.1850 as the franc came under pressure against the Euro.The Swiss retail sales data was weaker than expected with a 3.2% annual increase for July, although the underlying data was still firm which will limit any significant impact.Risk tolerances will remain important in the short term and further gains for global stock markets would continue to undermine Swiss currency demand.
After a temporary retreat, the Australian dollar regained the 0.85 level against the dollar on Tuesday with a peak above 0.8550 as high-yield currencies secured renewed demand.Australian yields will be seen as more attractive following the Fed’s rate cut, especially in view of the improvement in global risk tolerances. There were no significant domestic developments during the day with robust Reserve Bank comments earlier in the week still having a positive influence. Underlying credit-related stresses will still tend to restrict further strong buying interest.