EUR/USD
The Euro initially consolidated in the 1.22 region against the dollar in the European session on Friday.
There was some relief at the latest Italian auction with a decline in three-year yields on strong domestic buying and a small issue of 10-year paper also received solid demand which helped ease immediate funding concerns. There was still a high degree of unease surrounding the medium-term situation, especially with underlying political fears surrounding Monti’s government, and pressure to accelerate market reforms. There is a meeting of Finance Ministers due on the 20th and Chancellor Merkel continued to insist that there would be no room for manoeuvre on Germany’s position.
Spanish bank borrowing from the ECB increased to a fresh record high for June, increasing fears surrounding the banking sector and increasing fears that the eventual bailout costs would be substantially higher. There were also fears that the sharp move out of ECB deposits following the cut in rates to zero was not being translated into any increase in lending with funds simply switched into current accounts.
The headline US producer prices index was stronger than expected at 0.1%, but the core increase of 0.2% was in line with expectations and dampened any impact. Similarly, a decline in the University of Michigan consumer confidence index to 72.0 for July from 73.3 did not have a major influence.
The Euro briefly dipped to fresh 2-year lows near 1.2160, but the market was unable to break support levels and there was a significant positioning reversal later in New York as the Euro rallied towards the 1.2250 area.
Regional Fed President Lockhart, who is a voting member of the FOMC this year, stated that the current monetary policy would be untenable if the economy deteriorated and the comments overall suggested that he had moved closer to backing additional Fed action.
The latest IMM data also recorded a net increase in dollar longs which will maintain the threat of additional position adjustment and a weaker US currency. After being squeezed higher on position adjustment, the Euro stalled just below 1.2250 in Asia on Monday.
Source: VantagePoint Intermarket Analysis Software
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Yen
The dollar was unable to gain any significant support on Friday with no help from US data releases and dipped to lows near 79.10 before a limited recovery.
There was further speculation that the Federal Reserve would move towards additional policy easing which undermined dollar support. The global measures to expand monetary policy have helped underpin risk appetite, but have also increased the relative yen appeal in global terms which has helped underpin the currency.
The dollar was unable to make any impression on the yen in Asia on Monday even though Asian equity markets were generally stronger with the Euro hitting resistance above the 97 level.
Sterling
Sterling found support in the 1.5420 area against the dollar on Friday and pushed sharply higher during the New York session with a peak around 1.5575. Technical considerations were important with the UK currency gaining support from the Euro’s inability to regain the 0.79 level.
The Bank of England formally launched its Funding for lending scheme (FLS) and, although analysts were generally sceptical over the potential impact on the economy as a whole, there was still some positive impact on sentiment. There was also further evidence of defensive flows into Sterling as demand for AAA-rated bond markets remained very strong.
The latest Rightmove house-price index recorded a 1.7% decline for July which maintained underlying fears surrounding the domestic fundamentals even though the series is volatile.
Swiss franc
The dollar hit resistance close to 0.9870 against the franc on Friday and dipped sharply to the 0.98 area during the New York session, although there was still a small net advance for the week. There was no significant move in the Euro cross during the day with moves continuing to suggest that the central bank was intervening aggressively to prevent Euro gains.
Swiss producer prices fell 2.2% in the year to June which will keep the National Bank on alert over potential deflation pressures and maintain pressure for franc gains to be resisted. Wider losses against the dollar would, however, lessen fears to some extent.
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Australian dollar
The Australian dollar found support in the 1.0150 region against the US currency on Friday and pushed sharply higher as the US currency lost ground with highs around 1.0245.
The currency gained some support from an underlying improvement in risk appetite and gains for equity markets while there was also increased speculation that the Federal Reserve could move towards additional quantitative easing. There were still important doubts surrounding the longer-term outlook which restrained the currency, especially as there were increased doubts surrounding the Chinese economy with a further flurry of doubts surrounding data accuracy.
