EUR/USD
The Euro maintained a firm tone ahead of key events on Thursday and gains accelerated sharply during the US session as the currency strengthened to near a 2011 high with a peak just below 1.34 against the dollar.
The Euro-zone remained a very important focus on two main fronts. The latest debt auction for Spain was relatively well received and, although the amounts involved were relatively small, there was relief that market tensions did subside slightly. There was also further speculation that EU governments would look to improve the terms of the rescue fund and increase its size.
As expected, the ECB left interest rates on hold at 1.00% following the latest council meeting. The comments from ECB President Trichet were more surprising as he stated that short-term inflation risks had increased. He also stated that prices needed to be monitored very closely following the recent increase in inflation which is the ECB’s normal coded message that it will consider an increase in interest rates.
The Euro gained strong support from the comments, but there will also be concerns that any increase in borrowing costs would intensify strains within the Euro area and further weaken peripheral economies. IMF officials also warned that there were still major structural risks within the Euro area.
The latest US jobless claims data was weaker than expected with an increase to a 10-week high of 445,000 in the latest week. There is still the threat of distortions caused by the year-end period, but there will still be some disappointment over the data which will curb dollar yield support.
Source: VantagePoint Intermarket Analysis Software
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Yen
The dollar was unable to make headway much above 83 against the yen on Thursday and was subjected to renewed selling pressure during US trading with a retreat to 82.60. The dollar was generally on the defensive which contributed to the weakness, but there was also evidence of increased exporter dollar selling which had a negative impact on the US currency.
Commodity prices were generally weaker despite the US currency vulnerability and this will tend to curb yen selling to some extent on reduced demand for carry trades.
Overall confidence in the Japanese economy will remain weak and there will be a growing risk of structural outflows from the bond market which will tend to undermine the yen, especially if there is Chinese selling.
Sterling
Sterling found support above 1.57 against the dollar on Thursday and then advanced firmly to a one-month high near 1.5880. The UK currency was boosted mainly by dollar weakness and it lost ground against the Euro.
Domestically, the Bank of England left interest rates on hold at 0.50% for the 22nd consecutive month. There was no statement by the bank following the announcement and the vote split will not be known for another two weeks. There will be speculation that the bank will move towards a tighter policy, especially after the comments from ECB President Trichet, and this will tend to offer some degree of Sterling support.
There will still be major doubts over the economic outlook with unease over the housing sector and fears that consumer spending will weaken. In this environment, Sterling will still find it difficult to gain strong buying support and it drifted weaker in Asian trading on Friday.
Swiss franc
The Euro maintained a very strong tone against the franc on Thursday and, after initial consolidation near 1.2680, there was a renewed surge to a high near 1.2880 during the New York session. There was broad Euro support following Trichet’s comments and there was also a reduction in defensive Swiss franc demand as Euro-zone debt fears eased. The dollar was unable to make a break above 0.9750 against the Swiss currency.
There was further speculation that the National Bank would intervene to weaken the currency, especially after warnings over the damaging impact of franc strength from SNB member Jordan. For now, the bank may settle for verbal intervention, especially as developments within the Euro area will have a much bigger impact on the Swiss currency.
Source: VantagePoint Intermarket Analysis Software
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Australian dollar
The Australian dollar held above 0.9920 against the US dollar during Thursday and rallied to a peak just above parity as the US currency was subjected to wider selling pressure. It was unable to sustain the gains and weakened back to the 0.9960 area in local trading on Friday.
Commodity prices were generally weaker which sapped demand for the currency to some extent and there was caution towards risk appetite which dampened further demand for the Australian dollar, especially with flood damage still a significant market focus.
