EUR/USD
The Euro spiked higher in European trading on Friday following media reports that China was considering investing in the EFSF and ESM, but it retreated quickly following a more cautious interpretation of the comments from German Chancellor Merkel.
There was further downward pressure on the Euro following comments from Euro-group Head Juncker that the Greek debt restructuring situation was ‘ultra-difficult’. Following numerous reports over the past week that a deal was extremely close, the comments inevitably dampened optimism surrounding the near-term situation. More seriously, there were fears that any restructuring deal would still not provide a durable solution given the underlying debt burden. In this context, there were also fears that Greece could still face a Euro exit.
The US economic data did not have a major impact with a decline in jobless claims to 367,000 in the latest week from 379,000 previously. There were divergent views from regional Fed Presidents who are not on the FOMC this year with Fisher stating his opposition to any further quantitative easing while Evans maintained his dovish tone and promoted the case for further monetary action.
Fed Chairman Berrnanke took a more balanced approach in Congressional testimony and was keen to emphasis that the Fed would not abandon the inflation target, although is tone may well have been aimed at placating Republican fears.
The US monthly payroll data will inevitably have an important short-term impact on Friday, although it is more doubtful whether there will be a sustained impact given that the policy implications will be limited. Markets will continue to expect further interest rate cuts from the ECB over the next few months which will stifle Euro support. The dollar was still unable to gain much traction generally and failed to hold stronger than 1.31 against the Euro.
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Yen
The dollar again found support just above the 76 level against the yen on Thursday while rallies were very limited and capped below the 76.30 area. The US employment data will be watched closely and a firm release would help support the US currency to some extent.
Markets are also on high alert over intervention by the Bank of Japan and fear over action is deterring aggressive dollar selling. Finance Minister Azumi continued to intervene verbally and stated that Japan will act firmly to counter speculation.
The problem for the Japanese authorities is that there is little evidence of underlying yen selling even when risk appetite strengthens and this suggests that there is robust underlying demand for the currency as Euro-zone fears continue.
Sterling
Sterling was unable to hold above 1.5850 against the dollar on Thursday and drifted generally lower during the US session. Declines were curbed by a generally firm tone against the Euro as Sterling attacked Euro support in the 0.83 area.
The UK construction PMI index was weaker than expected with a decline to 51.4 for January from 53.2 previously and this was a disappointing release given that weather conditions had been favourable. The services PMI data will be watched closely on Friday and a weaker tone here would have potentially more damaging implications for Sterling.
Bank of England MPC member Posen was slightly more optimistic surrounding the economic outlook, but he still proposed additional quantitative easing of around GBP75bn. The currency impact of further easing on this scale should be measured, although uncertainty will be a key feature ahead of next Thursday’s Bank of England policy meeting.
Swiss franc
The dollar again found support on dips to the 0.9130 area against the franc on Thursday while resistance remained intact above the 0.92 area. Euro moves were again an important focus as the currency fluctuated around the 1.2050 region.
There was further market speculation that the National Bank will be less committed to defending the Euro minimum level, especially with no permanent Chairman in place. Acting-head Jordan maintained the standard line in comments on Thursday with comments that the minimum level would be defended with the utmost determination. Any intensification of the Greek crisis could severely test the bank’s resolve to block franc gains.
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Australian dollar
The Australian dollar pushed to highs around 1.0750 against the US currency during Thursday, but the performance was never very convincing and it dipped back to below the 1.07 level due in part to pressure for profit taking following recent gains. The domestic data offered some reassurance with the services-sector PMI index above the 50 level.
There was a slightly more cautious attitude towards risk and some disappointment over a lack of monetary easing by the Chinese central bank which dampened demand both for Asian risk assets and the Australian dollar.
