EUR/USD
The Euro again found support close to 1.4350 against the dollar on Monday and rallied to highs around 1.4430, but it was unable to sustain the advance and dipped back to the 1.4350 region late in New York as caution prevailed.
There were further stresses in the money markets as the dollar Libor rate increased to a five-month high and gauges of liquidity also continued to suggest that there were important stresses within the European funding markets. Although tensions did not increase significantly further, there was further speculation that European banks were finding it even more difficult to secure dollar liquidity.
The latest ECB statement recorded EUR14.3bn in peripheral bond-market purchases in the latest week from EUR22bn previously which was the third highest weekly total since the programme was originally launched in 2010. There was confidence that the ECB could contain market pressures in the short term, but also anxiety as to the longer-term policy implications. The German government remained strongly opposed to any form of Eurobonds.
There were very few fresh incentives surrounding the US economy with markets still on high alert over Fed Chairman Bernanke’s speech at the end of this week. There was further speculation as to whether there would be any suggestion of further quantitative easing measures.
Underlying risk appetite was still fragile which provided some degree of defensive dollar support, but enthusiasm for the US currency remained very limited with the Euro holding above 1.4350 on Tuesday.
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Yen
The dollar resisted a further test of support below 76.50 against the yen on Monday and was trapped in extremely narrow ranges with no move above the 77 level.
There was further speculation over intervention to weaken the Japanese currency which had an important impact in deterring yen buying, especially as there had already been an increase in speculative positions.
Finance Minister Noda continued to warn against excessive yen appreciation, but there was no actual intervention to curb the currency. The dollar was unable to gain any support on yield grounds, especially with further speculation over hints of additional Fed quantitative easing.
Sterling
Sterling initially found support close to 1.6470 against the dollar on Monday and briefly pushed to above 1.65, but the currency was unable to sustain the advance and dipped to test support below 1.6450 as ranges were generally narrow.
There were further concerns surrounding the UK economy with warnings that real incomes would remain under pressure and fall at faster rate than the 2009 recession which would also undermine consumer spending. MPC member Broadbent stated that he was broadly in the middle of the MPC debate over interest rates while there had been a deterioration in the economic outlook over the past few weeks.
Sterling trends were also influenced strongly by international trends with the currency still gaining some support on relative grounds as confidence in the Euro-zone and US economies remained extremely fragile. The UK currency continued to draw some support on defensive grounds as Euro-zone banking fears persisted.
Swiss franc
The dollar found support on dips to the 0.7850 area against the franc on Monday, but there was selling pressure just above the 0.79 level as markets consolidated within narrower ranges. The Euro was unable to move above the 1.14 level.
There was no evidence of National Bank intervention during the day, but there was further speculation that the central bank was intervening in the forward market. The action put further pressure on interest rates which moved deeper into negative territory which may discourage franc buying to some extent.
There will still be underlying fears surrounding the Euro-zone economy and financial sector which will maintain underlying defensive demand for the Swiss currency and certainly complicate the National Bank’s task.
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Australian dollar
The Australian dollar hit found support in the 1.0380 region against the US currency during Monday and again approached the 1.0480 area before hitting fresh selling pressure.
The latest Chinese PMI index edged slightly higher for August and, although it was still trapped below the 50 barrier, there some relief that conditions were not deteriorating further which underpinned risk appetite and commodity prices.
Domestically, Finance Minister Swan ruled out intervention to weaken the Australian dollar and there were no significant economic data releases.
