EUR/USD
Risk appetite faltered in Asian trading on Wednesday and the Euro retreated back towards the 1.31 area against the dollar as confidence in the global economy deteriorated.
The US trade deficit for June was sharply worse than expected with a 21-month high of US$49.9bn from a revised US$42.0bn the previous month as exports were generally subdued and imports rose strongly.
The main impact of the data was to increase fears over a sharp downward revision to the second-quarter GDP growth data with estimates that a cut in the trade contribution could push GDP growth as low as 1.0%. There will also be a loss of confidence surrounding the US fundamentals, especially with fears surrounding the budget deficit also increasing with a US$165bn deficit for July. The combination of substantial trade and budget deficits are certainly not favourable conditions for medium-term currency strength.
Concerns over the global economy tended to dominate during the day as risk appetite continued to deteriorate and this lead to defensive dollar demand.
The Euro was also undermined by speculation that the ECB was buying Irish bonds following higher than expected loan losses at the Bank of Ireland. The Euro fell sharply during the day with August lows close to 1.2830 in New York.
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Yen
There was a deterioration in risk appetite during Asian trading on Wednesday with slightly weaker than expected Chinese data and unease over the financial sector fuelling fears over a global slowdown, especially with the Federal Reserve also downgrading expectations. The Japanese economic data was also weaker than expected with a 1.6% increase in machinery orders after a 9.1% decline the previous month.
The Japanese Finance Ministry continued to warn over the impact of yen strength and the dollar was holding uneasily just above the 85 level against the Japanese currency while the Euro weakened to a 3-week low below 112.
There was renewed dollar selling in US trading and stop-loss selling pushed the dollar to test 15-year lows near 84.80. There was firm buying support below the 85 level and the dollar was able to recovery to the 85.25 area as the yen secured firm gains on the European crosses.
Sterling
A larger than expected decline in UK consumer confidence and weaker risk appetite helped trigger renewed selling pressure with a re-test of support below 1.58 against the dollar in early Europe on Wednesday. The employment data was mixed, but a lower than expected decline in the claimant count ensured a generally negative reaction.
In its quarterly inflation report, the Bank of England downgraded its growth forecasts to some extent and also stated that the growth risks were biased to the downside. As far as inflation is concerned, the bank expects the rate to be above the 2.0% target until the end of 2011, primarily due to the impact of higher taxes before falling to significantly below the 2.0% target level in 2-years’ time.
There was a strong emphasis on the high degree of uncertainty over the outlook and the bank stated that policy could be adjusted in either direction. There will be divisions within the bank, but the net risks suggest that rate increases will be resisted and this will tend to undermine Sterling
A sharp deterioration in risk conditions undermined Sterling, but it did find support below 1.5630. The UK currency also strengthened to a one-month high close to 0.8220 high against the Euro.
Swiss franc
The dollar found support below 1.05 against the Swiss franc on Wednesday and gradually strengthened during the day. The US currency was hampered by robust franc gains on the crosses as the Euro retreated sharply to lows near 1.36 against the Swiss currency.
A deterioration in risk appetite triggered renewed defensive support for the franc during the day, especially with rumours that the ECB was buying European bonds. The franc will also tend to gain support from a general lack of confidence in the global economy.
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Australian dollar
In contrast to recent sessions, the domestic data was stronger than expected with an increase in consumer confidence. There were, however, increased doubts over the global economy which curbed support for the currency and the US dollar also rebounded from lows with the Australian dollar weakening to a low close to 0.9020.
Global growth doubts are likely to remain a key feature and maintain a generally defensive tone for the Australian dollar. There was buying support below the 0.90 level, but the currency was unable to regain ground and dipped sharply weaker again late in the US session.
