EUR/USD
The Euro held steady in the first part of the European session on Tuesday and again challenged levels above 1.32, but it was unable to make fresh highs. Although the German unemployment data was better than expected with a decline of over 30,000 for December, the other data was less favourable as German and French spending declined while Euro-zone unemployment as a whole was a record 10.4% as the Italian jobless rate rose sharply.
Despite initial optimism, there was no Greek deal with private creditors and there was also additional speculation that negotiations with the troika were not progressing well. With the debt position still unsustainable, there was further pressure on the ECB to accept losses on its Greek bond holdings which unsettled confidence. Euro-zone leaders are now looking for a deal on Greece by the beginning of next week with continuing delays undermining Euro sentiment as Portuguese yields rose to fresh record highs.
The US economic data was generally weaker than expected with a decline in consumer confidence to 61.1 for January from a revised 64.8 previously, in sharp contrast to expectations of a gain. The Chicago PMI index also weakened to 60.2 for the month from 62.2 previously. The data had a significant impact in undermining risk appetite which provided some defensive dollar support.
Month-end flows triggered fresh volatility during the US session and the Euro fell sharply to lows below 1.3050 before a limited technical recovery. The currency was again unsettled by speculation that the ECB would announce an even bigger long-term repo operation at the end of February which is effectively a form of quantitative easing.
Source: VantagePoint Intermarket Analysis Software
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Yen
The dollar was unable to make any headway against the yen during Tuesday and retreated to lows in the 76.15 area with no significant recovery in Asia on Wednesday. The US currency was undermined by weaker than expected data releases as yield support remained very limited.
The Japanese currency also maintained a firm tone on the crosses as it strengthened back through the 100 level against the Euro. There was further speculation over capital repatriation which supported the yen and underlying risk appetite was fragile.
Renewed gains for the Japanese currency has increased expectations over intervention to weaken the currency. Finance Minister Azumi stated that their stance was unchanged and there will inevitably be speculation over action to weaken the yen, especially if the Swiss National Bank is forced to intervene directly.
Sterling
Sterling was unable to break above the 1.58 region against the dollar on Tuesday, but it maintained a firm tone as losses were held in the 1.5750 area. There were sharp moves on the crosses as the Euro reversed initial gains and weakened rapidly to test support below 0.83.
The latest UK consumer lending data was weaker than expected with a decline in consumer credit for December and there was also a further sharp monthly drop in money supply. Although the data may have been distorted by special factors, there will be further concerns over vulnerability within the banking sector and a lack of lending. In this environment, there will also be additional pressure for the Bank of England to engage in additional quantitative easing.
The PMI data will be watched very closely over the next few days with a particular focus on Friday’s services-sector data.
Swiss franc
The dollar found support in the 0.9125 area against the franc on Tuesday and rallied to a high above 0.9220 later in the New York session. Action on the Euro cross remained an extremely important focus of attention as the Euro dipped to lows near 1.2030, close to the 1.20 minimum level set by the central bank.
There will be a temptation to test the National Bank’s and acting Chairman Jordan’s resolve, especially if there is any evidence of defensive flows into the Swiss currency as this would make it much more difficult for the bank to curb franc gains. Inevitably, there will be very heavy stop-loss positions set just below the 1.20 level.
Source: VantagePoint Intermarket Analysis Software
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Australian dollar
The Australian dollar hit resistance close to 1.0680 against the US currency during Tuesday and dipped sharply to test support below 1.06 as risk appetite deteriorated, although the general performance was broadly resilient given wider Euro losses.
There was some relief surrounding the latest Chinese PMI data as the official measure was just above the 50 level, although it fell short of the rumoured data which lessened the impact. The domestic data was weaker than expected with a decline in house prices for the fourth quarter and a drop in home sales for December.
