EUR/USD
The Euro found support in the 1.3550 area against the dollar in Europe on Wednesday and pushed higher during the European session with a peak just below the 1.37 level.
Markets were relieved that the IMF-led troika would resume its negotiations over Greek fiscal policy on Thursday with increased optimism that there would be a positive recommendation that the next loan tranche should be approved. There was also relief that the Finnish parliament voted to approve expanded powers for the EFSF.
There was still a high degree of uncertainty over the situation, especially as there were reports that the German government was looking to re-negotiate the terms of the second Greece bailout package which fuelled fears over further policy divisions. There were further uncertainties surrounding the German EFSF parliamentary vote due on Thursday. Although there were increased expectations that the government would be able to pass the bill without resorting to opposition support, the outcome is liable to be close. More importantly, underlying fears will persist, especially as the EFSF even in its stronger form will not be able to stabilise the debt situation and there will be demands for even more aggressive actions.
The US durable goods orders data was marginally weaker than expected with a 0.1% decline for August, although the impact was limited as markets continued to concentrate on risk appetite. There was a sharp Wall Street decline in late trading which undermined confidence and the Euro was also subjected to renewed selling pressure as confidence deteriorated.
The currency retreated to lows near 1.3525 before gaining fresh support later in the Asian session on Thursday as it pushed back above the 1.36 level.
Source: VantagePoint Intermarket Analysis Software
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Yen
The dollar found support below 76.40 against the yen during Wednesday and rallied slightly in US trading, although ranges remained very narrow during the day as risk conditions continued to dominate both currencies.
The yen did retreat on the crosses when risk appetite improved, although there was still a high degree of caution over aggressive selling. There was further speculation over capital repatriation on fears over the global economy while there were also reports that Japanese institutions were lowering their holdings of European bonds.
The latest retail sales data was weaker than expected with a 2.6% decline in retail sales in the year to August which will increase doubts over the sustainability of any domestic rebound. The data will also tend to increase pressure for more aggressive Bank of Japan action to curb yen appreciation
Sterling
Sterling was blocked in the 1.5680 area against the dollar on Wednesday and retreated to lows near 1.5550 on a wider deterioration in risk appetite before regaining the 1.56 level. Sterling edged slightly weaker against the Euro, although ranges were narrow. Sterling was hampered to some extent by month-end Euro demand by sovereign buyers.
The latest Bank of England survey reported some improvement in credit conditions during the third quarter, but there was still a high degree of uncertainty over the situation and doubts whether the improvement would be sustained which maintained an underlying lack of confidence.
There was further market speculation that the Bank of England would introduce further quantitative easing, potentially as early as next week’s policy meeting which had some negative impact on the currency.
Swiss franc
The Euro continued to test support below 1.22 against the franc on Wednesday, but was able to resist heavy selling pressure. The dollar found support near 0.8925 and rallied back to above 0.90 late in the US session, but was unable to sustain the gains.
National Bank member Jordan stated that the franc cap was very, very credible and reiterated that the central bank would take all necessary steps to defend the lower Euro limit and prevent renewed franc appreciation. He repeated that the bank can effectively create francs without limit and played down the profitability issue. Fears over a sharp deterioration in the Swiss economy also maintained speculation over an aggressive defence of the franc cap.
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Australian dollar
The Australian dollar hit resistance near 0.9950 against the US dollar during Wednesday and was subjected to heavy selling pressure later in the US session and retreated to lows near 0.97 in Asia on Thursday.
There was a renewed deterioration in risk appetite as Wall Street retreated and underlying fears surrounding the Euro-zone banking sector continued. There was also speculation over a downturn in the local economy and lower Reserve Bank interest rates. Volatility remained a key feature and the currency rallied back to the 0.98 area late in the Asian session.
