EUR/USD
The Euro found support below the 1.34 level against the dollar on Monday and secured a significant recovery with a move to test resistance above 1.35 as trading conditions remained volatile.
There was increased speculation that the ECB would restart its covered-bond issuance policy to provide additional liquidity which helped underpin Euro confidence. There was also further speculation that the EFSF would be leveraged through the ECB to provide greater impact in the markets. A greater sense of urgency following the weekend IMF meetings also helped galvanize Euro support.
Underlying confidence remained extremely fragile, especially as there are extremely important splits within governments and central banks. The German Finance Minister stated that there was no need to increase the rescue fund. There were also very strong comments by Bundesbank head Weidmann against using the ECB to fund EFSF bond purchases and there will certainly be further major policy divisions. There will also be substantial tensions surrounding Thursday’s German parliamentary vote on expanding EFSF powers. From a longer-term perspective, there were also fears that any increase in funding through the EFSF would result in Germany losing its AAA credit rating.
There were further uncertainties surrounding the Greek situation with no timing yet for the troika’s return to Athens and officials also stated that it was unlikely that any decision on the next Greek loan tranche would be made at the October 3rd meeting.
There was some relief that the latest German IFO index fell less than expected which suggests some resilience in the industrial sector. Meanwhile the US economic data failed to have a significant impact. The US dollar was vulnerable to a correction and retreated to lows beyond 1.3550 in Asia on Tuesday, but still secured underlying defensive support.
Source: VantagePoint Intermarket Analysis Software
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Yen
Stalemate tended to dominate in the dollar/yen pair during Monday with the US currency securing support close to 76.20, but unable to make significant headway. Trends in both currencies were influenced strongly by developments in risk appetite which limited independent movement. The Euro did recover from 10-year lows against the Japanese currency.
The Japanese government announced that it would bring forward steps to ease stresses caused by a strong yen, although the impact was limited without any actual intervention.
The yen still secured defensive support from underlying weakness in Asian currencies as fears over the regional growth outlook increased.
Sterling
Sterling found support in the 1.5450 area against the dollar on Monday and rallied to a peak above 1.5550 for a three-day high. The UK currency initially tracked a firmer Euro, but then secured wider support as it tested levels close to 0.8650 against the Euro.
There was some reduction in short positions, especially as the speculative short position was at an 18-month high and there was buying related to corporate dividend payments.
Domestically, MPC member Broadbent was generally pessimistic over the economic outlook with particular concerns over the banking sector. He stated that he was close to voting for additional quantitative easing in September and the remarks reinforced speculation that the bank would re-start the bond buying programme either in October or November.
The UK currency was still resilient with some support from fears that the Euro-zone countries would lose their AAA ratings if EFSF support is increased and there was a peak near 1.56 on Tuesday.
Swiss franc
The dollar initially found support close to 0.90 against the franc on Monday, but was unable to regain the 0.91 level and dipped lower again in US trading. The Euro dropped below support to a low near 1.2150 before finding fresh support and a move back above 1.22.
There was some easing of risk aversion which curbed defensive demand for the franc, although safe-haven demands remain much less of a factor given the National Bank franc cap against the Euro. There was some further speculation that the UBS rogue trading scandal would damage both the bank and wider capital flows into Switzerland.
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Australian dollar
The Australian dollar initially remained under heavy selling pressure on Monday and tested support close to the 0.96 area before rebounding strongly from over-sold conditions.
Metals prices and commodity prices also staged some recovery following initial selling which helped support the Australian currency. Trading conditions remained very choppy and there was renewed selling before a further move to the 0.9850 area in Asian trading on Tuesday as Asian equity markets rallied.
Underlying confidence in the regional and global economy remained fragile with fears over a sharp downturn which limited fundamental buying support.
