EUR/USD
The Euro remained trapped below 1.3250 against the dollar for much of the European session on Thursday and tested support below 1.32 during the New York session.
The US economic data was mixed, but had a firm bias which helped underpin the dollar. Although the housing starts data was subdued, but jobless claims maintained the recent favourable tone with a small decline to 420,000 in the latest week from 423,000 previously. The Philadelphia Fed manufacturing index was significantly stronger than expected with a rise to 24.3 for December from 22.5.
Although US bond yields edged slightly lower, there should be some degree of optimism over the economy which will help underpin the US currency. There will still be unease surrounding the structural vulnerabilities with a third-quarter current account deficit of US$127bn reminding investors that the US is running substantial external deficits as well as the budget deficit.
At the EU Summit there was agreement to bring in a new Euro support mechanism in 2013 while the ECB also announced that it would raise additional capital to help boost its ability to buy bonds. Of particular importance was the ability to avoid public disagreements within the Summit, but there will still be fears that underlying disagreements will return. There will also be fears that a heavy debt-roll-over schedule in 2011 will effectively freeze Portugal out of the debt markets which would also maintain a high risk that Portugal would eventually need EU support.
Relief was still an important market element and the Euro rallied to the 1.3280 as it again survived an important test of technical support in the 1.3160-1.3180 band.
Source: VantagePoint Intermarket Analysis Software
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Yen
The dollar tested resistance levels close to 84.50 against the yen twice on Thursday, but was unable to make a break above this level and dipped heavily from late in the US session with a retreat to lows near 83.80.
The US economic data continued to provide some degree of support for the dollar on yield grounds, but it has been more difficult for the currency to make further gains. There will be further doubts surrounding the US fundamentals and longer-term unease over currency devaluation which will help protect the yen.
Although the immediate Euro-zone fears have eased slightly, there will still be fears over the outlook and Japanese investors will still have reservations over an aggressive policy of buying overseas bonds which will offer some degree of yen protection.
Sterling
Sterling found support blow 1.5550 against the dollar in Europe on Thursday and rallied following the data releases. Retail sales rose 0.3% for November following a revised 0.7% advance the previous month.
The latest Bank of England inflation expectations survey also had a significant impact with a rise in one-year expectations to 3.9% from 3.4% previously. The rise will tend to increase pressure for the central bank to raise interest rates.
There will still be doubts whether the central bank will be in a position to tighten policy given the loan-repayment burden and there will also be fears that the Bank of England will lose medium-term control of the economy.
Sterling found further support near 1.5550 and rallied back towards 1.5650 as it tracked the US dollar moves. The decline in the latest consumer confidence reading had some negative impact with Sterling underperforming on the crosses at close to 0.85 against the Euro.
Swiss franc
The Swiss National Bank held interest rates at 0.25% following the latest council meeting and there were minor changes to the economic forecasts. The bank warned over potential damage from Euro fragility, but there were no measures to directly influence the franc’s value.
The central bank clearly remains sensitive to the franc’s value and would be looking to increase interest rates if the currency was weaker.
Although the Euro attempted to rally against the major currencies, the Swiss currency resisted losses and strengthened back to the 1.2750 area in Asian trading on Friday with the dollar retreating back to near 0.96 against the franc.
Source: VantagePoint Intermarket Analysis Software
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Australian dollar
The Australian dollar found support below 0.9850 against the US dollar on Thursday and rallied later in the session as the Euro recovered ground against the US currency and there was a rally on Wall Street.
There have been no further domestic influences to guide the markets with the currency influenced strongly by international factors and it rallied to the 0.9920 area in local trading on Friday. There will be concerns over a slowdown in consumer spending which will tend to stifle currency support and there will also be unease over the possibility of further Chinese monetary tightening.
