EUR/USD
The Euro found support below 1.33 against the dollar on Friday and pushed sharply higher to a peak above 1.34 before falling back again during the US session. EU Leaders concluded their Summit on Friday, hammering out details of the ‘fiscal compact’. There would be a limit of 0.5% of GDP on structural budget deficits and any break of this limit could invoke sanctions. The main focus was political with the UK decision to opt-out of the Treaty.
During the European session, there were reports that China would set-up a US$300bn sovereign wealth fund for the forex market to be divided equally between dollars and Euros. The possibility of additional Chinese investment helped boost demand for the Euro, although there was still a high degree of uncertainty. Confidence in the Euro-zone banking sector also remained very fragile and yield spreads also moved in the dollar’s favour.
Markets were awaiting actions for credit-rating agencies as given the threat last week to downgrade Euro-zone countries. There were cautious remarks from the German Bundesbank which maintained its strong opposition to any central bank financing of government deficits and was also very wary over plans to channel funds through the IMF.
The US economic data was slightly better than expected as the trade deficit narrowed to a 10-month low in the latest month while there was a further improvement in the University of Michigan consumer confidence index to 67.7 from 64.1 previously. The data will help maintain a slightly more optimistic tone surrounding the US economy ahead of the Federal Reserve meeting on Tuesday. On domestic grounds, there appears little reason for the Fed to take further action at this stage and the meeting may be dominated by contingency planning.
Markets remained very cautious in Asia on Monday with the Euro edging slightly lower. There were still a very high number of short speculative Euro positions according to the latest data which should lessen the threat of further aggressive selling.
Source: VantagePoint Intermarket Analysis Software
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Yen
The dollar was unable to make any convincing attack on the 78 area against the yen on Friday and edged slightly lower to test support near 77.50 as ranges remained extremely narrow.
The US currency was unable to gain any significant support from the slightly stronger than expected US data and both currencies were dominated by trends in risk appetite. There were further doubts surrounding the Asian economic outlook which curbed selling pressure on the Japanese currency, although the impact was limited as regional bourses did make some headway.
The domestic data had little impact with a slightly weaker than expected reading for household confidence. As liquidity ebbs ahead of the Christmas period, markets will be on alert over potential Bank of Japan intervention.
Sterling
Sterling found support close to 1.56 against the dollar on Friday and pushed to a peak around 1.5740 before retreating equally sharply and re-testing support in the 1.56 zone with the UK currency holding around
The headline trade deficit fell to GBP7.6bn for October from a revised GBP10.2bn previously as exports rose to a record high which provided some support for Sterling. The data will help support fourth-quarter growth, although the impact was offset by a weak reading for construction orders.
Political ramifications of the EU Summit were an extremely important focus during the day, but the financial implications will also be extremely important. If Euro-zone fears intensify again, Sterling will be in stronger position to benefit from potential defensive inflows.
In contrast, isolation will also increase the potential Sterling downside risks if there is evidence of renewed deterioration in the UK economy. The UK currency consolidated on Monday as it was unable to make any fresh attack on the 1.57 area.
Swiss franc
The dollar hit resistance close to 0.9280 against the franc on Friday and retreated to a low just below 0.92 before moving back to the 0.9280 area on Monday. The Euro was trapped below the 1.24 level in cautious trading conditions as markets mulled the EU Summit implications.
There were major reservations and uncertainties surrounding the European banking sector which dampened speculative flows. There will be further caution ahead of the quarterly National Bank policy meeting on Thursday given the possibility of further action to weaken the franc.
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Australian dollar
The Australian dollar found support below 1.01 against the US dollar on Friday and pushed to a high above 1.02 before drifting weaker again later in the US session.
The latest economic data was slightly better than expected with a rise in home loans for October while a lower than expected AUD1.6bn monthly trade surplus did not have a major impact.
Although Asian equity markets rallied slightly on Monday, markets remained extremely cautious surrounding the outlook which limited any strong buying support for the local currency, especially with further doubts surrounding the Chinese outlook.
