EUR/USD
The Euro found support in the 1.4350 region against the dollar on Tuesday and rallied strongly following relief that the European PMI data did not signal a further sharp deterioration in conditions. The Euro-zone manufacturing PMI index weakened to 49.7 from 50.4, as the German sector held steady while the service-sector data overall was slightly stronger than expected.
In contrast, the German ZEW index was sharply weaker than expected with a decline to -37.6 for August from -15.1 previously and this was the lowest reading since December 2008. There was also a weaker than expected reading for consumer confidence which declined to -17 for August from -12 previously. Despite some relief, the data still suggested that conditions were continuing to deteriorate which will sap longer-term confidence.
There were further political discussions surrounding an expansion of the EFSF and the issue of collateral surrounding Greek loan payments with a warning that any requirements from collateral could destabilise the situation and undermine the whole Greek rescue deal.
The US housing data failed to have much of a market impact with new home sales falling 0.7% to an annual rate of 298,000 in the latest month. The FDIC reported that there had been a drop in the number of problem US banks in the second quarter for the first time in six years and there was a small increase in loans, but the sector remained extremely fragile.
There were further concerns surrounding the Euro-zone banking sector as Libor rates continued to increase. There was increased dollar demand by the banking sector and reports of increased liquidity stresses as Italian banks in particular were subjected to further heavy selling pressure.
With former Fed Chairman Greenspan also warning over the risk of the Euro breaking down, the currency was unable to hold levels near 1.45 and retreated to test support below 1.44.
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Yen
The dollar was trapped within familiar ranges during Tuesday and found further support close to 76.50 with a firmer tone in late US trading on speculation over fresh action by Japan to curb yen strength.
The Finance Ministry announced that there would be a US$100bn package to help companies deal with the impact of yen strength including additional reporting on currency positions, but there was no mention of intervention and the yen regained ground following the announcement.
Moody’s downgraded Japan’s credit rating by one notch to Aa3 with a stable outlook which had a small impact in weakening the yen.
Sterling
Sterling pushed higher in Europe on Tuesday, primarily as a function of wider dollar weakness with a peak just above 1.6560 against the US currency.
The latest economic data provided some relief with an increase in mortgage approvals for the latest month to 33,400 from 32,100 previously while the CBI industrial survey reported an increase in the orders component to 1 for July from -10 previously.
There was still a lack of confidence surrounding the economy given fears over the outlook for consumer spending and Sterling also found it more difficult to gained defensive support during the day with some correction after recent advances. Sterling retreated to lows below 1.65 before finding support as the Euro struggled to hold above 0.8750.
Swiss franc
The dollar found support on dips to the 0.7850 area in European trading on Tuesday and advanced steadily during the US session with a break higher once the 0.79 area was breached. The Swiss currency also lost ground against the Euro with a peak just above 1.1450.
There was a solid tone in US equity markets which helped curb defensive demand for the franc especially when there was a sharp decline in gold prices. There was still underlying caution towards risk.
There was no evidence of National Bank intervention, but there was further evidence of activity in the forward markets as interest rates remained firmly in negative territory.
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Australian dollar
The Australian dollar challenged levels above 1.05 against the US dollar on Tuesday and did retain a firmer tone, but resistance levels were tough to break down.
The currency gained support from relief that the latest global manufacturing data was not worse than expected. There were still concerns over an underlying slowdown which curbed currency support with a reluctance to take on aggressive currency positions. Domestic influences remained limited, but a 0.8% drop in the latest reading for leading indicators was a reminder that recent data had suggested a sharp slowdown in the economy.
