EUR/USD
Market volatility remained extremely high during Thursday with both the Euro and dollar struggling to gain strong support as confidence in both currencies remained very fragile due to increased structural fears.
After a brief rally, there was further selling pressure on the European financial sector. There were further fears that credit conditions were deteriorating with further speculation that there would be a withdrawal of credit lines from the French banks, especially with pressure for funds to withdraw from European markets.
There was further buying of Italian and Spanish bonds by the ECB during the day which kept yields down, but there was pressure elsewhere as French and Belgian credit default swaps continued to increase and dollar Libor rates also continued to increase as fears over a credit crunch persisted.
The US jobless claims data was slightly better than expected with a decline to 395,000 in the latest week from 402,000 previously, but attention was focussed on the trade data. The deficit increased to US$53.1bn from a revised US$50.8bn the previous month as exports registered the biggest decline for two years. As well as increasing fears surrounding the trade account, there will also be a further downgrading of growth estimates which will continue to sap underlying confidence.
From lows near 1.41, the Euro rallied to highs above 1.4250 on a rally in equity markets. There was also an announcement that there would be a ban on short selling of financial securities for two weeks in Belgium, France, Italy and Spain. The Euro was unable to sustain the gains and retreated back to below 1.42 with a continuing lack of confidence in the Euro-zone financial sector while there was also speculation that the ECB would switch to an easing bias for monetary policy with French GDP flat for the second quarter.
Source: VantagePoint Intermarket Analysis Software
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Yen
The dollar found support below 76.50 against the yen during Thursday and had a generally firmer tone from early in the US session, although the US currency was unable to break above the 77 level as fear curbed trading activity.
There was further speculation that the Bank of Japan would intervene to sell the yen which curbed yen buying, especially with increased Swiss National Bank resistance to currency gains. There was also a tentative recovery in risk appetite in the US session which helped support the dollar.
There was retail yen selling interest on intervention speculation, but caution over the financial sector and growing doubts over the global economy continued to limit selling pressure on the Japanese currency.
Sterling
Sterling re-tested support near 1.61 against the dollar during Thursday and then rallied to a high around 1.6240 during the US session. The UK currency also advanced to near 0.8750 against the Euro.
There was a further deterioration in confidence surrounding the Euro-zone financial sector which provided some immediate defensive support for Sterling, especially with confidence in the US economy also weak.
There was still an important lack of confidence in the UK economy, especially with the Bank of England pledging to maintain low interest rates throughout the next year. The UK banking sector will be watched very closely and Sterling will be vulnerable to further selling pressure if there is any evidence of deterioration in credit conditions. Chancellor Osborne warned over the impact of Euro-zone difficulties, but pledged to maintain the current economic policies.
Swiss franc
The dollar found support below 0.73 against the franc during Thursday and the Swiss currency weakened rapidly during the day. The US currency rose sharply to a high above 0.7650 and also weakened to lows around 1.09 against the Euro.
Following comments from the National Bank officials, there were increased expectations that the central bank would take more aggressive action to curb franc strength. There was further speculation that the bank could introduce a temporary currency peg or trading band against the Euro in order to combat further speculative flows into the Swiss currency.
As the National Bank continued to flood liquidity into the market, swap rates also turned negative which had some impact in dampening demand for the currency. There was still the potential for capital inflows due to fears over the Euro-zone credit markets and the franc retreated slightly in Asia on Friday.
Source: VantagePoint Intermarket Analysis Software
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Australian dollar
The Australian dollar was initially blocked close to 1.03 against the US dollar on Thursday and retreated to lows below 1.02 before rallying again to a peak above 1.0350 as equity markets attempted to rally.
The Australian currency continued to draw support on yield grounds and commodity prices also rallied strongly, but underlying risk conditions remained extremely fragile, especially with fears over the global growth outlook. There was also speculation over a shift in Reserve Bank policies and volatility is likely to remain extremely high in the short term. There will be further concerns over the domestic economy which is liable to undermine buying support.
