Daily Currency Analysis

Darrell Jobman, Senior Analyst, TraderPlanet.com, LLC

EUR/US$

The Euro maintained a firm tone in early Europe on Tuesday and pushed to highs close to the 1.4150 level before hitting tough resistance and edging weaker.

The US Chicago PMI index was stronger than expected with an increase to 39.9 in June from 34.9 the previous month, although this still indicated a significant contraction in the manufacturing sector. The mood of optimism was short lived as there was a surprisingly weak report for consumer confidence. The June Conference Board measure weakened to 49.3 from a revised 54.9 the previous month, disrupting the recent run of favourable consumer-related data.

The decline in confidence triggered some increase in risk aversion and the dollar gained some fresh underlying demand on defensive grounds. The employment and manufacturing indices will be watched closely on Wednesday for further evidence on the economy and weaker than expected releases would trigger further defensive dollar demand.

The longer-term dollar indicators were mixed as the latest data recorded an increase in the dollar’s proportion of global reserves. In contrast, there was evidence of a cautious revival in US investment flows overseas. If there is  sustained increase in risk aversion, then these flows could be jeopardised which would tend to underpin the dollar.

The Euro-zone data recorded a rise in German unemployment to a two-year high, although the monthly increase was lower than expected. The flash Euro-zone consumer inflation estimate recorded a decline in the annual rate to -0.1% from 0.0% the previous month, the first ever annual decline. The immediate monetary policy implications should be limited. As risk confidence ebbed away, the Euro retreated to lows near 1.40 against the dollar before consolidating around 1.4040.

Yen

The Japanese economic data was broadly in line with market expectations as unemployment rose to 5.2% for May from 5.0% while the jobs/applicants ratio was at a record low for the month. The data will maintain fears over the outlook for consumer spending and, although the household spending data was firmer over the month, cash earnings continued to decline which suggests that sales will be very fragile. The manufacturing PMI index rose to a 1-year high, although it was still below the 50.0 level

Regional stock markets were firmer on Tuesday which helped underpin risk appetite, although the yen was able to resist further selling pressure.

The Japanese currency strengthened to highs around 95.30, but was unable to sustain the gains and weakened back beyond the 96.0 level even though equities were generally on the defensive.

Sterling

The Nationwide bank reported that UK house prices rose for the second successive month in June which helped boost sentiment. In contrast, the GDP data was sharply weaker than expected with a revised 2.4% decline for the first quarter from a 1.9% estimate previously, the weakest performance for 50 years. Business investment also fell sharply by 7.6% for the quarter, reinforcing the downward pressure on capital spending.

The current account data was also weaker than expected with a GBP8.5bn deficit for the first quarter. The releases had a significant impact in weakening sentiment and from highs above the 1.67 level, Sterling dipped sharply to a low near 1.64.

There were also negative press reports on the UK debt position which undermined sentiment towards the currency. Volatility levels are liable to increase and Sterling will be much more vulnerable if global risk aversion increases.

Swiss franc

The dollar dipped to lows near 1.0780 against the Swiss franc on Tuesday before finding support and rallying to highs around 1.0880.  The Swiss currency was little changed against the Euro with Euro support on dips towards the 1.5220 region.

The UBS consumption index dipped to 0.77 for June from a revised 0.91 the previous month which suggests that consumer demand is struggling to make much headway.

The National Bank policy actions will continue to be monitored closely in the short term given the potential for franc sales.

Australian dollar

The Australian dollar secured a peak close to the 0.8145 level against the US currency in early Europe on Tuesday as confidence remained firm. The domestic data was slightly weaker than expected with a drop in housing sales and consumer credit. The immediate impact will be limited as markets continue to focus on degrees of risk appetite, although the domestic data will still need to be watched closely.

Although there will be strong Australian dollar buying support on dips, there was a retreat to lows near 0.8050 in New York as the US currency recovered lost ground.