Daily Currency Analysis

Darrell Jobman, Senior Analyst, TraderPlanet.com, LLC

EUR/US$

The dollar was unable to break Euro support in the 1.40 area on Wednesday and had a generally weaker tone during the day. The Euro gained some initial support from a slightly stronger than expected German retail sales report while global risk appetite was also generally firmer.

The US economic data was mixed and did not have a decisive impact on trading. The ISM index for the manufacturing sector rose to 44.8 in June from 42.8 the previous month which was marginally above expectations, although there was some disappointment that the orders index slipped back to below the 50.0 level which suggested an important risk that any recovery in the industrial sector will stall relatively quickly.

The ADP report recorded a private-sector employment decline of 473,000 for June after a revised 485,000 drop the previous month. Elsewhere, there was a marginal increase in pending home sales while construction spending edged lower for the month.

The dollar weakened sharply in US trading following a report that the Chinese authorities had called for the issue of global reserve policies and the introduction of a new reserve currency to be discussed at the G8 meetings next week. The Euro strengthened to a high at the 1.42 level before consolidation around 1.4150.

There will be the risk of high volatility on Thursday with the US employment release and the latest ECB policy decision. The Euro will be vulnerable to selling pressure if the ECB announces any additional quantitative easing measures.

Yen

The headline quarterly Tankan index of business confidence improved to -48 from the record low of -58 recorded previously, which was a weaker improvement than expected. Companies were also more pessimistic over investment plans with capital spending expected to decline by 9.4% in the current fiscal year. The survey evidence suggests that the economy is still facing major difficulties which will tend to hamper the yen.

There was a further small increase in the Chinese PMI releases for June which helped stabilise risk appetite and the yen registered net losses despite the evidence of indecision over near-term trends. The dollar edged higher to the 96.80 region in early Europe on Wednesday, but was unable to extend the gains and was slightly weaker in New York. This was primarily due to dollar weakness as the yen was still struggling on the crosses.

Sterling

The UK currency found support below 1.64 against the dollar in European trading on Wednesday.

The UK PMI index for manufacturing rose to 47.0 for June from 45.4 the previous month, maintaining the recent tone of improvement with output expanding. The UK currency also gained some support from a general improvement in international risk appetite as equity markets attempted to recover from Monday’s losses.

The UK currency is still being hampered by renewed fears over the UK debt position and it failed to hold its best levels against the dollar. Sterling also weakened to near 0.86 against the Euro.

Swiss franc

The dollar was unable to make any significant headway against the Swiss franc during Wednesday and weakened to lows near 1.07 before finding some degree of support. The Euro edged weaker against the franc with a test of support in the 1.52 region.

The Swiss PMI index strengthened for the month to 41.9 from 39.8 previously which continues to suggest a weak and fragile recovery in conditions.

The Swiss currency is still proving to be broadly resilient and markets will again need to be on high alert for fresh intervention if there is a fresh move towards the 1.50 level against the Euro.

Australian dollar

The Australian dollar found support on dips to the 0.80 region against the US currency. The domestic data was mixed as there was a stronger than expected report for retail sales with a 1.0% monthly increase, but there was also a sharper than expected decline in building approvals while the PMI data was also disappointing.  Levels of risk appetite will still tend to dominate in the short term.

There was still evidence of inflows into high-yield currencies and the Australian dollar strengthened to a high of 0.8110 as the US currency was subjected to general selling, although it failed to hold its best levels and retreated back to below the 0.81 level.