Friday, November 27, 2009

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EUR/USD

The Euro re-challenged the 1.5140 region on Thursday, but was unable to make new highs and then was generally on the defensive during the day. Trading conditions remained volatile with liquidity curbed by the US Thanksgiving holiday.

The news that Dubai World, the government investment company, was looking to reschedule debt payments had a significant negative impact on risk appetite and also provided some significant dollar protection during the day. Chinese equity markets dipped sharply and there were substantial losses for European bourses which undermined European currencies. There will be some fears of a wider withdrawal of investment funds from major markets, especially if Dubai corporations are forced into distressed asset sales, and there will be the risk of a more serious deterioration in risk appetite over the next few days which could provide additional dollar support.

Provisionally, German consumer prices fell by 0.2% for November, although the annual inflation rate rose to 0.3% from unchanged the previous month due to the sharp decline in prices last year.

The latest Euro-zone money supply data recorded a  slowdown in annual growth to 0.3% from 1.8% the previous month while private-sector loans fell by 0.8% over the year. The consistent slowdown in lending over the past few months will maintain fears over deteriorating credit conditions within the Euro-zone.

The Euro weakened to lows around 1.4960 before consolidating just above 1.50. An underlying lack of confidence in the dollar will continue to hamper rally attempts.

Yen

The US selling pressure continued on Thursday with the dollar weakening to a 14-year low near 86.25. Finance Minister Fujii warned that the Ministry was watching currency moves very closely and would be prepared to act against abnormal currency moves. Deputy Finance Minister Noda, however, stated that there were no plans to intervene. Markets remained sceptical that there would be any action to weaken the Japanese currency, but there will be caution over aggressive dollar selling.

There are still important stresses in the Japanese economy with the latest Bank of Japan minutes stating that the special lending facility could be re-introduced next year and this will maintain pressure for yen gained to be capped.

As risk appetite deteriorated during the day, the yen maintained a robust tone, resisting pressure for a correction against the dollar while the Japanese currency strengthened sharply to highs near 129.50 against the Euro.

Sterling

Sterling was unable to hold a position above 1.67 against the dollar on Thursday and weakened sharply to lows below 1.65. Sterling was undermined by a firmer US dollar tone, although there was also important independent weakness with the Euro strengthening to November highs above 0.91during the day

The latest CBI retail sales survey was in line with expectations with the headline index at a 2-year high of +13. The data failed to have a significant impact with markets tending to concentrate on the global environment.

There will be fears that difficulties within Dubai will result in a withdrawal of investment funds from major markets such as the UK and this will tend to have a negative impact on Sterling. The UK currency will also tend to lose ground if there is a sustained deterioration in risk appetite while renewed fears over rising bad debts within the banking sector could result in heavy selling pressure.

Swiss franc

The dollar dipped to 6-month lows near 0.99 against the franc in Asian trading on Thursday, but then rallied strongly. There were rumours of National Bank intervention early in Europe and the dollar pushed to a high above 1.0050 The franc maintained a strong tone against the Euro with gains to highs near 1.50 before consolidation near 1.5050 towards the end of the European day

The Swiss currency will tend to gain support if there is a sustained deterioration in international risk appetite. Caution is required, however, as any renewed fears over the global banking sector could renew fears over the Swiss banking sector given the heavy Swiss bad-debt burden.

Australian dollar

The Australian dollar was unable to extend the gains on Thursday and dipped significantly to lows near 0.9160 in Europe. There was a correction in equity markets which undermined the Australian dollar, especially as there was another sharp retreat for Chinese equities.

There will still be strong Australian dollar buying support on dips, maintaining the risk of choppy trading. As risk appetite weakened further during Thursday, the Australian dollar dipped to lows just below 0.91 before a tentative recovery. The currency will be vulnerable to more sustained downward pressure if commodity prices come under sustained selling pressure.