7-9-09

EUR/US$

The Euro was unable to make any great headway during European trading on Wednesday and had a generally weaker tone. Risk appetite deteriorated again during the day which undermined demand for the Euro and also triggered fresh defensive support for the US currency while the sharp decline in commodity prices was also important in supporting the US currency.

Euro-zone GDP was left unrevised at a decline of 2.5% for the first-quarter final reading while the annual drop was slightly larger than expected, although the impact was limited. The German industrial data was sharply stronger than expected for the second successive day with industrial production rising 3.7% for May following a revised 2.6% decline the previous month.

New US consumer credit declined for the fourth consecutive month according to the latest data, illustrating that consumer spending levels will tend to be subdued and this will maintain a mood of caution over US and global growth prospects.

G8 officials were generally cautious over the economic outlook with comments that there were signs of stabilisation while there were still important risks remaining.

The comments contributed to the generally cautious tone surrounding risk appetite and the Euro weakened further to lows below 1.3850 during US trading before staging a recovery as Wall Street rallied. There were no major comments on the dollar, although markets will inevitably remain on alert for remarks on reserve diversification.

Yen

The Japanese core machinery orders data was significantly weaker than expected with a 3.0% decline for May following a 5.4% decline the previous month and this pushed orders to the lowest level for over 20 years. Although there was some recovery in key manufacturing orders, there was evidence of a notable deterioration in the services sector. The data will maintain pressure for the quantitative easing programme to be extended.

The data also sparked a further deterioration in risk appetite and this helped push the yen stronger with the currency strengthening to a six-week high against major currencies as the Nikkei index also weakened to the lowest level since late May. The dollar was near 94.25 in early Europe on Wednesday.

The dollar lost support near the 94 level in US trading and then weakened very sharply with lows below the 92 level before a recovery to 92.80. The Japanese currency also strengthened rapidly against the Euro and Sterling as technical levels were broken. There will be an increasing threat of verbal intervention to restrain the yen.

Sterling

Sterling was trapped below the 1.62 level against the dollar during Wednesday and dipped to test one-month lows below 1.60 in US trading before a recovery. Sterling was weaker against the Euro, but recovered from lows near 0.8670.

The Halifax house price index recorded a 0.5% decline in prices for June for a 15.0% annual decline which suggested that the underlying pressures have eased, at least on a short-term basis.

The government announced revised plans for the banking sector, although there was a lack of detail and the impact was limited with global trends still important for direction. Sterling was still unsettled by underlying fears over the debt situation if the economy fails to improve.

The Bank of England policy decision will be watched closely on Thursday and any expansion of quantitative easing would tend to weaken Sterling, possibly sharply.

Swiss franc

The dollar found support above 1.0850 against the franc on Wednesday, but was unable to push above the 1.0950 region. Moves against the dollar were dampened by Euro/Swiss moves with the Euro weakening to near 1.5130 in New York.

The Swiss unemployment data was weaker than expected with an increase in the seasonally-adjusted rate to 3.8% from 3.6%. Although the National Bank is mandated to control inflation, higher unemployment will tend to increase resistance to franc gains.

In this context, there will be the high risk of intervention if the franc strengthens towards the 1.50 level against the Euro.

Australian dollar

The domestic data was broadly supportive with stronger than expected increases in home loans and consumer confidence, although trends in international risk appetite were still dominant. The currency weakened to a low of 0.7825 in Asian trading on Wednesday before a recovery to 0.7885.

Trends in risk appetite remained dominant and the Australian currency weakened sharply to lows near 0.7720 in New York as equity markets weakened. There were also very sharp yen gains against the high-yield currencies which pushed the Australian dollar weaker.