Friday, July 10, 2009

EUR/US$

The dollar was unable to hold stronger than the 1.39 level against the Euro on Thursday and had a generally weaker tone as markets found it difficult to challenge resistance levels as currencies struggled to gain any momentum.

The German trade surplus was slightly higher than expected at  EUR10.3bn for May which provided some degree of relief over trends in exports with a marginal 0.3% increase for the month, although the impact was limited.

US initial jobless claims fell to 565,000 in the latest week from a revised 617,000 the previous week and this was the first week below the 600,000 level sine January. The data will tend to revive hopes that the economy is stabilising, although there will still be a high degree of uncertainty given the seasonal considerations.  The number of continuing claim also rose sharply which suggest that conditions are still very tough which will limit positive sentiment towards the economy.

Nevertheless, there was some degree of relief which helped improve risk conditions and this helped lessen underlying defensive dollar demand.

There were further cautious remarks on the dollar and potential for alternative reserve currencies from Chinese monetary officials and these pressures helped allow the Euro to challenge the 1.40 resistance area. Later in the US session, the Euro pushed to highs around technical resistance in the 1.4070 region before consolidating around 1.4035.

Yen

There were warnings over excessive yen moves from government and Finance Ministry officials during the Asian trading session on Thursday. There will also be an increasing threat of intervention to restrain the yen if there are further rapid gains with markets watching official comments very closely.

These fears will tend to limit yen buying and there was also an increase in importer yen selling as the Japanese currency strengthened.  As Asian markets looked to stabilise, the yen retreated towards the 93 level on Thursday.

The dollar pushed to a high around 93.60, but was unable to regain the key technical support levels broken on Wednesday and the US currency weakened back to below 93 and consolidated just below this level.

Sterling

Sterling found solid buying support above the 1.60 level against the US currency during Thursday and was able to secure a consistently stronger tone during the day.

The UK trade deficit narrowed to a three-year low in may with a goods deficit of GBP6.3bn which will provide some underlying Sterling support, although the impact was limited.

As expected, the Bank of England left interest rates on hold at 0.50% following the latest MPC policy meeting. The central bank also announced that the quantitative easing programme would be maintained at GBP125bn, contrary to some expectations that the amount of bond buying would be increased and this provided an immediate boost to Sterling.

The bank announced that there would be a review at the August meeting when the latest inflation report will be available. There will continue to be some expectations that the bank will increase the bond buying next month and this will tend to curb any significant improvement in sentiment.

Sterling was still able to maintain a firmer tone and pushed to a high near 1.6350 against the US dollar while there was also support beyond 0.86 against the Euro.

Swiss franc

The dollar was unable to make any headway on Thursday and weakened sharply in US trading with lows below the 1.08 level. There was significant volatility in the Euro/Swiss cross during the day. There was a jump to the 1.5170 level which triggered some speculation over fresh intervention by the Swiss National Bank, although there was no actual sign of the bank or the BIS in the market.

There will still be strong speculation of bank action if the franc continues to strengthen against the Euro and there will be the risk of additional market volatility.

Australian dollar

There was a significant Australian dollar recovery back to 0.7830 against the US currency on Thursday as risk appetite looked to stabilise. The labour-market data was close to expectations with the unemployment rate rising to 5.8% from 5.7% while employment fell around 21,000. Trends in risk appetite will still tend to dominate in the short term and the Australian dollar will gain further relief if there is a rebound in confidence and recovery in commodity prices.

The Australian currency resisted renewed losses during Thursday, but was unable to make much headway with significant selling pressure above the 0.7850 level.