Wednesday, November 4, 2009

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EUR/USD

Although the Euro edged back towards the 1.48 area on Tuesday with markets looking to take a more positive attitude towards risk, it was unable to sustain the gains.

Risk appetite was generally cautious which supported the dollar for much of the day. There were increased fears over the European banking sector which undermined confidence and also reminded investors of the underlying Euro-zone structural vulnerabilities. The Euro weakened to key support near 1.4620 before rebounding to the 1.47 region.

It may prove difficult to break any major technical levels ahead of the Fed meeting on Wednesday as caution will prevail, although choppy trading is liable to remain a key feature.

The Federal Reserve decision will be very important for the dollar on Wednesday. Most market attention has focussed on the phrase stating that interest rates will be left at very low levels for an extended period. There has been speculation that the Fed will look to alter this policy wording at the November meeting.

There looks to very little chance of a substantial shift in rhetoric at this meeting, but a subtle change will be considered to suggest that the Fed has moved slightly closer to a tightening, especially as it would help lessen the risk of policy shocks and market volatility during 2010.

Any change in rhetoric would tend to support the dollar, especially with the potential for stop-loss Euro selling while the dollar is liable to weaken sharply if the wording is unchanged.

Yen

The Australian interest rate increase was in line with expectations with a 0.25% increase. The bank statement was slightly less hawkish than expected which curbed any rise in flows into high-yield currencies and also stemmed selling pressure on the yen.

Japanese markets were closed for a holiday which also curbed trading activity and the dollar consolidated just above the 90 level as caution prevailed ahead key central bank meetings and US employment data.

The yen was unable to sustain its best levels during the day while the dollar held just above the 90 level.

Sterling

Sterling was generally weaker in early Europe on Tuesday. The government announced a further support package for the UK banks as part of a wider restructuring scheme and the additional support could be close to GBP40bn.

There will be increased fears over the government debt position, especially as confidence is already very fragile. There will also be unease over underlying financial-sector vulnerability which will tend to be a negative factor for the currency.

The construction PMI index weakened to 46.2 for October from 46.7 the previous month, maintaining unease over the sector. In contrast, the house-price data remained firmer with the Halifax reporting a 1.2% gain for October, the fourth consecutive increase.

Sterling dipped to lows near 1.6260 against the dollar, but bounced firmly from this support level with gains back to 1.64 in New York. The Euro was also unable to hold above the 0.90 level against Sterling. Volatility will remain a key threat ahead of the Thursday Bank of England interest rate decision.

Swiss franc

The dollar found firm support close to 1.02 against the franc on Tuesday and strengthened to a high near 1.0340, but it was unable to sustain its best levels and weakened back to below 1.03 later in the US session. The Euro was trapped within relatively narrow ranges close to 1.51 against the Swiss currency.

The latest UBS results were weaker than expected which had a mixed franc influence. Support on wider risk aversion was offset  by fears over further weakness in the Swiss financial sector.

The franc will continue to gain some defensive support when there is a deterioration in global risk appetite with markets remaining on high alert over the potential National Bank intervention threat.

Australian dollar

The Australian Reserve Bank interest rate decision was in line with market expectations with a 0.25% rate increase. The statement from the bank was slightly more cautious than expected and there was reduced speculation that the bank would increase rates again at the December meeting. In response, the Australian dollar failed to hold gains and retreated back to below the 0.90 level against the US dollar.

There is likely to be an underlying more cautious attitude towards risk which will curb Australian currency support and it retreated to lows near 0.8915 in early US trading before recovering back to the 0.9020 region later in New York. Volatility will remain a key threat as risk appetite also fluctuates.