EUR/US$
The dollar recovered some ground in Asian trading on Wednesday, but was unable to make strong headway. It was then subjected to renewed selling and weakened sharply to lows near 1.5840 in New York trading. Sentiment towards the US economy and currency remained depressed while the Euro developments were more positive.
The US new home sales data followed a similar pattern to the existing homes data released on Monday. Sales were at a 13-year low, but were higher than expected with an upward revision to January’s data. There was a small decline in inventories while mortgage applications rose sharply, but there was also a reported decline in prices which will maintain fears over the mortgage sector.
Elsewhere, durable goods order fell by 1.7% for February while underlying orders fell by 2.6% which will maintain fears over the industrial sector.
In contrast, the German IFO index rose to 104.7 in March from 104.1 the previous month which will underpin near-term confidence in the German economy and Euro. There will still be unease over the economic prospects elsewhere in the Euro-zone.
ECB President Trichet testified to parliament on Tuesday and maintained the recent pattern of comments by ECB officials by concentrating on the inflation risks. The bank remains extremely anxious to avoid secondary inflation effects and Trichet also stated that the current level of interest rates was appropriate for the conditions. The hawkish stance by Trichet will continue to provide near-term support to the Euro as markets downgraded the potential for interest rate cuts this year.
Source: VantagePoint Intermarket Analysis Software
Yen
The dollar was unable to sustain gains above the 100 level against the yen on Wednesday and weakened to test levels below 99.0 before consolidating around 99.30 as the yen weakened against the Euro.
Capital flows will be watched very closely over the next 48 hours due to the possibility of last-minute capital repatriation ahead of Japan’s fiscal year-end. Strong repatriation flows would provide important near-term yen support, especially if risk aversion increases again.
The Japanese trade account reverted to a JPY970bn surplus for February after a seasonal deficit in January. Although export shipments to the US fell again, there were strong gains to Europe and Asia. These gains will ease fears over yen strength against the dollar and lessen pressure for Finance Ministry intervention to restrain the Japanese currency.
Sterling
Sterling pushed to highs above 2.01 against the dollar on Wednesday and challenged resistance levels below 0.78 against the Euro, but then weakened sharply.
The Bank of England warned over the inflation outlook in testimony to the Treasury Select Committee with Governor King stating that the headline inflation rate was likely to increase to around 3.0%. The MPC members were also generally cautious over growth prospects and the bank effectively stated that it was more willing to consider a cut in interest rates as the credit tightening took effect.
The Bank of England members also stated that it was expecting a further decline in Sterling due to current account deficit concerns and had included a weaker currency in their forecasts. Despite the inflation concerns, the comments on growth and the exchange rate will tend to undermine near-term confidence in the currency.
Following the Bank of England comments, the UK currency weakened to near-record lows against the Euro at 0.7885 and retreated against the dollar.
Swiss Franc
The dollar was unable to hold above 1.01 against the US currency on Wednesday and dipped to lows near 0.9900 as the US currency was subjected to renewed selling pressure. The Euro also failed to hold gains above the 1.5750 level against the franc and settled just below the 1.57 level.
The persistent volatility in asset prices is continuing to discourage carry trades and this is also undermining confidence in high-yield currencies which is also providing underlying franc support.
Source: VantagePoint Intermarket Analysis Software
Australian dollar
The Australian dollar has taken advantage of a renewed increase in commodity prices and a downturn in the US dollar over the past 24 hours. The Australian dollar pushed to a high near 0.9250 against the US currency, although it was unable to sustain the gains and weakened back to 0.9185 as risk aversion edged higher again.
Commodity prices were generally firmer which provided support to the currency, but there was still some unease over overall risk conditions. Although the domestic influences remained limited, there will be a close focus overnight on comments from Reserve Bank Governor Stevens. Any stronger suggestion that interest rates have peaked would tend to undermine the local currency.
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