The Euro broke down through support levels just above 1.27 in Asian trading on Tuesday and stop-loss selling helped push it to lows near 1.26 in early Europe.

The German ZEW economic confidence survey recovered further to -5.8 in February from -31 the previous month which briefly helped improve Euro sentiment, but the currency was unable to sustain the initial advance. The currency continued to be unsettled by fears over the Eastern European economy and banking sector. Fears were fuelled again on Tuesday by a warning from Standard & Poor's that credit ratings were at risk.

The US manufacturing data remained bleak wit the New York PMI index weakening to a record low of -34.6 for February from -22.2 previously. The manufacturing data had shown some signs of stabilisation and any renewed deterioration would be a significant setback for confidence. In this context, the Philadelphia Fed index will be watched closely on Thursday. President Obama signed the fiscal stimulus bill into law which helped improve sentiment while developments surrounding the auto sector were also watched closely.

The US capital flows data was better than expected with net long-term inflows of US$34.8bn for December from a net outflow of US$ in November. The data will help ease fears that the US will be unable to secure sufficient long-term flows.

As risk appetite remained weak, the US currency secured defensive support with the Euro retreated to 2009 lows near 1.2560 before stabilising around 1.26. Significantly, the Euro again failed to gain any significant benefit from a rally in gold prices.

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Domestically, the Tankan manufacturing index remained close to historic lows of -74 for February from -76 the previous month, reinforcing severe industrial-sector difficulties. The Nikkei index also weakened to a three-month low as confidence remained fragile.

The Japanese Finance Minister remained under heavy pressure following allegations of being drunk at the weekend G7 meetings and his resignation briefly pushed the dollar down.

Overall, however, the yen found it more difficult to gain ground despite the increase in risk aversion and the US currency pushed to a high of 92.75 before consolidating around 92.50.
There will be the suspicion of covert intervention through Japanese funds to undermine the yen, especially as it failed to gain any significant support from the initial decline on Wall Street.


Sterling dipped to lows below 1.4150 against the dollar in early Europe on Tuesday, but proved resilient and recovered back to above the 1.42 level. The UK currency also strengthened to beyond 0.8850 against the Euro.

Headline UK consumer inflation fell to 3.0% in January from 3.1% previously while the core rate rose to 1.3% from 1.1%. The higher than expected data will provide some Sterling support as it will demand Bank of England attention even though the RPI rate fell to 0.1%.

The Bank of England comments remained generally gloomy with MPC member Besley warning that the speed at which the economy is weakening is striking while it has unfinished business in the realm of fiscal and monetary policy. There will be further expectations that the bank will move to quantitative easing which will curb Sterling support.

The MPC February minutes will be watched closely on Wednesday for further evidence on future policy. Fears over the Euro-zone economy will continue to provide some degree of UK currency protection.

Swiss franc

The dollar pushed higher against the Swiss franc on Tuesday, but again hit tough resistance above the 1.1750 level and dipped back towards 1.17 in US trading. The franc strengthened through 1.48 against the Euro with a four-week high near 1.4750 as weaker stock markets provided support.

Domestically, headline retail sales rose 3.6% in the year to January, although there was a decline once sales were adjusted for the number of shopping days.

The franc should gain support from increased fears over Eastern Europe even if doubts over the Swiss banking sector cap support. Comments from the National Bank will continue to be watched closely given the threat of intervention.

Source: VantagePoint Intermarket Analysis Software

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Australian dollar

The weaker Australian dollar tone continued in Asian trading on Tuesday with a decline to lows around 0.6375 against the US dollar as the Reserve Bank was cautious over prospects. Confidence in the global economy weakened and equity markets came under pressure.

Confidence will remain fragile initially, but sentiment could still turn rapidly towards favouring high-yield currencies given the amount of fiscal and monetary support being provided. The Australian currency attempted to stabilise over the day with rising gold prices providing some degree of support.