Yen

Bank of Japan Governor Shirakawa stated on Friday that the central bank was treating the upside inflation risks and downside growth risks equally, but minutes from the latest policy meeting indicated that most members were more concerned over downside growth risks.

The minutes will reinforce market expectations that the bank will not increase interest rates and this will continue to expose the yen to potential selling pressure on yield grounds.

Although Japan is a big net oil importer, the impact of lower oil prices is liable to be a slight negative factor the Japanese currency as risk appetite would improve which would increase interest in carry trades. The dollar found support below 106.0 on Friday and pushed to highs near 107.0 following the Citigroup results.

Sterling

Sterling was unsettled slightly by reports that the government could relax the fiscal rules and increase borrowing, especially as the latest monthly borrowing requirement was higher than expected. The impact should be limited as the Bank of England would be less likely to cut interest rates if the government shifts policy.

Sterling was holding just below the 2.00 level in early Europe on Friday before drifting weaker with lows close to 1.99.

MPC member Gieve made similar remarks to Sentence the previous day in a speech on Friday with comments that the bank will want to maintain  a very tough stance on inflation expectations. He also repeated the warning that inflation could move significantly above the 4.0% level. The strong 2.0% monthly increase in M3 money supply growth will also unsettle the central bank to some extent as rapid monetary expansion does not suggest that policy is too restrictive.

Speculation over higher interest rates will provide some degree of support if the economy does not appear to be deteriorating further.

Swiss Franc

The Swiss franc weakened slightly during Friday, although the Euro found further resistance above the 1.62 level. The US currency was also unable to strengthen above the 1.0250 level and the franc edged stronger later in the day.

Overall risk appetite was again slightly weaker which curbed franc demand, although the impact was measured. A sustained recovery in risk appetite would tend to maintain a softer tone for the Swiss currency.

The Swiss banking sector will remain an important focus with fears that tighter regulation will undermine growth.

Source: VantagePoint Intermarket Analysis Software

Australian dollar

The Australian dollar found support above the 0.97 level against the US dollar in local trading on Friday, but gains were capped below the 0.98 level

There was a lower than expected increase in second-quarter import prices, but this is not likely to have a significant policy impact.

Commodity prices remained a significant focus and a renewed decline in gold prices put downward pressure on the Australian currency in New York trading. There will still be important buying support on dips given the international interest in yield which will offset the impact of any further decline in commodity prices.

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