Daily currency analysis
The Euro was unable to make a fresh challenge on 1.44 on Thursday and dipped to lows around 1.4310 before consolidating close to 1.4325 later in US trade with the dollar still benefiting from significant position adjustment.
The Philadelphia Fed index dipped sharply to -5.7 in December from +8.2 previously and this was the lowest reading since April 2003. The underlying components were slightly stronger with prices paid remaining at elevated levels, but the survey will reinforce expectations of a slowdown in the economy.
Elsewhere, jobless clams rose to 346,000 in the latest week from 334,000 previously which also suggests a slowing labour market. The second GDP growth revision for the third quarter was static at 4.9% and did not have a significant impact. The dollar is proving relatively resilient to poor economic data which suggests that a liquidation of long Euro positions is still an important market factor.
There was also some unease over the ECB credit policies with some claims that the central bank had been over-generous in supplying additional liquidity. There will be some further negative impact on the Euro in the near term, although selling pressure should now start to subside. There will again be the risk of erratic currency moves on Friday and Monday as trading volumes continue to decline.
The yen has secured gains over the past 24 hours, although the currency has still found it difficult to sustain moves through 113.0 against the dollar.
As expected, the Bank of Japan held interest rates at 0.50% following the latest policy meeting. Mizuno, who has consistently voted for a rate increase over the past few meetings, joined the majority in voting for rates to be left unchanged. Markets will not be expecting a near-term increase in rates which will maintain Japanese currency vulnerability on yield grounds.
The yen will still gain support on fears that sub-prime losses and credit difficulties were spreading. Following the bond insurer downgrades yesterday, Bear Sterns reported its first ever quarterly loss which reinforced market fears over credit conditions and will help protect the Japanese currency. The Chinese interest rate increase should also help underpin the yen in the short term.
The November trade surplus fell by 12% over the year to JPY797bn as exports to the US fell for the third successive month. On a short-term view, levels of US demand will be more important than the yen's level which will limit the currency impact.
Sterling has remained under pressure over the past 24 hours as fundamental concerns increased. The UK currency weakened to four-month lows near 1.9810 against the dollar and also dipped to test November lows around 0.7240 against the Euro. There was further evidence of a deterioration in the economy with credit growth and mortgage lending slowing for November.
The latest government borrowing data also recorded a higher than expected cash requirement which will reinforce unease over the UK fundamentals as slower growth is already damaging revenue growth.
The third-quarter current deficit widened to a record GBP20bn as investment income fell. Markets may not immediately focus on the deficit, but it will still represent an important medium-term Sterling risk factor as it will fuel expectations that the UK currency will need to fall sharply to help close the deficit.
The Swiss currency found support close to 1.1580 against the dollar on Thursday, but was unable to post significant gains. An initial franc advance against the Euro was halted by gains on Wall Street.
Fears over global credit conditions will continue to provide short-term franc support with some further pressure to close carry trade positions ahead of the year-end period.
The November trade surplus increased to CHF1.89bn from CHF 1.40bn the previous month which will maintain confidence in Swiss export trends.
The Australian dollar has continued to fluctuate around the 0.86 level against the US dollar over the past 24 hours. There was a slight weakening bias in Asian trading on Thursday with selling pressure above 0.86, but the currency proved resilient thereafter.
The global market conditions have continued to dominate the Australian dollar with the currency undermined by increased fears over global growth and credit conditions. Risk tolerances are liable to remain lower in the short term and this will lessen the potential for Australian currency gains, especially as markets will be unwilling to extend risky positions ahead of the year-end period.