by Darrell Jobman, Editor-in-Chief, TradingEducation.com, LLC
Daily currency analysis
for Tuesday, February 5, 2008
The Euro was unable to make any headway above the 1.4830 level on Tuesday and weakened sharply to lows around 1.4620, the sharpest daily fall of the year.
The German deputy Finance Minster warned that the Euro should not take all the burden of currency adjustment and protests against Euro strength will intensify if economic fears increase.
In this context, the Euro-zone data will remain under close scrutiny. The revised PMI index for the services sector weakened significantly to 50.6 from a provisional 52.0 which will increase fears over economic trends, especially as significant revisions are unusual. There will be particular concerns that the indices for Germany, Italy and Spain were all below the 50.0 level which suggests contracting activity. Euro-zone retail sales also fell for the third consecutive month to give a 2.0% annual decline.
The weaker data will increase pressure on the ECB to sanction a looser policy while there will be an increased risk of divisions within the bank which will unsettle the Euro.
The US PMI index for the services sector fell very sharply to 41.9 in January from 54.4 the previous month while the new composite index also fell substantially. An index around this level is consistent with recession conditions which will revive fears that the US economy is weakening sharply. The data is a negative dollar factor and will invite speculation over another emergency Fed interest rate cut, but the US currency will secure further protection from fears that the damage is spreading to Europe.
There was some yen selling following the Australian central bank interest rate increase on Tuesday. Movements were limited and the US dollar was unable to regain the 107.0 level as a lower close for the Nikkei index provided some yen backing.
Wider buying support allowed the US currency to break resistance levels around 107.30 in Europe with a peak around 107.70, but the dollar was unable to hold the gains.
The weak US PMI data increased economic fears which helped strengthen the yen, especially as Wall Street weakened. Fears over the US and Euro-zone prospects will also improve Japan’s relative position which will tend to support the yen, especially as capital repatriation is liable to increase.
The G7 stance on exchange rates will also be monitored closely ahead of meetings this weekend as sustained pressure for stronger Asian currencies would provide underlying support to the yen.
Sterling found further support weaker than 0.7520 against the Euro on Tuesday and strengthened to highs near 0.7450. The UK currency was unable to hold above 1.97 against the dollar and weakened to lows near 1.96.
The PMI index for the services sector increased marginally to 52.5 in January from 52.4 the previous month. The survey still suggests a sharp underlying slowdown in the economy and there was a deterioration in business confidence, but there will be some relief that conditions did not deteriorate further. The prices index also rose over the month which will reinforce inflation concerns within the Bank of England.
The latest Halifax house-price survey reported that prices were unchanged in January which will also increase confidence in a controlled slowdown, although confidence will remain fragile. Sterling will gain some support from the weaker than expected US and European data releases.
The Swiss franc weakened to lows near 1.6220 against the Euro and 1.1060 against the dollar on Tuesday before regaining ground. The franc consolidated around 1.10 against the US currency and pushed back to near 1.61 against the Euro.
A lack of confidence in the European economy pushed the Swiss currency weaker against the dollar, but a renewed downturn in global stock markets provided some important protection in New York.
Underlying unease over global market conditions should continue to provide some short-term franc protection.
As expected, the Reserve Bank increased interest rates by 0.25% to 7.00% at the latest policy meeting. The decision will reinforce attractive yield spreads, but failed to boost the currency further with tough resistance close to the 0.91 level against the dollar.
There were no clear signals from the bank over future policy and the rate hike had been fully priced in. The domestic data had a slightly weaker tone with the retail sales increase held to 0.5% while there was a sharp drop in building approvals.
The stronger US dollar tone and weaker stock markets pushed the Australian dollar down sharply to lows below 0.8950 in US trade and global growth fears will sap buying support.