Daily currency analysis
The dollar again tested lows beyond 1.4740 in Asian trading on Monday before consolidating just weaker than the 1.47 level ahead of the US open. The dollar then pushed ahead sharply to highs beyond 1.4600 in new York as thin volumes ahead of the New Year holiday contributed to higher volatility.
US existing home sales were little changed at 5.00mn in November from a revised 4.98mn the previous month. Inventories fell for the month while prices were little changed. Following Friday's very weak report on new home sales, the existing sales data will provide some relief for the markets. The data may curb the most pessimistic housing forecasts, although sales are still at multi-year lows and there will still be expectations of very tough conditions in 2008.
There will be a series of important US economic reports after the Tuesday holiday, starting with the ISM manufacturing survey on Wednesday. The dollar will need a strong series of data to secure more solid foundations on growth grounds.
The institutional weightings will be watched very closely at the beginning of 2008 with some possible reduction in Euro positions as funds may have been over-weight in the currency at the end of 2007. Any shift would increase the potential for a dollar correction stronger, although structural concerns will persist and limit recoveries.
The Japanese currency secured a renewed advance in Asian trading on Monday with the break of dollar support close to 112.40 helping to trigger gains to highs around 111.75 before a corrective move back to 112.00 in Europe. The yen retained a strong tone against the dollar in New York and strengthened strongly to near 163.20 against the Euro.
Risk tolerances were generally lower on Monday with a reluctance to maintain carry-trade positions over the year-end period. This provided significant yen support, especially with underlying credit risks still an important factor. The geo-political uncertainty surrounding Pakistan was also still a significant background factor.
The attitude of domestic investors will be watched very closely in 2008, although Japanese markets will now be closed until January 4th. Any drop in retail yen selling would provide important support to the Japanese currency early next year, especially with the lack of domestic trading.
From record lows against the Euro at the end of last week and seven successive daily losses, the UK currency was able to secure a significant correction on Monday with a move to 0.7325 from 0.7385 before settling around 0.7355 in choppy trading. Sterling strengthened to two-week highs near 2.01 against the dollar before a very sharp retreat to 1.9825 in volatile trade as liquidity dipped.
Any evidence of firm UK retail spending during the holiday period would provide near-term currency support as it would tend to discourage another early interest rate cut by the Bank of England.
Institutional weightings at the beginning of 2008 will be watched closely to assess whether there is any exodus from the UK currency on growth fears or whether there will be increased demand within Europe on valuation grounds following sharp losses against the Euro during 2007.
The Swiss franc has retained a firm stance against the Euro on Monday with initial safe-haven demand. This trend was enhanced in US trading by a generally weaker Euro with the franc holding close to 1.6550. The US currency weakened to lows around 1.1230 against the franc before a recovery back to 1.1330 following the US data releases.
The franc was able to draw some further support from defensive demand with the geo-political tensions surrounding Pakistan and credit risks still having some positive impact on the currency. The drop on Wall Street also helped underpin the Swiss currency.
The Australian dollar consolidated with a firm bias in US trading on Friday and there were renewed gains in local trading on Monday with an advance to 0.8825 against the US currency. Domestically, there was a firm 16.2% increase in Australian private credit which provide some support, although global conditions were the dominant influence.