Daily currency analysis
The dollar found support close to 1.4750 in Asian trading on Monday and strengthened to highs near 1.4660 before consolidating around 1.4690 in subdued US trade. The dollar’s ability to avoid further selling pressure following Friday’s weak payroll report triggered some covering of short positions, even though confidence was still very fragile.
There were no significant data releases and there was some speculation that the US administration would look to boost the economy through temporary tax cuts which helped underpin sentiment to some extent.
Comments from Fed officials will be watched closely in the short term, especially with the lack of US economic data. In particular, any remarks from Fed Chairman Bernanke will be important on Thursday and any hints over an aggressive rate cut would tend to erode dollar support.
The Sentix Euro-zone confidence index continued to weaken in January while the EU business confidence index fell to 0.92 in December from 1.03 previously which will maintain concerns over a slowdown in Euro-zone growth.
Euro-zone inflation data will also be watched closely with producer price inflation again above the 4.0% rate for December. ECB President Trichet stated on Monday that growth risks were biased to the downside, but that there were also important inflation risks.
Comments from ECB officials will continue to be watched very closely in the short term, although bank members will be reluctant to make substantive comments ahead of Thursday’s interest rate decision.
The US currency recovered back to near 109.0 in Asian trading on Monday even though the Nikkei index continued to weaken. There were no significant domestic developments and the dollar pushed higher to 109.30 in Europe as the correction continued from recent sharp losses.
There was some evidence of increased domestic investment into overseas assets as Japanese markets returned to normal following the series of holidays last week. There will also be pressure for a more extensive technical correction following heavy yen gains over the past week.
Concerns over global growth doubts will continue to provide underlying yen support with a reluctance to maintain aggressive carry trade positions and this will tend to limit the dollar’s potential for a sustained rebound.
Sterling weakened back to test support below 1.97 against the dollar in early Europe on Monday. From lows near 1.9650, the UK currency pushed back to 1.9750 in choppy trading, but there was further evidence of rallies being sold into with the UK currency drifting weaker in US trading.
There will be strong market expectations of an interest rate cut during the first quarter of 2008 and a series of cuts for the year as a whole.
The January decision on Thursday is liable to be very close and, ahead of the decision, there will certainly be further speculation over a cut which will curb Sterling buying support. The shadow MPC, comprised of academics, voted by 5-4 margin for a further rate cut at their latest meeting which will maintain some pressure on the Bank of England to cut again.
The latest IMM data recorded a switch to a net short position in speculative contracts which may curb Sterling selling to some extent, but the position is not extreme at this time.
The dollar found support below the 1.11 level on Monday and pushed to highs near 1.1190 before consolidation close to 1.1160. The Euro strengthened back to 1.64 against the franc, but struggled to sustain gains above this level.
Underlying risk aversion should limit selling pressure on the Swiss currency, especially with investors still cautious over the global growth situation.
The seasonally-adjusted unemployment rate held at 2.6% in December with domestic economic trends still appearing firm which will provide some background franc support.
The Australian currency briefly tested levels below 0.87 in Asian trading before consolidating around 0.8720 in Europe. The Australian dollar has again been undermined by the increase in risk aversion and fears over the global growth outlook following the US payroll data with a switch into more defensive currencies.
The domestic influences were limited, but expectations that interest rates would be increased further drifted slightly lower despite optimism over this week’s retail sales report. Global risk and growth conditions will tend to dominate in the short term and this will limit the scope for a rebound in the Australian dollar with the currency unable to break away from the 0.87 level.