by Darrell Jobman, Editor-in-Chief, TradingEducation.com, LLC
Daily currency analysis
for Monday, June 30, 2008
The dollar dipped to lows around 1.5835 against the Euro in European trading on Monday, but found some support weaker than the 1.5820 level and strengthened back to consolidate around the 1.5750 region with the US currency gaining some support from position adjustment as the first half came to a close.
The preliminary Euro-zone CPI data for June recorded an increase in inflation to 4.0% from 3.7% previously which will maintain serious ECB concerns over the situation.
Given the growth fears, there will be some important political pressure for the ECB to resist a rate increase, although the bank will still want to push ahead with an increase on inflation grounds with major tension ahead of the Thursday decision.
The official attitude towards the dollar will also need to be watched very closely in the short term, especially with the US currency weakening back towards the crucial 1.60 area. US Treasury Secretary Paulson is due to meet with European central bank officials on Tuesday and any media statement will be very important for the dollar.
As far as the US data is concerned, The Chicago PMI index for the manufacturing sector edged stronger to 49.6 in June from 49.1 previously which was contrary to expectations for a small decline.
The overall manufacturing survey evidence has been mixed which will maintain uncertainty over the national PMI report which is due for release on Tuesday. The report will be very important for overall dollar sentiment and any sharp decline from the May reading would increase fears over US trends.
The Japanese currency continued to gain some support from the drop in risk appetite during Monday. Elevated oil prices also increased fears over the global growth outlook which provided some yen support even though the Japanese economy will be damaged.
In this context, markets are pessimistic over the Japanese Tankan business survey which is due for release on Tuesday and the dollar was unable to sustain levels above 106.0.
The Japanese currency was boosted by a surprise Moody's upgrade of Japan's local currency rating which triggered some further reduction in short yen positions. This pushed the yen to highs around 105.00 in European trading before a retreat to 106.15 as Wall Street staged a tentative rally.
Sterling was little changed on Monday with a focus on global risk as the currency held above 1.99 against the US dollar.
The UK economic data remained weak with consumer confidence falling to near-record lows while Hometrack recorded another drop in house prices for May. Mortgage approvals fell to 42,000 in May which was the lowest rate for over 10 years while net lending was also sharply weaker than expected at GBP5.4bn.
The combination of data will maintain fears over the UK housing sector and economy as a whole which will curb short-term currency support although Sterling recovered after an initial dip.
The UK PMI data this week will be very important for underlying currency sentiment as a sharp decline to significantly below the 50.0 level for both the services and manufacturing sectors would reinforce recession fears. The first Sterling hurdle will, therefore, be the manufacturing data due on Tuesday.
The dollar dipped to lows around 1.0130 against the Swiss franc on Monday before rallying back towards 1.02 in US trading. The franc fluctuated around the 1.6050 level against the Euro.
The franc gained initial support from the decline in risk appetite and fears over a further decline in stock market valuations. The currency also gained some support from speculation of further central bank reserve diversification into the Swiss currency.
Market fears eased slightly during the day and underlying confidence in the Swiss economy is likely to remain fragile which will limit franc support.
The Australian dollar remained strong on Monday and briefly pushed above the 0.9650 level against the US dollar. Commodity prices have remained strong with oil and gold both edging high which will provide near-term Australian dollar support.
The local currency will still be unsettled by the underlying increase in global risk as a further increase in stresses would tend to undermine capital inflows, notably from Japan.
The Australian Reserve Bank is likely to leave interest rates on hold at the monthly interest rate meeting on Tuesday and the statement will be watched very closely. Any suggestion of an interest rate cut later this year would undermine the Australian dollar heavily and the currency weakened back to below 0.96 in New York.