by Darrell Jobman, Editor-in-Chief, TradingEducation.com, LLC
Daily currency analysis
for Monday, March 3, 2008
After consolidating just stronger than the 1.52 level in European trading on Monday, the dollar dipped sharply to fresh record lows around 1.5270 around the time of the US data releases.
The PMI index for the manufacturing sector fell to 48.3 for February from 50.7 in January. The index signals contraction in the industrial sector, but there will be some relief over the headline data given that markets were prepared for an even weaker reading while the overall reading is consistent with weak GDP growth rather than contraction.
Fed officials generally pointed to price risks on Monday with Governor Plosser voicing fears that inflation expectations were moving higher. Markets will still be expecting the Fed to cut interest rates by at least 0.50% in March unless there are clear signals over a more cautious stance from key officials.
The Euro-zone PMI data was generally close to expectations and did not have a major impact. There will continue to be some fears over divergence within the individual economies, especially as the Spanish PMI index weakened to the lowest level for over six years.
The Euro was pegged back by comments from ECB President Trichet who reiterated his strong support for the US strong dollar policy. Euro Group head Juncker also stated that he was becoming increasingly concerned over the Euro while the IMF head called the currency overvalued. A tougher stance on the Euro would hamper attempts to secure further gains.
The theme of risk aversion and Japanese currency strength continued in Asian trading on Monday with the yen strengthening to a fresh 3-year high against the dollar around 102.50. The Nikkei index dropped by over 4% to a six-week low as confidence remained very fragile.
The Japanese Finance Minister declined to comment on exchange rates on Monday The lack of comment on yen gains continues to be a notable feature and will increase speculation that a stronger yen will be tolerated.
Nevertheless, there will still be reservations over aggressive yen buying beyond the 102.0 region due to the greater threat of measures to stabilise the currency. The dollar corrected weaker to 103.20 in US trading as immediate fears eased while Wall Street attempted to stabilise.
Sterling dipped to fresh record lows against the Euro close to 0.7680 in early Europe on Monday before finding some degree of relief. The UK currency resisted a decline through 1.98 against the dollar, but there was still a lack of confidence in Sterling with fears over institutional capital outflows.
The PMI index for the manufacturing sector edged higher to 51.3 in February from 50.7 the previous month and this will provide some slight degree of reassurance over the industrial sector with relief that the figure was not below the 50.0 level. The impact will be measured with underlying fears over spending trends persisting. The services-sector data will be very important for Sterling sentiment on Wednesday.
The franc continued to gain strongly in early European trading on Monday with a fresh record high close to 1.0320 against the dollar and highs near 1.5750 against the Euro.
Elevated levels of risk aversion continued to support the currency, but there was some correction towards 1.04 in US trading with the franc also heavily over-bought after the recent rapid advance against major currencies. Underlying caution over carry trades is still likely to prevail in the short term. The overall tightening of liquidity and reduction in global leverage will also tend to limit Swiss currency losses.
The Swiss PMI index was weaker at 60.5 in February from 61.6 in January, but this will not have a significant impact as it was still a firm figure in historic terms.
The Australian consolidated above 0.93 against the US currency in local trading on Monday. The latest survey recorded higher inflation expectations and markets are still looking for the Reserve Bank to increase interest rates on Tuesday. Yield support will remain very strong in the near term even if the central bank does not increase rates. Nevertheless, a decision to leave rates on hold would still trigger a sharp corrective decline in the Australian dollar.
Increased risk aversion will undermine the currency and increased fears over a global downturn will also tend to be a negative influence. The principal short-term feature is likely to be an increase in volatility and the currency pushed back to near 0.94 in US trading.