by Darrell Jobman, Editor-in-Chief, TradingEducation.com, LLC
Daily currency analysis
for Wednesday, March 5, 2008
The dollar pushed to highs around 1.5140 against the Euro in European trading on Wednesday before drifting back towards the 1.52 level ahead of the New York opening.
The composite PMI index rose to 49.3 in February from 44.6 previously. Although the index remained below the 50.0 expansion threshold, there will be some relief that there was a monthly recovery.
In contrast, the ADP employment report recorded a 23,000 decline in employment for February which was the first recorded decline in the index, although it is a relatively recent survey. The employment decline will increase fears over a second successive monthly payroll drop on Friday.
The Beige Book reported that the economy had slowed and that credit conditions had tightened while the jobs market was slightly weaker. The net impact is that there is likely to be some reduction in speculation over a 0.75% Federal Reserve interest rate cut at the March meeting.
The dollar dipped slightly following the ADP data but, paradoxically, the US currency weakened further after the stronger than expected PMI release. The dollar was unsettled by a fresh surge in oil prices as overall confidence remained weak and there was a fresh record low close to 1.53 against the Euro.
Market attention will focus on the ECB during Thursday. Interest rates should be left on hold, but the statement from ECB President Trichet will be watched very closely. A softer stance by the central bank head or strong protests against the currency levels would undermine the Euro.
The dollar consolidated just above the 103.0 level in Asian trading on Wednesday as risk aversion eased, but was unable to secure strong support.
Domestic developments offered no support for the yen with a sharp recorded drop in capital spending for the fourth quarter. The 7.7% annual decline is liable to trigger a significant downward revision to the GDP data.
There is also continuing uncertainty over the next Bank of Japan governor. Fukui is due to leave office in two weeks and no replacement has been named which will tend to undermine yen sentiment.
The stronger than expected US PMI report eased short-term risk aversion and this pushed the yen weaker to beyond the 104.0 level. The dollar was unable to sustain the gains and weakened back to 103.70 as speculation surrounding bond insurer Ambac triggered fresh volatility. There will still be pressure for consolidation after recent sharp yen gains.
There was a further deterioration in consumer confidence with a dip in the Nationwide index to 78 in February from 81 previously. Sterling dipped to lows near 1.9720 against the dollar ahead of the PMI data on Wednesday.
The PMI index for the services sector increased to 54.0 in February from 52.5 the previous month and this should provide significant near-term relief over the UK economic trends, especially given the importance of the services sector.
Given that the Bank of England is concerned over inflation trends, any evidence of the economy holding firm will increase resistance to a further near-term interest rate cut. The most likely outcome is that the MPC will leave interest rates on hold at the Thursday meeting with only a very small chance of a further cut.
The UK currency pushed sharply stronger against the dollar in US trading on Wednesday with a peak close to 1.9950, although it was still struggling near record lows around 0.7670 against the Euro.
Swiss currency reversed course against the Euro several times on Wednesday and the Euro twice found support on dips towards the 1.5750 level.
Risk aversion eased following the US data releases and this pushed the Swiss currency weaker with renewed losses beyond the 1.58 level against the Euro in choppy trading triggered by volatile Wall Street moves. The dollar found support close to 1.0350 against the franc, but was unable to hold above the 1.04 level.
The Australian dollar dipped to lows around 0.9220 against the US currency on Wednesday as commodity prices weakened. Domestically, fourth-quarter GDP growth was held to 0.6% compared with expectations of a 0.8% increase which reinforced market speculation that interest rates have now peaked.
The Australian dollar will also be vulnerable if there is a deeper correction weaker in commodity prices, although prices rebounded on Wednesday which provided fresh support to the currency with a move back to 0.9320. The substantial existing yield premium will continue to provide important net support for the currency.