by Darrell Jobman, Editor-in-Chief, TradingEducation.com, LLC
Daily currency analysis
for Friday, May 16, 2008
The dollar was unable to make a fresh challenge on Euro support levels below 1.54 on Friday and, after a period of technically-dominated trading, the US currency weakened sharply. The dollar was undermined in part by fresh gains for gold and oil prices.
The US housing data was stronger than expected with starts rising to an annual rate of 1.03mn for April from a revised 0.95mn the previous month while building permits also increased to 0.98mn from 0.93mn previously. The gains were concentrated in the multi-family sector which suggests that there are still substantial difficulties within the residential sector, but the data will maintain some optimism over a rebound in the economy.
In contrast, the University of Michigan consumer confidence index weakened to a fresh 28-year low at 59.5 in May from 62.6 previously. Inflation expectations also rose strongly in the survey which will reinforce Fed unease over inflation trends. Given the inflation fears, there will be further pressure for the Fed to resist any further interest rate cuts in the short term and yield trends should stem dollar selling.
There were no significant Euro-zone data releases during the day, but German officials were generally upbeat over the economic outlook. There was also a further series of tough comments on monetary policy from ECB officials during the day.
The weak Michigan data triggered dollar losses to lows around 1.56 in New York on stop-loss Euro buying. Markets will watch official comments very closely in the near term to assess whether there are any protests against dollar weakness.
The latest Japanese GDP data was stronger than expected with a 0.8% increase for the first quarter of 2008 compared with expectations of a 0.4% rise and there was a positive contribution from net exports. The yen secured initial support from the data, but struggled to sustain the advance as risk appetite was slightly firmer which fuelled capital outflows from Japan.
The dollar was still trapped below the 105.0 level in early Europe on Friday as it was again unable to overcome resistance close to this level. The trading pattern around these levels will remain key for short-term yen direction and the dollar weakened back towards 104.20 in Europe.
The US currency was unable to sustain the initial gains seen after the US housing data and it then dipped sharply towards 103.50 in New York before a recovery to around 104.00.
Sterling found support above the 1.94 level against the dollar on Friday and advanced strongly in US trading as the US currency was subjected to renewed selling pressure. Sterling edged weaker against the Euro during the day, tracking dollar moves, and it weakened to 0.7970 in New York.
There were no significant domestic developments on Friday with markets waiting for further evidence on growth trends next week. Further evidence on the potential Bank of England response will be examined in the central bank minutes from May’s meeting which is due on Wednesday.
The UK currency gained some support from the ability to hold support levels against the dollar while the yield considerations also provided some degree of support for Sterling even though underlying sentiment remained weak.
The US dollar was unable to make a fresh challenge on the 1.06 level on Friday and it weakened to lows around 1.0435 in New York.
After initial gains, Wall Street weakened on Friday and this curbed franc selling pressure. The franc had weakened to beyond 1.6360 against the Euro before consolidating around 1.6320 later in New York
The Swiss currency also gained some support from a stronger than expected retail sales report for March, although the impact was measured as international considerations remained the dominant market influence.
There were no significant fresh domestic developments during Friday although a firm stance from the Reserve Bank Governor provided some degree of currency support. Commodity prices were generally firmer which, combined with a recovery in risk appetite, were positive influences for the Australian currency and it strengthened to 0.9470 in Europe.
The near-term Australian dollar trends will tend to remain dominated by the international considerations and any further gains in commodity prices would underpin the currency. In this context, the currency challenged 25-year highs around 0.9550 in New York on Friday as the US currency came under pressure.