by Darrell Jobman, Editor-in-Chief, TradingEducation.com, LLC
Daily currency analysis
for Tuesday, May 27, 2008
Following very limited holiday-hit trading on Monday, the Euro tested levels above the 1.58 level in early Europe on Tuesday. The dollar moves were again influenced strongly by oil and gold-price moves, although leadership was difficult to discern.
After the weak Euro-zone data at the end of last week, the releases were again generally downbeat on Tuesday as German consumer confidence weakened to 4.9 in May from 5.6 previously. French housing starts also weakened to the lowest level since the series started in 2000 while business confidence also continued to weaken.
The ECB will still want to focus on prices in the short term, especially as inflation levels are likely to remain elevated in the near term. The currency will gain some support from the ECB stance, but it will be increasingly difficult for the Euro to benefit significantly if there is evidence of more substantial deterioration in the Euro-zone economy.
There will also be some renewed fears over the financial sector as the ECB’s emergency funding facility was tapped on Monday.
The US data was generally frail, but offered some slight encouragement over future trends. Consumer confidence weakened to 57.2 in May from 62.8 the previous month which was a fresh 16-year low for the index as expectations also remained depressed. The Richmond Fed index also deteriorated for May while the Case-Shiller house-price index recorded a 14.4% decline in the year to March.
US new home sales rose to 526,000 in April from a downwardly-revised 509,000 the previous month. There was, however, a significant drop in inventories while prices also rose over the year. Any perception that sales have reached a trough would be likely to spur additional buying support for housing.
There was further evidence that investors were defending option positions which tended to narrow yen trading ranges.
Japanese corporate services prices rose 0.5% in the year to April, but this did not have a significant impact with markets still focussed on asset prices. The Nikkei index rebounded from two-month lows which provided some dollar support. The yen was around 103.50 against the US currency in Europe on Tuesday with the Japanese currency under pressure against the Euro.
The yen retained a generally weaker tone and the dollar pushed back above the 104.0 level as Wall Street attempted to rally following the housing data. Overall risk appetite also improved which helped underpin the dollar.
Sterling hit tough resistance close to 1.9850 against the dollar and dipped sharply to lows below 1.9750 before stabilising. The UK currency also dipped to lows near 0.7990 against the euro before recovering.
The latest BBA data recorded a small increase in mortgage approvals for April, but there was still a substantial annual decline of close to 40% which reinforced fears over the underlying outlook. There will be persistent fears that the economy is heading for recession in the near term.
The UK currency will gain some support if there is a renewed increase in risk appetite while evidence of Euro-zone deterioration would underpin Sterling given the sharp deterioration seen over the past few months. There are no major data releases due over the next 24 hours.
The dollar dipped to lows near 1.0220 against the franc on Tuesday, but then recovered strongly to push back above the 1.03 level. After gains to 1.6150 against the Euro, the franc also retreated back to beyond 1.62 against the Euro.
The franc was undermined in US trading by some evidence of renewed interest in carry trades as interest rate spreads narrowed.
The Swiss trade surplus increased to CHF1.54bn in April from CHF1.27bn the previous month with firm annual export growth while the UBS consumption index was also firm for the month. The combination of data will ease fears over a sharp slowdown in growth and provide some franc support.
The Australian dollar has retained a firm tone since the end of last week, but again struggled to extend gains to fresh 25-year highs against the US currency with selling interest above the 0.96 level.
The currency is continuing to gain support from expectations that the Reserve Bank will look to increase interest rates further over the next few months. The currency is still liable to be hampered by the risk of a sharp slowdown in the global economy, especially if there is a sustained downturn in commodity prices. The currency edged weaker to just below the 0.96 level in US trading on Tuesday as gold prices fell.