Daily currency analysis
The dollar maintained a firmer tone on Monday following the strong gains seen at the end of last week. The US currency pushed to highs around 1.4335 before settling close to 1.4390 in New York with the Euro securing a tentative corrective recovery.
The US current account for the third quarter of 2007 fell to US$179bn from a revised US$189bn the previous quarter which was close to 5.0% of GDP. A higher positive services balance was compounded by a larger surplus on investment income while direct investment inflows also improved over the quarter. The data overall will maintain optimism that the underlying US balance of payments position is gradually improving.
The latest capital account data also recorded net long-term inflows of US$114bn following a revised US$15.4bn the previous month. The sharp improvement in the capital account will increase confidence that the US could attract capital once the immediate panic of the sub-prime issue had eased. The capital account data in tandem with the reduced current account deficit will tend to have a positive impact on dollar sentiment.
As far as growth is concerned, the New York Empire index fell to 10.3 in November from 27.4 the previous month which will maintain unease over industrial trends, although the New York data is volatile. Futures markets continued to cut the chances of a further January rate cut which will underpin the dollar, although the implied probability was still above 50%.
The Euro-zone PMI manufacturing index was little changed at 52.5 for November while the services-sector index fell to 53.2 from 54.0 previously. The slowdown for the services sector will reinforce expectations of weaker Euro-zone growth. The German Bundesbank also forecast that GDP growth would slow to 1.6% in 2008 from 2.6% in 2007.
The yen edged stronger to 113.0 against the dollar in Asia on Monday as regional stock markets continued to fall and credit fears will remain an important short-term prop for the yen. The Japanese currency initially failed to hold the advance against the US currency, but regained ground in US trading as Wall Street fell.
The persistent pressure for a tighter Chinese monetary policy to control inflation should also curb carry trades and help underpin the yen.
The domestic influences were limited, although a 1.1% monthly increase in the index of services-sector activity provided some reassurance over economic trends following the generally disappointing Tankan survey last week. Exporters will be looking to sell dollars ahead when the yen is weaker than the 113.0 level which will also lessen the potential for further US currency gains.
Sterling weakened to lows near 2.01 against the dollar on Monday before stabilising around 2.0160. Initially, the UK currency struggled to regain previous support levels, but pushed back above 2.02 in New York.
The Rightmove organisation recorded that there was a sharp 3.2% decline in house prices for December which will maintain fears over a sustained downturn, especially with a sharp downturn in London. Some caution as activity is low during December while the data represents asking prices rather than realised prices.
The UK data this week will be very important for near-term interest rate expectations. In this context, a high inflation reading on Tuesday would make it more difficult for the central bank to justify a further near-term rate cut.
The franc moved stronger on Monday as Asian stock markets continued to fall . Growing doubts over Euro-zone growth trends should help support the Swiss currency against the Euro and the franc strengthened to 1.6550 in US trading. The credit-related stresses should also provide some near-term franc protection and the dollar also failed to hold above 1.1550 against the Swiss currency.
The Swiss industrial data remained solid with a 10.7% annual increase in production, although output was unchanged over the quarter.
The Australian dollar dipped to lows just below the 0.86 level late last week and was unable to pull significantly away from this level on Monday with a dip to lows near 0.8560 in Europe before a slight recovery to 0.8580.
The domestic influences remained limited with levels of risk aversion still the dominant influence. The Australian dollar will remain vulnerable if fears over the global economy increase, especially as this will tend to put downward pressure on industrial commodity prices.