Currency trading has calmed after a frenzied week during which the yen surged to the point that bulls handed the Bank of Japan every reason under the rising sun to intervene for a second week running. The dollar jumped in both directions. Its typical safe haven status has been weakened by the threat of quantitative easing. That threat eased even after the Fed said it might intervene again and guaranteed a freeze on rates for two years. The slide in the yield curve ironically created a hurdle to another round of asset purchases. Onlookers spying a weakened economy can already see the lowest cost of borrowing since the financial crisis began. By Friday dealers were tripping over the suggestion of a peg for the Swiss franc, which also lost its safe haven appeal.

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U.S. Dollar - The dollar was weakened further on Friday by the strongest pace of consumer purchases in four months. Retail sales rose by 0.5% in July but the largest chunk of the increase appeared to come from a 1.6% jump in sales at gasoline stations even as the per gallon cost fell to $3.65 last month. Blame that increase in on driving season if you will, but equity index futures built on earlier gains as investors dare to hope that the economy is not falling apart at the seams. The dollar index is 0.3% lower at 74.42 and remains susceptible to a further rise in bullish sentiment in to the weekend.

Euro - Take your pick on the health of the euro, which continued a slump against the yen while it remained a better choice for some investors instead of the dollar. Authorities in Europe late on Thursday announced a ban on naked stock short sales after the financial sector was torn to shreds in a vicious bear market brawl this week. Hopes are also high for some positives to come out of a Franco-German summit on Tuesday. Frankly, quite why investors are so looking forward to a chinwag between Merkel and Sarkozy escaped me, but clearly authorities believe such statements to be a valuable tool in the box. The euro was buffeted by an unseen standstill in second-quarter French growth and a fifth-straight contraction in the Greek economy. This morning it appears that investors are overlooking the lack of necessary growth to mend broken budgetary policies. The euro rose to $1.4289 after the U.S. retail sales report sparked risk appetite and the single currency recovered to ¥109.41 against the Japanese unit.

British pound - The pound traded in a wide range although there was no supporting data to drive events. Sterling was buffeted more by the ebb and flow of risk aversion as gyrating stocks recovered after an earlier dip. The pound rose from a session low at $1.6172 to a peak following improved U.S. retail sales data to reach $1.6292. Against the single currency the pound strengthened to 87.59 pence per euro.

Japanese yen -During the last two days demand for the safety of the Japanese unit appears to have picked up regardless of recovery for stocks. The dollar is barely able to sustain any rise above ¥77.00, which means that the yen looks inspired to retest the ¥76.25 March 18 low so that investors can further prod the mettle of the Bank of Japan. Industrial production in June rose by 3.8% leaving it down by 1.7% over one year ago.

Aussie dollar - Perhaps it's a sign of how much investor confidence has been shaken but neither of the two commodity-sensitive units could muster much strength as stocks rebounded. That means that investors have changed their attitude towards what growth might deliver from Australia and Canada going forward, but it also depicts a volte-face in expectations for monetary policy where within the space of a two week the movement in the yield curve suddenly depicts monetary easing rather than tightening. The rebound in confidence in stocks barely extended to the Aussie, which was unchanged at $1.0336 U.S. cents.

Canadian dollar - The Canadian unit erased an earlier decline to $1.0096 U.S. cents after dealers were comforted by a healthy headline retail sales number across the border in its number one export market and the upwards revision to the June report. The Canadian dollar rose back to an unchanged reading on the day at $1.0139 cents.

Andrew Wilkinson

Senior Market Analyst       

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