EUR/US$
The dollar was unable to gain any traction during Friday and dipped significantly weaker in European trading.
There were potentially significant comments from the Chinese central bank in its latest financial stability report. There were calls for a greater diversity in global reserve currencies with the establishment of a new reserve currency. There was also an implicit attack on the US economic policies.
The comments renewed market fears over the underlying threat of a central bank diversification away from the US currency and this was an important element in undermining dollar confidence during the day.
The area of reserve management will remain an extremely important market focus over the next few weeks at least and comments from global central bank figures will continue to spark substantial currency moves.
The US personal income data was significantly stronger than expected with a monthly increase of 1.4% for the month as incomes were boosted by the fiscal stimulus package. Spending levels were still subdued with a 0.3% monthly increase and a significant proportion of extra income is likely to be saved which will limit any positive impact on consumer spending levels.
The provisional German consumer prices data was stronger than expected with a 0.4% monthly increase and this will tend to dampen expectations of a more aggressive ECB stance on monetary policy with the latest monthly meeting due next Thursday. The Euro challenged levels above 1.41 before consolidating around 1.4065 later in New York.
Source: VantagePoint Intermarket Analysis Software
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Yen
As far as the economic data is concerned, core Japanese consumer prices fell 1.1% in the year to May which was in line with market expectations. The Tokyo data was weaker than expected with an underlying decline of 1.3% in the year to June. The declines will maintain fears over the deflation risk and will also increase pressure for quantitative easing to be maintained beyond September. The deflation fears will also tend to increase Japanese opposition to any substantial yen strengthening.
There will be further expectations of capital outflows from Japan as new investment trusts are launched and this will tend to be a negative factor for the Japanese currency. The dollar was holding close to 95.90 in early Europe on Friday.
The US currency weakened to lows near 95 in New York on wider weakness while the Japanese currency was resilient against the Euro.
Sterling
Sterling found support below 1.64 against the dollar during Friday and advanced steadily during the day with a test of resistance levels above 1.65. The UK currency also strengthened back towards 0.85 against the Euro.
In its financial stability report, the Bank of England warned that the banking sector remained fragile and vulnerable to external shocks, but the UK currency managed to avoid selling pressure. The key factor is that overall risk appetite remained firm over the day which underpinned the currency and lessened the impact of bank warnings.
Similarly, fears over the budget situation have also lost some of their impact for now. Nevertheless, there are still important vulnerabilities over the debt issue and only a small shift in sentiment could trigger sharp downward pressure on the currency.
Swiss franc
The dollar was unable to gain any fresh support against the franc on Friday and weakened to lows just below the 1.08 level. The franc also regained some ground against the Euro with a move back towards 1.5220.
There was no evidence of further National Bank intervention during the day and the markets were tempted to challenge the bank’s determination to resist currency gains which helped underpin the currency.
The central bank will not want to be predictable in its actions, but there is still a high probability of further intervention.
Source: VantagePoint Intermarket Analysis Software
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Australian dollar
The Australian dollar held firm on Friday as equity markets were generally robust with gains in commodity prices also providing firm support for the local currency. Confidence could remain strong in the very short term, although there are still very important risks to the favourable scenario being priced in which is liable to trigger significant volatility.
As the US currency faltered and risk appetite was generally resilient, the Australian dollar pushed to a high of 0.8075 against the US dollar in New York with expectations of further capital inflow providing significant support.
