EUR/US$
The Euro maintained a firm tone in European trading on Tuesday and challenged levels above 1.4250 in early US trading, but was unable to sustain the gains.
In his semi-annual testimony to Congress, Fed Chairman Bernanke stated that there were tentative signs of stabilisation in the economy and that the pace of decline appeared to have slowed significantly.
Bernanke also re-iterated that the bank did have a credible exit strategy from the ultra-loose interest rate policy. The bank is clearly taken this aspect of policy very seriously, especially as there was a article on exit strategies in today’s Wall Street Journal ahead of the Fed testimony.
These comments illustrate that the Fed is very sensitive to the issue of maintaining confidence in the US assets, particularly the Treasury market and dollar.
Nevertheless, Bernanke also stated that the Fed would maintain a highly accommodative monetary policy for an extended period and there is still very little chance of a near-term tightening. The Fed chief’s comments will again be watched closely on Wednesday with a particular sensitivity to any comments on the dollar.
Risk appetite faded to some extent following Bernanke’s comments, especially after the warnings on the commercial real-estate market. There was also fresh speculation that US lender CIT would file for bankruptcy despite the US$3.0bn credit line secured early in the week. From lows near 1.4280, the dollar recovered back to the 1.4180 region before consolidating near 1.4220 as the dollar was unable to secure sustained support.
Source: VantagePoint Intermarket Analysis Software
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Yen
Asian equity markets remained firm on Tuesday as confidence remained generally robust, although the yen was able to resist further selling pressure with a test of dollar support below the 94 region. In part, this was due to caution ahead of Bernanke’s testimony, although the trend also suggest some underlying support for the Japanese currency.
In the latest Bank of Japan minutes, one member called for an exit strategy for the current monetary policies, although there is unlikely to be any near-term move to change policy given that corporate stresses are still severe which will limit the impact.
Risk appetite temporarily stumbled again later in the US session and the yen strengthened back to the 93.30 level against the dollar while it also strengthened to 132.50 against the Euro before losing ground again following favourable earnings from Apple.
Sterling
The UK currency was unable to hold above 1.65 against the dollar in early Europe on Tuesday and weakened towards the 1.6420 region.
The latest government borrowing data provided some degree of initial relief with a figure of GBP13bn for June after a revised GBP18.6bn the previous month and compared with expectations of a GBP16bn shortfall.
This was still sharply higher than the GBP7.5bn recorded the previous year and overall debt fears will remain an important issue as the budget deficit is heading towards 14% of GDP for the current fiscal year.
Bank of England Deputy Governor Bean stated that second-quarter GDP was also certainly negative. Markets will remain very sensitive to growth considerations as any evidence that a recovery is stalling would reinforce debt fears and increase downward pressure on the currency.
Swiss franc
The dollar dipped to lows near 1.0620 against the franc on Tuesday before finding support and strengthening back towards the 1.07 level. The dollar’s inability to sustain gains will maintain an underlying lack of confidence in the currency. The Euro was unable to make a convincing challenge on resistance levels near 1.52 against the Swiss currency and weakened back to 1.5160 in New York trading.
The Swiss trade surplus edged lower to CHF1.60bn for June while exports and imports continued to decline sharply over the year. The sharp decline in exports will reinforce National Bank unease over the implications of franc strength.
Source: VantagePoint Intermarket Analysis Software
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Australian dollar
The latest Reserve Bank monetary policy minutes stated that there was still a bias towards lower interest rates and this will dampen currency support to some extent, although trends in risk appetite will tend to dominate in the short term. The currency edged lower towards the 0.8120 region on Tuesday with a slightly more cautious global tone.
The Australian currency retreated again in New York trading as risk appetite tended to fade, but there was again evidence of strong buying support on dips as underlying sentiment remains firm.
