EUR/US$

The Euro strengthened to 1.2830 against the US currency in European trading on Friday, but the dollar regained some ground in US trading with a move to 1.2790. The Euro was vulnerable to some profit taking, especially with markets already holding substantial long Euro positions.

The US currency also gained wider support from rising risk aversion in global markets. The immediate focus was on emerging markets with currencies such as the South African rand coming under further downward pressure. The increase in risk aversion and switch into more liquid investments such as US Treasuries offered support to the dollar.

Underlying dollar sentiment was still fragile on Friday with markets unsettled by the weak Philadelphia Fed survey released on Thursday. Markets are not expecting the Federal Reserve to increase interest rates again and are starting to price in a rate cut over the first half of 2007. There will be expectations of weak housing data next week, although it is now the case that data near or just above market expectations could trigger a significant rebound in the dollar given the market expectations of weak data.

Source: VantagePoint Intermarket Analysis Software

The yen strengthened to highs of around 116.10 against the US dollar on Friday before the US currency staged a fragile recovery. There has been pressure to reduce carry trades over the past 24 hours and this has offered support to the Japanese currency as short yen positions are reduced.

The latest Japanese survey of manufacturing confidence recorded a significant improvement for the third quarter and this will provide a small boost to yen confidence, although the forward-looking indicators were less optimistic which will tend to neutralise the impact.

The Chinese yuan continued to strengthen on Friday, edging to a new post-revaluation high, and US Treasury Secretary Paulson took an optimistic stance at the conclusion of his visit to China. The comments suggest that the Chinese authorities will allow gradual yuan gains and, although substantial moves are unlikely, there will be some beneficial impact to the Japanese currency.

Sterling

Sterling was vulnerable to a correction weaker during Friday although the currency was still resilient after a strong few days. Sterling drifted weaker to near 0.6730 against the Euro and 1.90 against the dollar after hitting resistance above the 1.9050 level against the US currency.

Expectations of a further interest rate increase will persist in the short term and the speculation will continue to offer near-term currency support.

The UK currency should not be vulnerable to heavy selling pressure on a rise in risk aversion unless there is a very weak current account figure next week.

Swiss franc

The Swiss currency strengthened sharply against the Euro on Friday with gains to 1.58 and the franc also strengthened sharply to highs near 1.2320 against the dollar before a partial correction to 1.2350.

There was an increase in risk aversion during Friday as emerging-market investments were subjected to selling pressure. Currencies such as Polish Zloty and Icelandic krona came under renewed selling pressure and this triggered a move into the franc.

The wider shift away from high-yield currencies also offered support to the Swiss franc. The positioning data will be watched closely in the short term to assess the potential for further franc gains.

Australian dollar

The Australian dollar has again hit resistance close to the 0.7570 level over the past 24 hours and the currency weakened back towards 0.7500 in US trading even though the US dollar was still struggling.

International trends will remain important in the short term and there will be further concerns that slower global growth will undermine commodity prices with the CRB index now at a 15-month low. There has also been a downgrading of interest rate expectations which has undermined the Australian currency and will make it difficult for the currency to recover ground.

Source: VantagePoint Intermarket Analysis Software