EUR/US$

The Euro was unable to hold a position above 1.28 in early Europe on Monday and weakened towards 1.2765 ahead of the US data.

US existing home sales fell to 6.30mn in August from 6.35mn the previous month. There was a drop in annual prices for the first time in 11 years while there was also a further increase in housing inventories. The secondary data in particular continues to suggest a weakening of the housing sector, but the limited decline in the headline sales figure will offer some reassurance that the sales decline may be easing. There was some relief over the data and the dollar strengthened to 1.2635 before a retreat to 1.2660.

Markets have moved to price in a small possibility of a US interest rate cut before the end of 2006 and the dollar will need these expectations to reverse before the US currency finds durable support. Nevertheless, US interest rate expectations are unlikely to deteriorate further in the short-term which should lessen the risk of further selling pressure. Fed Governor Fisher, for example, stated that the Fed must remain vigilant over inflation.

Provisionally, German consumer prices fell 0.4% in September with the annual inflation rate dropping to 1.0%. If there is a significant drop in the German IFO index on Tuesday, 2007 Euro-zone interest rate expectations are liable to be revised down and this will hamper the Euro. The currency is also still vulnerable to position adjustment given the high number of long Euro positions.

Source: VantagePoint Intermarket Analysis Software

The dollar found support close to 116.20 against the yen on Monday and strengthened to highs around 116.70, although it was unable to make significant headway.

The latest IMM positioning data recorded a drop in short yen contracts of close to 9,000 in the latest week, but there is still a net short position of over 90,000 contracts which will maintain the risk of yen corrections stronger as these positions are reduced.

The possibility of capital repatriation back to Japan before the end of September, coupled with the firm Chinese yuan, will continue to underpin the Japanese currency and help curb near-term selling pressure.

The downgrading of US interest rate expectations will lessen the potential for yen selling, but the Japanese currency is still not in a good position to gain support on interest rate grounds which leaves the currency dependent on short covering to make more than limited gains.

Sterling

Sterling remained firm against the Euro on Monday at close to 0.6710 and also found support below the 1.90 level against the US currency even though upward momentum stalled above the 1.9050 level.

Bank of England deputy governor Gieve reported on Monday that he had been close to voting for an interest rate increase at the September MPC meeting and this will reinforce speculation that there will be a rate increase at one of the next two meetings, especially as it increases the chances that bank members on the committee will vote for an increase.

Swiss franc

The Swiss franc retained a firm stance against The Euro on Monday, although there was evidence of resistance close to the 1.5750 level. The US dollar also found support below the 1.23 level against the franc and strengthened back to 1.2380 after the US housing data.

Caution was still evident on Monday, but there was no intensification of emerging-market stresses and this lessened further market support for the Swiss currency. The overall market positioning bias will still offer significant background franc support.

Australian dollar

The Australian dollar found support just below the 0.75 level on Monday and strengthened to 0.7530, but was struggling to make significant headway.

The Australian currency remains vulnerable on concerns over the international growth outlook and the risk of further downward pressure on commodity prices. Any increase in wider risk aversion will also tend to undermine the Australian dollar with a reduction of short-term capital inflows, although the immediate evidence does not suggest serious market concerns with the New Zealand dollar gaining strongly. Domestic interest rate expectations have weakened, but the local currency will continue to gain some support from the downgrading of US yield expectations.

Source: VantagePoint Intermarket Analysis Software