EUR/US$

The dollar was trading close to 1.2720 ahead of the US data on Tuesday, but weakened sharply to near 1.28 in New York before stabilising close to 1.2785.

The US producer price data was weaker than expected with a 0.1% headline increase while there was a 0.3% drop in underlying prices compared with expectations of a 0.2% monthly increase. This was the first drop in core prices since last October and the annual increase slowed to 1.3%. The data will ease concerns that rising crude prices are being passed on to finished goods and this will ease pressure for higher interest rates. The consumer inflation data on Wednesday will, however, be more important for markets and there will be a substantial reaction in interest rate futures and the dollar if the consumer inflation data does not support the case for moderating inflationary pressure.

The New York manufacturing index was also weaker than expected with a drop to 10.3 in August from 16.6 in July with the employment and prices indices both weakening slightly over the month. A drop in housing starts in the Wednesday data would reinforce expectations of slowing growth.

The US capital flows data was higher than expected with inflows of US$75.1bn for June after US$63.6bn in May. The data will offer near-term reassurance over capital flows into the US currency. The longer-term data was less encouraging with a drop in central bank bond buying which will increase fears over underlying reserve diversification away from the dollar.

Source: VantagePoint Intermarket Analysis Software

Yen:

The yen fluctuated close to 116.60 ahead of the US data on Tuesday before strengthening back to 115.90 after the US data. The yen struggled to recover significantly from another record low beyond 148.5 against the Euro.

The Japanese tertiary index was significantly weaker than expected with the index dropping 0.6% in July, although there was still a 2.2% annual increase. The weaker than expected data will undermine expectations of a further near-term increase in Japanese interest rates and this will lessen the potential for yen buying.

There will, however, be a flow of US Treasury coupon payments back to Japan over the next 48 hours and this will offer important support to the Japanese currency, especially if the US consumer inflation data is again weaker than expected on Wednesday.

Sterling

Sterling weakened against the Euro after the UK inflation data and again after the US producer price data, but the UK currency was still resilient at close to 0.6750. Sterling weakened to near 1.8850 against the dollar and was unable to sustain gains above the 1.8950 level after the US data.

The July RICS house-price data recorded the strongest increase in prices for two years and the latest domestic surveys also suggested that inflation expectations are edging higher which will be of concern to the Bank of England.

The official UK consumer inflation data, however, recorded a drop in prices of 0.1% for July with the annual rate dropping to 2.4% from 2.5% while the core annual inflation rate fell to 0.9% from 1.1% the previous month. The data will ease immediate concerns over inflation and reduce pressure for another near-term rise in interest rates, although the statistics office has warned that tuition fees will increase the inflation rate from October.

The Bank of England minutes will be watched very closely on Wednesday and Sterling will be vulnerable if there was a significant minority calling for rates to be left on hold at the August meeting.

Swiss franc

The Swiss currency found support close to 1.2440 ahead of the US data and strengthened back towards 1.2350 after the US data. The franc remained on the defensive against the Euro.

Domestically, National Bank chairman Roth warned that the pace of interest rate adjustment could become more urgent if the Swiss franc weakened significantly and this should offer background franc support, although franc sentiment will remain weak in the short term.

Australian dollar

The Australian dollar weakened significantly on Monday, undermined by a deterioration in yield spreads, and the Australian currency dropped to lows of 0.7585 in local trading on Tuesday.

The speculation that high US inflation figures would trigger a renewed increase in US interest rates unsettled the Australian currency, but this pressure reversed after the US produce prices data with a move back to 0.7645. The biggest threat to the Australian currency is likely to be a slowdown in global growth and there will also be underlying pressure on the currency from bond redemptions.

Source: VantagePoint Intermarket Analysis Software

Best Regards,

Darrell

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