EUR/US$

The Euro found support close to 1.2790 against the dollar in early Europe on Wednesday and pushed to highs around 1.2850 after the US housing data. The Euro, however, was unable to sustain the gains and weakened back to 1.2790 later in New York. The pattern of trading continues to suggest that there is significant pressure to reduce long Euro positions and trading conditions will also remain choppy given low market liquidity.

US existing home sales data recorded a 4.1% drop for July with the annual selling rate dropping 13.3% over the year to 6.33mn. Sales were at the lowest level for 30 months while there was also a sharp increase in unsold homes and the annual increase in prices was the lowest for over 10 years. The data clearly indicates a slowdown in the housing sector and will deter further interest rate increases, especially if the new home sales data confirms the trend on Thursday. On a medium-term view, the data will be negative for the dollar.

The Euro-zone data remained weaker than expected with a decline in the Belgian leading index for August and the latest German IFO report will be watched closely on Thursday. The index should prove more resilient that the ZEW index on Tuesday, but a sharp drop in the index would further undermine Euro confidence and increase the risk of ECB interest rate expectations being revised down.

Source: VantagePoint Intermarket Analysis Software

Yen:

The yen showed some resilience against the Euro on Wednesday, but was unable to strengthen through the 116.0 level against the US currency and settled close to 116.30.

Position adjustment has the potential to offer some further short-term yen support, but the Japanese currency will find it more difficult to secure underlying buying interest. The latest investment flows data will be watched closely on Thursday to assess the recent capital account trends. Strong inflows and measured outflows would offer near-term yen support.

The Japanese trade surplus fell marginally to JPY860bn in July from JPY862bn last year. The export performance was strong, but this was offset by a sharp increase in import values with rising oil costs a particularly important factor. Strong import demand will increase confidence over domestic growth trends to some extent, although the recent data has not suggested strong spending.

Sterling

Sterling continued to recover against the Euro during Wednesday with gains to 0.6755. Sterling was subjected to choppy trading against the dollar with support below the 1.89 level, but with tough resistance close to the 1.90 level.

The CBI industrial survey was slightly stronger than expected with the orders component improving to a 20-month high of -8 in August from -11. There was also a general improvement in confidence, although this is unlikely to have major impact on the currency markets

The UK currency should continue to secure some degree of underlying support from expectations of central bank diversification into Sterling from European central banks, but these pressures are likely to be offset by shorter-term pressures for position adjustment given the high number of long Sterling positions.

Swiss franc

The Swiss currency found support close to 1.2360 against the dollar on Wednesday, but was unable to break back stronger than the 1.23 level as the franc struggled to sustain gains through the 1.58 level against the Euro.

The Swiss franc will gain some support in Europe if the German IFO data on Thursday confirms the generally disappointing set of data seen over the past two weeks. Any sustained increase in risk aversion would offer more substantial franc support.

Australian dollar

The Australian dollar resisted a drop through the 0.76 level against the US dollar and strengthened to 0.7665 after the US housing data before a retreat back to 0.7625.

The Westpac leading index was stronger than expected for July, but the short-term domestic influences are likely to remain limited. There will be further concerns over a global slowdown in growth given disappointing US and Euro-zone growth this week and sustained growth concerns would pose a medium-term threat to the Australian currency.

Source: VantagePoint Intermarket Analysis Software

Best Regards,

Darrell

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