Daily Market Analysis May 12th 2008
Key events for the next 24 hours
| Time (GMT) |
Data release/event |
Previous |
Consensus |
08.30 (Tues)
|
UK consumer prices year-on-year headline)
|
2.5%
|
2.6%
|
08.30 |
UK consumer prices year-on-year core)
|
1.2%
|
1.3%
|
Key factors to watch
There are no further major data releases due on Monday
Comments on the Euro and dollar from European and US officials will continue to be monitored very closely in the short term.
Oil and wider commodity-price trends will continue to have an important market influence while gold price trends will be watched especially closely.
Low consumer inflation data would undermine the UK currency on Tuesday.
Support/Resistance levels
| |
EUR/USD |
USD/JPY |
GBP/USD |
| |
|
|
|
| Resistance |
1.5600
|
107.20
|
1.9880
|
| |
1.5510
|
105.80
|
1.9730
|
| |
1.5430
|
105.05
|
1.9610
|
| |
1.5425 |
103.95 |
1.9575 |
| Support |
1.5360
|
103.70
|
1.9500
|
| |
1.5230
|
102.85
|
1.9410
|
| |
1.5190
|
101.80
|
1.9330
|
Current spot level is in bold type
09:15 AM GMT Overall strategy: The dollar will be in a much stronger position to regain momentum if there is clear evidence that G7 authorities will encourage a stronger US currency. The dollar will need to break through the 1.5350 level and sustain gains through this level to secure momentum for further gains towards a possible medium-term target area around 1.50.
Market analysis
Euro/dollar:
The US economic data will be under close scrutiny this week with important data releases on spending and industrial trends. The US currency will tend to gain further underlying support if there is further evidence that the economy could stage a short-term recovery. The Euro-zone growth trends will also be watched very closely given further speculation over a sharp slowdown in the economy with expectations that the ECB will move towards an easing bias. The G7 stance towards currencies will remain a very important background focus with further speculation over efforts to push the US currency stronger. In this environment, the dollar should find further support on dips towards 1.55 against the Euro with a net firmer bias. Caution will tend to prevail ahead of Tuesday's retail sales reports with the dollar hitting resistance close to 1.5350.
|
The dollar was unable to sustain gains through the 1.54 level against the Euro on Friday and drifted weaker to lows around 1.5490 with the US currency at the weaker end of this range in New York.
The US currency had gained support earlier in the week from the expectations of a softening of the ECB stance and the US currency was still suffering from some reassessment of the situation following Thursday’s council meeting. The Euro will still be hampered by expectations of a sharp slowdown in Euro-zone growth and markets will stay on high alert this week for any evidence of further weakness in the Euro area. On Friday, the ECB reported that lending standards had generally tightened during the first quarter, notably in the business sector, which will reinforce expectations of deteriorating conditions.
The US currency was unsettled to some extent by an increase in risk aversion following further debt write-downs in the financial sector. Wider than expected losses increased fears that there were still major stresses in the economy and the risk of further debt write-downs. Oil prices also pushed to fresh record high during the day which unsettled the dollar.
The US trade deficit fell to US$58.2bn in March from a revised US$61.7bn the previous month. There was a drop in oil imports over the month despite the high level of prices while there was also a drop in exports. The deficit decline will underpin longer-term dollar sentiment to some extent, but the impact will be offset by the fact that lower imports indicate weak demand within the economy. The dollar pushed back towards the 1.54 level in early Europe on Monday with buying support on dips due to persistent underlying doubts over Euro-zone trends and speculation over background G7 efforts to support the dollar. The Euro found support below the 1.54 level.
Yen:
The yen moves will continue to be dominated by levels of risk aversion and carry trades. Market conditions have stabilised, at least in the short term, with equity markets securing renewed gains which will tend to curb aggressive demand for the Japanese currency. Cautious remarks from the Bank of Japan governor will also tend to unsettle the yen. Some elements of caution will inevitably persist, especially as credit conditions will remain fragile. Overall, there is scope for further dollar support below the 103.0 level against the US dollar with potential gains towards the 104.50 level..
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A sharp dip in equity markets pushed the dollar down to 103.00 in European trading on Friday and the US currency was trapped close to this level in New York as credit fears persisted. The dollar will also tend to struggle in the short term if wider volatility levels increase as this will discourage carry trades and limit yen selling.
The Nikkei index proved resilient on Monday which lessened defensive demand for the yen while the domestic bank lending data was also weaker than expected which maintained unease over Japanese economic trends. Bank of Japan Governor Shirakawa was also generally downbeat on the Japanese economy which undermined the Japanese currency.
The dollar was boosted by further evidence of stronger underlying demand in the option market due to speculation over a slowdown in demand outside the US. The US currency strengthened towards the 103.50 level before consolidating with a technical correction following the sharp losses over the second half of last week.
.
Sterling:
There will still be major fears over the UK economy given the pressures on spending. The inflation data, however, will make it more difficult for the Bank of England to cut interest rates in the near term and this will offer some short-term Sterling support even if the data increases the long-term economic risks. The UK currency will gain some support if there is any recovery in risk appetite and there should also be important protection from greater doubts over the Euro-zone economy. Overall Sterling sentiment will remain very fragile, but the Euro continues to offer little value stronger than the 0.79 level against the UK currency. Sterling is still at risk of a move to 1.94 against the dollar over the next few days.
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Sterling remained under pressure on Friday with losses to lows around 0.7940 against the Euro. The UK currency also dipped below support levels at 1.95 against the dollar before pushing back to just above this level later in New York.
There were no significant domestic indicators with Sterling undermined to some extent by a drop in risk appetite over the day as investors shifted into more defensive assets.
Sterling was below the 1.95 level against the dollar in early Europe on Monday ahead of the UK data. Producer prices continued to rise strongly in April with input prices rising 2.4% over the month with an annual increase of 23.3%. There was also a stronger than expected monthly increase of 1.4% for output prices and the core increase of 1.0% will increase fears that inflationary pressure is building within the economy which will make it more difficult for the Bank of England to cut interest rates and this triggered initial Sterling gains.
Swiss franc:
The Swiss currency moves will continue to be driven by degrees of risk aversion in global markets. The franc will gain some further support if risk tolerances remain lower, especially if there is sustained downward pressure on global equity prices, but underlying fears should ease in the short term which will limit scope for franc buying. Overall, the dollar should be able to find support on dips towards the 1.04 level against the franc with tough selling resistance on an advance towards 1.06. There should be Euro support below the 1.61 level against the franc.
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The franc was firm on Friday with a peak around 1.6065 against the Euro and below 1.04 against the franc. The renewed risk aversion increase provided some support to the Swiss currency during the day as European equity markets came under selling pressure. There was some correction in US trading with dollar buying on dips.
Overall credit-related fears should still run at a reduced level compared with March which will limit strong demand for the Swiss currency. There is also the potential for further unease over the Swiss banking sector and the franc was around 1.0470 on Monday with the dollar hitting resistance close to the 1.05 level.
Australian dollar:
The Australian dollar held close to the 0.94 level against the US dollar during Friday, but was unable to make significant headway as risk tolerances were lower. The Australian currency had a weaker tone on Monday, primarily due to domestic concerns. The latest home loans data recorded a sharp decline for the second month running which will increase fears of a sharp downturn in the housing sector and undermine the wider economy, especially as business confidence also deteriorated. The local currency temporarily retreated back to below the 0.94 level before edging stronger again and is vulnerable to a further decline towards the 0.93 level in the short term.
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Canadian dollar:
The Canadian dollar drew support on Friday from a higher than expected increase in employment for March even though there was an increase in unemployment over the month. The currency also gained support from the high level of crude oil prices which pushed to record highs. The Canadian dollar pushed to highs around 1.0050 against the US currency before weakening back to 1.01 in early Europe on Monday. The Canadian currency will gain some support if there is greater confidence in the North American economy, but there is likely to be further volatility triggered by energy prices. The net risks still point to a weaker Canadian currency, especially if G7 look to promote a stronger US dollar to help weaken oil prices.
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