EUR/USD
The dollar was able to resist further losses on Friday, but was still finding it very difficult to secure sustained respite as gains quickly attracted fresh selling pressure.
The US industrial data was stronger than expected with a further 0.7% increase in output for September following a revised 1.2% increase the previous month while capacity use also recovered.
In contrast, the latest University of Michigan consumer confidence data recorded an unexpected decline to 69.4 from 73.5 the previous month. Although spending appears to have held relatively firm over the past few weeks, there will continue to be fears over underlying consumer vulnerability.
The capital account data will continue to be watched very closely given underlying fears over a medium-term shift away from US assets. The latest data recorded net long-term inflows of US$13.0bn for August following inflows of US$15.3bn the previous month. China’s US Treasury holdings fell slightly over the month.
Total net inflows were also slightly positive after big outflows the previous month. The data will maintain fears over a gradual erosion of the US currency position, but should stem some of the more alarmist rhetoric surrounding the dollar. Nevertheless, underlying sentiment is certainly liable to remain weak in the short term
Markets will stay on high alert for comments on the Euro’s value by key European and US officials. So far, there has not been any evidence of a concerted effort to stem dollar selling. In comments on Friday Euro-group head Juncker stated that a further Euro rise would slow the economic recovery and rhetoric is likely to become more aggressive above the 1.50 level
Yen
The yen was slightly weaker against the dollar in Asia on Friday with selling against Sterling important in pushing it down against the US currency.
The Japanese government announced that it would freeze some spending for the fiscal 2009/10 budget and this will maintain pressure for very low interest rates which will tend to hamper the yen to some extent.
The dollar was able to hold above important support levels near 90 during Friday, but was unable to extend gains above 91.20 as underlying sentiment remained weak.
Sterling
Sterling maintained a firmer tone on Friday, although the rally against major currencies was showing signs of fatigue after the rapid gains seen over the previous 24 hours. The UK currency pushed to 3-week highs near 1.64 against the dollar and was able to consolidate above 1.63 in the US session. Sterling also challenged the 0.91 level against the Euro. Sterling was broadly resilient in the face of weaker equity markets which suggests some improvement in underlying sentiment.
There were no major domestic trading influences during the day. Markets will continue to monitor Bank of England comments closely next week given uncertainty over monetary policy. There will be a particular focus on Wednesday’s MPC minutes for further evidence on whether the quantitative easing programme is likely to be extended in November. A generally dovish set of minutes would risk renewed selling pressure on Sterling.
Swiss franc
The dollar found support below 1.0130 against the franc on Friday and recovered to 1.02, but was unable to sustain the improvement as underlying sentiment remained weak. The Euro edged firmer to the 1.5170 region with the threat of central bank intervention continuing to deter any significant franc challenge on the 1.51 area.
The latest retail sales data was weaker than expected with a 1.0% decline in the year to August, although the data is not having a major impact with international developments dominant.
Australian dollar
The Australian dollar has maintained a strong tone with buying support on dips still a key market feature. There was a peak close to 0.9260 against the US dollar before a consolidation near 0.92 on Friday. Underlying confidence in the Australian dollar will remain strong in the short term with firm risk appetite and a weak US currency also still key support factors.
The Reserve Bank is likely to sell the local currency which will tend to curb the potential for Australian dollar gains and a substantial amount of favourable news has been priced in which will increase the risk of a sharp corrective retreat. The Australian dollar dipped to lows around 0.9125 as commodity prices slipped and equity markets declined before rallying back to 0.9175.