Evidence of the Euro Being Used as a Global Funding Currency

EUR/USD

The Euro was trapped within familiar ranges during Friday as players were again unable to break major resistance levels in generally tentative conditions.

There were underlying fears over Euro-zone sovereign debt and the risk of medium-term defaults which continued to undermine sentiment towards the region and Euro. Confidence was also dented significantly by renewed fears surrounding the financial sector, especially after German bank Hypo Real Estate announced that it had secured an additional EUR40bn in loan guarantees which reinforced increased market fears over the banking sector.

The latest institutional reports also indicated that demand for peripheral Euro-zone assets remained generally limited as medium-term fears persisted. There was also some evidence of the Euro being used as a global funding currency as risk appetite was generally firm.

There were no significant US data releases during the day, but there was a rise in Treasury yields to a one-month high. The potential positive impact on the dollar was limited as part of the rise in yields was related to reduced defensive demand for US Treasuries as risk appetite improved. This, in turn, also limited demand for the US currency.

The Euro hit resistance close to 1.2750 against the dollar, but found support below 1.27 reflecting the fact that underlying dollar demand was also weaker.

Source: VantagePoint Intermarket Analysis Software

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Yen

The dollar found support below 84 against the yen during Friday and pushed to a peak near 84.40 before stalling. There was an improvement in risk appetite which helped underpin the dollar and curb yen demand.

The Chinese demand was generally stronger than expected with a particular gain in imports which helped boost risk appetite, although yen losses were still limited.

Finance Minister Kan again warned that intervention was a policy option to weaken the Japanese currency. The Democratic Party leadership campaign will be watched closely during the forthcoming weak. There will be further speculation that challenger Ozawa will be more willing to consider intervention, especially as he is less concerned over upsetting other G7 members.

Sterling

Sterling remained generally on the defensive during Friday as underlying sentiment remained fragile. The currency gained initial support from firm corporate demand related to upcoming dividend payments, but rallies quickly ran into selling pressure and retreated to lows near 1.5350 against the US currency while the Euro pushed to highs near 0.83 against Sterling.

Overall confidence in the UK economy remained weak amid expectations that there will be a deterioration in conditions and consumer spending. There was a further focus on the UK budget deficit position as there were reports that the government was looking for additional spending cuts. There were also further threats of strike action by major unions which undermined confidence in the economy and currency.

Sterling still gained some degree of protection from a lack of confidence in the Euro-zone economy and risk of sovereign debt defaults within the Euro area. A raft of  UK economic data releases will be watched closely over the following week to assess the potential Bank of England policy response with inflation data due on Tuesday.

Swiss franc

There was increased franc volatility during Friday's trading as there were net losses for the Swiss currency. There were reports of aggressive sales by Swiss banks and the franc weakened to lows beyond 1.3070 against the Euro and it also dipped to beyond 1.0220 against the dollar before finding some respite.

There was a general improvement in risk appetite during the day which curbed demand for the franc on defensive grounds. There are still important doubts surrounding underlying Euro-zone stresses and this will tend to limit potential selling pressure on the Swiss currency.

Any comments from National Bank members will be watched very closely ahead of Thursday's policy meeting, although a period of silence looks the most likely outcome.

Source: VantagePoint Intermarket Analysis Software

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Australian dollar

The Australian dollar found support close to 0.92 against the US currency during Asian trading on Friday and strengthened to a high near 0.9270 during the US session. It maintained the recent firm tone as international sentiment remained robust.

There was an improvement in risk appetite following the Chinese economic data and this also helped support the Australian dollar with optimism that firm demand from China would help underpin commodity prices and the Australian dollar. The currency maintained a firm tone following the release of further robust Chinese economic data on Saturday.