EUR/USD
Volatility remained extremely high on Friday with the Euro strengthening to a high above 1.2650 on further speculation over intervention by the major central banks as speculative players pushed to trigger stop losses. The currency was, however, unable to sustain gains in European trading as underlying sentiment was still generally weak. The German IFO index weakened to 101.5 from 101.6 the previous month while there was a dip in the manufacturing PMI index, but there was a gain in the services sector.
The German parliament approved the Euro-zone support package which provided some degree of relief for markets as the immediate threat of political divisions eased. Euro-zone Finance Ministers also met during the day to discuss the crisis situation and look at ways of bolstering market confidence.
Risk appetite was still very fragile with equity markets subjected to further selling pressure. There was a tentative improvement in confidence during US trading as Wall Street rallied and this also provided some degree of Euro protection. Underlying confidence was still fragile with dollar Libor rates at a six-month high.
There was also further speculation that the G7 central banks could take action to defend the Euro and this encouraged a covering of short positions ahead of the weekend, especially over the past few weeks there have been substantial gaps when markets opened following the weekend break.
The Euro found support close to 1.2450 and consolidated near 1.2550 later in the US session as selling pressure eased slightly.
Yen
The Japanese Finance Ministry warned against excessive currency moves on Friday and there will certainly be domestic unease over the impact of currency strength. The Bank of Japan left interest rates on hold at 0.1% following the latest monetary meeting and the currency will remain vulnerable on yield grounds.
After very heavy losses, there was a recovery in the Australian dollar which curbed demand for the yen while the Euro also recovered strongly from 11-year lows. In this environment, the dollar edged back above the 90 level against the yen in early Europe.
The dollar weakened back to the 89 level ahead of the US open as risk appetite weakened again. There was further support close to this level with speculation over semi-official buying support for the dollar and the US currency pushed back to around 89.80 later in the US session.
Sterling
Sterling again underperformed on Friday as it held below 1.45 against the dollar with doubts over the UK ability to attract international funds. The latest government borrowing data was better than expected with a GBP10bn deficit for April compared with expectations of a GBP11.1bn shortfall and the rise in tax receipts will provide some degree of optimism over the economy.
In contrast, the money supply, mortgage lending and bank lending figures were all weaker than expected with a sharp decline in business lending. There will be fears over a renewed credit crunch which could destabilise the economy over the next few months and this will tend to unsettle Sterling.
There were also some fears over bank profitability and there will also be speculation that further balance-sheet stresses within the banking sector could undermine lending even further. Sterling did find support close to 1.4320 against the dollar during the day with a rally back to the 1.4430 region as global risk appetite stabilised.
Swiss franc
There was further volatile franc trading during Friday. The US currency peaked close to 1.1580 in Asian trading and then dipped to lows near 1.1450 before consolidating just below the 1.15 level. The Euro was unable to sustain a move above the 1.45 level against the franc, but did maintain the bulk of the gains recorded over the previous 36 hours.
There was further speculation over National Bank intervention and this will discourage speculative Euro selling. There will still be a high degree of unease over the Euro-zone fundamentals which will tend to limit any sustained Euro support.
Australian dollar
There was an Australian dollar recovery back to 0.8360 against the US dollar in Asia on Friday before selling pressure returned. The currency slipped back towards the 0.82 region before rebounding to the 0.8280 region as equity markets attempted to rally while the currency was also heavily over-sold on a short-term technical view.
Overall confidence will remain extremely fragile in the short term, especially after very heavy losses seen this week. Investors much more cautious over carry trades, especially as volatility has also been extremely high over the past few days.
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