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Overall risk conditions continued to dominate ahead of Monday’s New York open with equity markets coming under renewed pressure. The dollar gained a further element of defensive support amid deteriorating sentiment and commodity currencies weakened further. The Euro did, however, find support close to the 1.1700 level and gained an element of protection from the closing of carry trades funded through the single currency.

ECB council member Schnabel stated that premature policy tightening would be a bigger mistake than waiting, maintaining expectations that the central bank would maintain a very accommodative stance in the short term despite higher inflation.

The US NAHB housing index edged higher to 76 for September from 75 the previous month and slightly above consensus forecasts of 74 which helped maintain near-term confidence in the housing sector. There was, however a warning from a major housebuilder that supply shortages would lead to lower than expected sales.

There was some speculation that the Federal Reserve would draw back from more hawkish policy language, especially given reservations over developments in China and this curbed dollar demand to some extent. In this environment, the Euro edged higher to 1.1730 at the European close but failed to make further headway. Tight ranges prevailed on Tuesday with the Euro around 1.1735 as the dollar retreated slightly and commodity currencies attempted to recover ground.




US Treasuries gained fresh support from risk aversion ahead of the New York open with further demand for liquid assets. The decline in US yields curbed potential dollar support and there was also renewed defensive demand for the yen. Given that the latest CFTC data recorded only a slight decline in short yen positions and there is still the potential for substantial position adjustment if fear dominates for an extended period.

The dollar faded from its best levels and weakened to near 109.50 against the Japanese currency as yen demand remained firm.

There were no expectations of significant policy changes by the Bank of Japan and the dollar remained under pressure around the Wall Street close.

There was further uncertainty over the US fiscal support package with further difficulties in getting legislation through congress.

Chinese markets remained closed on Tuesday, maintaining a high degree of uncertainty ahead of the re-opening on Wednesday. Expectations of further central bank liquidity injections helped soothe markets to some extent and US futures recovered ground, although Hong Kong stocks edged lower.

The dollar edged higher to just above 109.50 with the Euro around 128.50 as Evergrande attempted to offer reassurance, but sentiment remained notably fragile with the potential for sharp moves across asset classes when Chinese markets re-open. Markets will be braced for choppy conditions in Asia on Wednesday.




Sterling remained on the defensive during Monday with the slide in global risk appetite having an important in curbing demand for the UK currency. There was an early dip below 1.3700 against the dollar and it was unable to recover this level into the European close with losses to a 4-week trough below 1.3650.

There was an element of speculation that higher gas prices would undermine UK output and trigger a less hawkish Bank of England policy stance despite the fact that there will also be notable upward pressure on the inflation rate. The Euro also posted net gains to highs above 0.8580 as the single currency secured defensive support.

A tentative bounce in risk appetite helped underpin Sterling on Tuesday with a recovery to 1.3675 against the dollar while the Euro held firm. Global risk conditions will tend to dominate during the day, but there will also be caution ahead of Thursday’s Bank of England policy announcement.

The latest UK government borrowing requirement was higher than expected at £19.8bn for August with Sterling sentiment remaining notably cautious.




Swiss sight deposits edged lower to CHF714.7bn in the latest week from CHF714.8bn previously which does not suggest that the National Bank had been intervening significantly to weaken the franc in the latest week, but there will still be reservations over potential action to curb gains.

Weaker risk conditions underpinned demand for the Swiss currency. There was also renewed demand for gold during Monday which also had a significant impact in boosting demand for the franc. The Euro dipped back below the 1.0900 level while the dollar retreated to near 0.9275 as equity markets came under pressure.

The franc weakened only slightly on Tuesday with the Euro around 1.0885 as gold prices were unable to extend gains.


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