The euro, Swiss franc and yen remain slightly higher against the dollar since the much-anticipated military retaliation against Afghanistan began on Sunday. EUR/USD continues to hover above support at 92-cents while the dollar struggles to regain the 120 yen level and 1.6090 francs. Traders report little inclination to buy the dollar due to fears of revenge attacks by terrorists. Yet, compared to the September 11 attacks, the dollar appears less intimidated by the actual invasion of Afghanistan. What happens to the dollar and US equity markets now depends on the intensity and duration of the campaign and any possible reprisals by terrorists which would have a strong effect on consumer confidence.
USD/JPY fell to an overnight low of 119.61 but continued to maintain above key support at 119.50 as it tested the 120 level in Asian trade. Dealers report that demand for USD remained subdued, with the decline in USD/JPY being attributed to Japanese investors' reluctance to take money offshore due to the reemergence of uncertainty stemming from military action on Afghanistan. Risk-aversion is seen limiting the speculative flows from Japanese institutions into higher yielding foreign assets. But, below the 120 level could prove to be a good entry position for long USD/JPY positions given the speculation of intervention by Japanese monetary authorities to keep the yen's rise under control. FinMin Shiokawa said on Monday that Japan had not made a decision yet as to whether further intervention was needed after the attacks, but added there may be a need to intervene if speculative flows made FX rates unstable.
USD/JPY support is seen holding at 119.50, with subsequent foundation built at 119.35 and the119 figure. Upside is seen capped at 120, 120.40 and 121. On Monday, EUR/JPY was dragged down to a session low of 110.06 by losses in USD/JPY. EUR/JPY managed to recover to a session high of 110.53 but is still trapped inside a consolidation pattern. Support at 109.80 followed by 109.00. Resistance is seen at 110.90.
USD/CHF slipped below key support at 1.6090 after the NY close and subsequently fell to a session low of 1.6063. USD/CHF recovered slightly overnight amid squaring of short positions, but the announcement of a second wave of attacks and a second instance of anthrax in Florida dragged it back down. The franc has come off its overnight highs around 1.60 but could break through that resistance level if more terrorist attacks occur in the US or abroad. The euro was also affected by risk aversion as it remained below key support at 1.48 francs. The viability of the Swiss franc as a safe have currency has also improved since Swissair had been able to fly some of its aircrafts after a winning court protection from creditors on Friday and securing emergency funding from the government. Yet from a technical standpoint, dealers point out that the Swiss franc looks overbought at these levels, which indicates that any gains would be short-lived in the event of a victory.
EUR/USD continues to hover above support at 92-cents, but its inability to show any substantial gain from the uncertainty enshrouding the dollar and US economy signals that the single currency may be vulnerable to evidence of its own weakness. With strong resistance at 92.40, it is important to realize that EUR/USD broke above its downtrend resistance line around 92.25 on Monday, but has since fallen back and failed to break back above. Only sustained gains above this level would bode well for the pair because the euro is not seen as a safe haven by investors and it will come under further pressure against the Swiss franc if investors turn more cautious. Sources indicate that Germany's unemployment rate may have risen as much as 30k from August to September which would further weigh on the Eurozone's largest economy.
Also weighing on the euro is the fact that most market observers expect the ECB to keep interest rates unchanged at 3.75%, when it meets this Thursday. On Saturday, ECB President Duisenberg said, "At the current juncture the level of key ECB interest rates is seen to be consistent with maintaining price stability over the medium term," indicating that markets would indeed be disappointed this week, which will weigh on the euro. The hawkishness comes despite expectations of a sharp drop in September CPI to 2.1% from 2.6% in August and July. Such a development could coerce the ECB to ease rates at a meeting that will be followed by the monthly press conference. But the ECB is expected to revert to its pre-Sep11 efforts to force Finance ministers of their fiscal stability obligations, which would outweigh the obvious implications of a further fall in the US economy on the Eurozone.
Meanwhile, sterling remains supported above $1.4710 after plunging from a fresh 8-1/2 month high of $1.4836 in Asian trade on Monday. GBP/USD was again unable to maintain gains above key resistance at 1.48 and fell back against the euro to 62.60 pence to become the worst performing major currency since the Sunday assault on Afghanistan. Sterling had benefited from Monday's better than expected industrial production data for August, but economic data took a back seat to the more important question of UK involvement in Afghanistan. Nevertheless, the war in Afghanistan has diminished the pound's role as a safe-haven currency but not inhibited the 3-1/2 month bull trend in GBP/USD. Resistance is seen at 1.48 while support still holds at 1.47 followed by 1.4760.