by Darrell Jobman, Editor-in-Chief TraderPlanet.com
Commentaryfor Thursday, September 18, 2008
EUR/US$
The dollar dipped sharply in Europeantradingon Thursday with a retreat to lows around 1.4540. Global central banks responded to the serious market stresses with substantial injections of funds into money marketstotalling around US$180bn. The heavy allocation of funds initially weakened the US currency, but there was further evidence of robust dollar demand which helped the currency recover ground.
The dollar will still tend to be undermined by a lack of confidence in the US financial markets and economy. In addition, the yields on money-market instruments is at very low levels which will erode support.
The US labour-market data remained disappointing with a further increase in jobless claims to 455,000 in the latest week from 440,000 the previous week, although the data may have been distorted by hurricane Gustav.
In contrast, the Philadelphia Fed index was stronger than expected with a recovery to 3.8 for September from -12.7 the previous month. The return to positive ground will lead to some hopes that the manufacturing sector can help stabilise the economy, but confidence will remain very fragile in the near term.
ECB officials maintained a tough stance on inflation with further warnings over secondary effects, but there will be further speculation over action to cut interest rates if tensions fail to subside.
Wall Street rallied strongly later in US trading on hopes for a wider market support package and this pushed the US currency to highs around 1.43 against the Euro in choppy trading.
Yen
Regional stock markets fell very sharply on Thursday with the Hong Kong index for example falling by over 7% in late trading. With Asian currencies also weakening, there was further defensive demand for the Japanese yen as risk appetite declined sharply.
The latest monthly Japanese Tankan survey reported a small recovery in the manufacturing sector, but the services-sector index dipped to a 5-year low. The Bank of Japan also lowered capital spending estimates in its latest monthly report.
The global risk factors will still tend to dominate for now with further underlying yen support. The Japanese currency weakened to around 105 against the dollar after central banks provided additional liquidity with Tokyo offering dollar liquidity for the first time.
As Wall Street struggled to sustain gains, the yen advanced back towards 104.0 in choppy trading conditions, but the Japanese currency then weakened to 105.70 as US equities rallied more strongly.
Sterling
The UK currency initially held firm on Thursday with confirmation of a LloydsTSB deal to buy banking group HBOS. The UK currency was then unsettled by speculation that the Bank of England would cut interest rates.
UK retail sales were reported to have increased 1.2% in August compared with expectations of a monthly decline. Sales are liable to have been driven by heavy price discounting which will limit any positive Sterling impact.
The other UK data was also generally weak with a GBP28.2bn borrowing requirement for the first five months of the fiscal year while mortgagelending remained weak. Fears over the economy will continue to limit currency support.
Sterling was still able to gain some support asfinancial stocks rallied in New York and the UK currency regained the 0.79 level against the Euro. MPC member Besley also warned against hasty action on interest rates.
Swiss Franc
The franc secured a net advance against the dollar with gains to 11-day highs around 1.09 as the dollar came under pressure against European currencies.
At the quarterly policy meeting, the National Bank held interest rates at 2.75%. The bank also retained its growth and inflation forecasts for the current year. The bank took a generally firm tone against the inflation which should provide near-term currency support.
Markets will still be uneasy over the outlook for the Swiss banking sector and fears over further losses at UBS will tend to limit franc buying support. Gains on Wall Street pushed the US currency back to near 1.11 against the franc in US trading.
Source: VantagePoint Intermarket Analysis Software
Australian dollar
The Australian dollar retained a firm tone in local trading on Thursday, but hit resistance above the 0.80 level against the US dollar.
Underlying fears over the domestic and regional economy will continue and this will limit scope for strong Australian dollar support, especially if rallies in equity markets fail to hold. The key feature is likely to be a sustained increase in volatility.
After an initial retreat, the currency pushed back to the 0.80 level in US trading as financial fears eased with volatility still a key feature.
