by Darrell Jobman, Editor-in-Chief TraderPlanet.com
Commentaryfor Wednesday, August 13, 2008
US retail sales fell a headline 0.1% in July as auto sales continued to weaken while there was a 0.4% underlying monthly increase. The data overall should not have a major impact oninterest rateexpectations, although there will be underlying fears over the spending outlook now the impact of tax rebateswill fade. Markets will look at the inflationdata on Thursday to assess the degree of pressure for higher interest rates.
The Euro-zone GDP data releases will be watched closely on Thursday for further evidence on the Euro-zone conditions. There is a strong probability that the German economy will contract after a very strong first-quarter increase, although a significant decline has been discounted. The wider Euro-zone trends will also be important and confidence will be unsettled by news that the Spanish government will hold an emergency session to discuss the economy.
Commodity pricesrallied on Wednesday and this prevented the US currency holding levels stronger than 1.49 against the Euro. The dollar is also vulnerable to a period of consolidationand correction following recent rapid gains.
Domestically, there was a 0.6% decline in GDP for the second quarter which was the weakest quarterly outcome for 7 years and reinforced expectations that the economy is in recession. Sentiment towards the Japanese economy will, therefore, remain fragile.
The data, however, also reinforced market fears over the global economy. In this environment, there was further downward pressure growth-orientated currencies and a continuing reversal in carry trades as commodity currencies fell.
The Japanese currency strengthened to below 109.0 against the dollar on Wednesday and pushed to beyond 162.0 against the Euro. The yen will continue to secure underlying support if global economic fears intensify with higher volatility likely to persist.
The Japanese currency weakened back to 109.50 against the dollar in New York as commodity prices and Wall Streetrallied.
The UK currency remained under pressure in early Europe on Wednesday as underlying confidence in the economy and currency remained weak.
UK unemployment rose by a further 20,100 in July after a revised 20,000 increase the previous month while average earnings growth slowed to 3.4% from 3.6% and the unemployment rate increased to 5.4% from 5.2%.
The data reinforced near-term fears over the economy, although the inflation report had a much bigger market impact.
In the quarterly report, the Bank of Englandforecasted that inflation would peak close to 5.0% late in 2008. The main focus, however, was the renewed downgrading of growth forecasts with thebankwarning that the economy would probably not grow over the next 12 months. A recession was a possibility and Bank Governor King noted that conditions would be difficult over the next year. The bank’s warning triggered a shift in interest rate expectations with markets moving to price in a cut before the end of 2008.
The adjustment in yield expectations will undermine Sterling in the short term, especially with a wider move out of high-yield currencies. The UK currency dropped to lows around 0.7970 against the Euro and also pushed to 22-month lows below 1.8650 against the dollar as confidence weakened sharply with the trade-weighted index at an 11-year low.
The currency has now discounted a substantial amount of bad news which may limit further losses.
The dollar was again unable to sustain gains above the 1.09 level against the franc on Wednesday and dipped to 1.0850 in US trade while the franc also strengthened to 1.6155 against the Euro before correcting weaker.
Globalstock marketswere unsettled during the day, especially in Europe, and this provided some degree of support to the Swiss currency. The dollar was also hampered by underlying overbought conditions.
There were further sharp Australian dollarlosses to lows below the 0.86 level against the US dollarin local trading on Wednesday before a recovery back to 0.8680 in early Europe. The currency was again undermined by a decline in commodity prices with copper prices at a six-month low.
Domestically, there was a recovery in consumer confidence which may have some positive impact on the currency, although overall sentiment is likely to remain very fragile in the near term after a series of weak data releases.
Commodity prices rallied in New York trading and this helped the Australian currency rally to 0.8750 against the US dollar.