by Darrell Jobman, Editor-in-Chief TraderPlanet.com
Commentaryfor Thursday, August 28, 2008
The Euro pushed to highs above the 1.48 level against the dollar during Thursday, but was unable to sustain the advance and was generally weaker in New York trading. Oil prices strengthened to just above US$120 per barrel on fears that storm Gustav could develop into a major hurricane and threaten Gulf of Mexico installations, but energy prices subsequently retreated sharply which also underpinned the US currency.
US second-quarter GDP was revised up to an annualised rate of 3.3% from the 1.9% original estimate. Consumer spending was revised slightly stronger, but the prime impetus behind the revision was a higher estimate for trade as exports rose.
Initial jobless claims edged slightly lower to 425,000 in the latest week from a revised 435,000 previously while continuing claims continued to rise. There will still be unease over underlying US prospects which will limit further dollar buying support. In particular, a lack of confidence surrounding themortgage and financial sectors will be important underlying factors in curbing currency support.
The latest PMIEuro-zone retail sales recorded a further decline for August which will maintain unease over the economic trends. The latest business and consumer confidence surveys will be watched closely on Friday and a further sharp deterioration would reinforce negative sentiment.
The Australian and New Zealand dollars were unable to sustain gains and this also tended to support the Japanese currency. There was, however, further evidence of a flow of capital into high-yield overseas bond funds which will certainly trigger yen selling on any significant rallies. The dollar settled slightly stronger near 109.50 in US trading.
The yen found support close to 162.0 against the Euro on Thursday and pushed back to the 161.0 region.
Reports that the G7 countries had planned a dollar rescue plan during the March Bear Stearns collapse did not have a major market impact whileBank of Japan member Suda stated that the bank should remain on guard over inflation.
The latest capital account recorded strong net Japanese sales of overseas bonds and there will be some further speculation over capital repatriation which will support the yen.
The UK currency remained under pressure in early Europe on Thursday with tentative evidence of rising wage settlements not having a major impact.
The latest Nationwide house-price survey recorded a further 1.9% decline for August to give a 10.5% annual drop which will reinforce housing fears. The latest CBI retail survey also recorded a net sales reading of -46 for August from -36 the previous month, intensifying already very negative sentiment towards consumer spending and the wider economy.
The UK currency was also undermined by negative comments from MPC member Blanchflower. Blanchflower has consistently called for lowerinterest ratesover the past few months, but he ratcheted up his rhetoric in the latest interview. He warned that unemployment would rise sharply and that the Bank of England needed to cut interest rates aggressively to prevent a deep recession.
His opinions have not been shared by other MPC members, but the comments will continue to unsettle confidence in the short term. Sterling dipped to fresh 2-year lows near 1.8250 against the dollar before a slight correction.
The dollar found support below the 1.09 level against the franc on Thursday and made another challenge on resistance close to 1.10 in US trading. The Euro found support close to 1.61 and strengthened to 1.6150 in New York asequity markets rallied.
The second-quarter employment survey remained robust, but there was some evidence of a slowdown and employment is a lagging indicator.
The KOF index will be watched closely on Friday to gauge the extent of the Swiss economic slowdown and a further sharp decline would unsettle the currency.
The underlying tone has still been corrective and there were renewed Australian dollar gains in local trading on Thursday. As far as the economic data is concerned, there was a stronger than expected 5.7% second-quarter increase in capital spending which supported confidence.
International trends are still liable to be more important for currency trends in the short term. The Australian dollar was initially boosted by a weaker US dollar and a recovery in commodity prices.
The currency pushed to highs near 0.8690, but was unable to sustain the gains and dipped back towards 0.8620 as oil prices came under renewed selling pressure.