by Darrell Jobman, Editor-in-Chief TraderPlanet.com
EUR/US$
The US currency fell to fresh record lows on sustained selling pressure during Tuesday. The dollar weakened to lows around 1.4825 and was unable to secure any recovery as confidence remained depressed.
There were reports that Saudi Arabia was considering a change in its currency regime and this continued to fuel wider speculation over a diversification away from the US currency. This speculation is liable to continue which will tend to increase near-term selling, especially as the weaker dollar fuels additional stresses on the pegs.
US housing starts edged stronger to an annual rate of 1.23mn in October from a downwardly-revised 1.19mn the previous month. There was, however, a jump in multi-family homes with single-home starts continuing to fall and permits remained weak.
The Federal Reserve minutes from October’s meeting stated that the rate decision was a close call and could be reversed readily if necessary, but was a useful insurance against a steeper slowdown. The Fed also lowered its 2008 GDP growth forecast to 1.8 – 2.5% from a 2.5 – 2.7% range previously. Wednesday’s data should not have a major impact ahead of the Thanksgiving holiday and markets are pricing in over a 90% chance of a December rate cut.
ECB President Trichet and Chinese central bank governor Zhao both voiced support for the dollar on Tuesday while Euro-group head Juncker stated that it was not possible to maintain a benign approach to a strong Euro.
There is likely to be further central bank verbal intervention to help keep dollar selling in check. There is also a growing risk that there will be actual intervention, especially with liquidity lower than usual during the Thanksgiving period.
Yen
As regional stock marketsrecovered on Tuesday, the yen weakened back towards 110.40 against the US dollar, although the US currency was struggling to sustain gains and retreated back to lows near 109.50 in choppy New York trading.
Markets will remain cautious over dollar selling below the 110.0 region due to the threat of verbal intervention from Japanese officials while importer demand is also likely to increase below this level.
The general increase in volatility will tend to discourage carry trades and this will provide important underlying yen support. Any seizure in global credit markets would also increase the risk of capital repatriation and strong yen gains. It is significant that strong Wall Street gains failed to provide a boost to the dollar while a reversal put the US currency under near-term selling pressure which indicates an underlying flow of funds into the yen.
Sterling
Sterling drifted only slightly weaker against the Euro on Tuesday and strengthened to highs above 2.0650 against the dollar as the US currency came under renewed selling pressure.
The latest UK data continued to suggest a slowdown in the economy as lending and money supply growth weakened. The headline CBI industrial survey was stronger than expected which provided some relief, although the underlying components were little changed.
A narrow vote for unchanged rates in Wednesday’s Bank of England minutes from the November meeting would reinforce speculation over a December rate reduction, especially as Libor rates increased again on Tuesday.
Swiss franc
The Swiss currency held firm against the Euro on Tuesday, although the main focus was against the dollar as the franc pushed to record highs near the 1.1050 level as the US currency came under heavy selling pressure.
The franc will continue to gain support from underlying weakness in global equity markets as the main US indices were unable to sustain a rally.
The Swiss trade surplus edged lower to CHF1.56bn for October from CHF1.70bn the previous month, although there was a further robust export performance with a 5.8% annual increase which will maintain confidence over the economic outlook.
Source: VantagePoint Software, Market Technologies, LLC
Australian dollar
The Australian dollar weakened to lows just above 0.8750 in local trading on Tuesday as risk aversion intensified and regional stock markets were subjected to heavy selling pressure. There was a reversal later in the session as stock markets stabilised and the Australian dollar also gained support from general US currency weakness with a move back to 0.8910 as gold prices also rose strongly.
The domestic influences are likely to remain of secondary importance in the short term with global flows dominant. Underlying market stresses are liable to continue with much reduced confidence in carry trades. The key feature is likely to be a sustained increase in volatility.
