by Darrell Jobman, Editor-in-Chief, TraderPlanet.com
Commentaryfor Tuesday, September 30, 2008
EUR/US$
The Eurowas unable to make any headway in European tradingon Tuesday and then weakened sharply in US trading.
There was still strong evidence of a technical dollar shortage as money-market conditions remained very tight with the Fed Funds rate generally well above the 2.0% target level. The liquidity shortage was compounded by calendar considerations at the end of the third quarter. The money markets will be watched closely on Wednesday to assess whether the underlying pressures ease at the start of the new quarter.
The US economic data again failed to have a big impact, but was generally stronger than expected. The Chicago PMI index edged lower to 56.7 in September which was the first decline since February, but markets were expecting a larger decline. Consumer confidence was also above expectations, although it did not capture the recent banking turbulence. The Case-Shiller house-price index recorded a 16.3% decline in the year to August.
There will still be major fears over a further deterioration in the US economy. The congressional negotiations will be watched closely in the near term with the House of Representatives due to reconvene on Thursday and another failure to reach agreement would trigger a renewed slump in confidence.
The Euro was undermined by further stresses within the banking sector as French authorities were forced to inject capital into Dexia. Confidence in the Euro-zone economy also remains weaker and there will be further pressure on the ECB to adopt a looser monetary policy. In this context, the ECB rate decision and press conference will be watched very closely on Thursday.
The Euro weakened very sharply to lows near 1.40 before a partial rebound as volatility remained very high.
Yen
Domestically, the economic datawas weaker than expected with a 3.5% decline in industrial production for August while unemployment rose to 4.2% and the manufacturing PMI index dipped to a 6-year low. Attention will still be focussed firmly on global risk aversion and capital market stresses.
Net capital outflows from Japan are likely to remain lower due to elevated risk aversion and higher volatility which will continue to provide underlying yen support. Bank of Japan liquidity injections will lessen the potential for sharp currency gains, although volatility will be remain high.
The dollar found support below the 104 level with further evidence of strong institutional buying around the 103.60 level and it recovered back to 106.40 in New York as Wall Streetrecovered ground strongly.
Sterling
The final second-quarter UK GDP data was unchanged from the previous reading of 0.0% with a marginally higher year-on-year reading. The current account deficit widened to GBP11.0bn for the second quarter of 2008 from a revised GBP5.5bn previously.
There will be further speculation that the Bank of England will move forward an interest rate cut, although the Sterling impact may be lessened by the fact that there will also be growing speculation over a co-ordinated global approach to lowering rates, possibly within the next few days.
Sterling was very volatile over the day and eventually weakened to lows below 1.78 against the dollar while it strengthened to highs near 0.7840 against the Euro before weakening back to 0.7910 later in New York. For the quarter, Sterling weakened over 10% against the dollar, the steepest decline for 16 years.
Swiss Franc
The franc had a softer tone in global markets as risk fears eased slightly during the day. The Swiss currency dipped to lows near 1.5820 against the Euro in cautious trading. Dollar moves dominated and it strengthened to beyond the 1.12 level.
The near-term franc moves will remain strongly influenced by levels of risk aversion in the short term with the rally on Wall Street dampening immediate franc demand.
The Swiss banking sector will be watched very closely with some degree of fears that the major domestic banks will come under funding pressures.
Source: VantagePoint Intermarket Analysis Software
Australian Dollar
The Australian dollar dipped to below the 0.80 level in local trading on Tuesday before finding some composure. The domestic data was mixed with a small increase in retail sales while there was a sharp decline in building approvals.
The data will reinforce unease over the housing sector and there will be speculation over an early move to cut interest rates by the Reserve Bank, but the focus will tend to be on international trends. The currency will be unsettled by a decline in commodity pricesand higher volatility will discourage aggressive position taking. As the US dollar rallied strongly, the Australian currency weakened back to lows below 0.79 against the US dollar.
