by Darrell Jobman, Editor-in-Chief, TraderPlanet.com
Commentary for Wednesday, October 1, 2008
EUR/US$
The Euro pushed to highs above 1.4150 against the dollar in early European trading on Wednesday, but failed to sustain the gains and weakened sharply in early New York with a dip to below 1.40.
Funding pressures eased slightly at the beginning of the third quarter, but there were still substantial stresses. The underlying dollar shortage persisted on market de-leveraging and this remained a positive US currency factor. Markets will continue to monitor congressional negotiations closely and signs of a deal would tend to improve risk appetite which would also tend to weaken the US currency against European currencies.
The US ISM data was sharply weaker than expected with a decline to 43.5 in September from 49.9 previously and this was the weakest reading since late 2001. Individual components also recorded depressed readings for employment, orders and inflation.
The data will reinforce fears that the economy has entered a fresh downturn which will undermine sentiment. The ADP employment data was slightly stronger than expected with an 8,000 decline for September after a 37,000 decline the previous month. The jobless claims data will be watched closely on Thursday for further labour-market evidence ahead of the Friday payroll report.
The Euro-zone September PMIindex for the manufacturing sector was revised down slightly which will maintain fears over economic trends. There will be increasing pressure on the ECB to shift policy and move quickly towards a policy of lowering interest rates. The ECB policy decision and press conference will, therefore, be watched very closely on Thursday.
There is a possibility of an interest rate cut, although this would probably only be sanctioned by the ECB if there was a move to co-ordinate cuts among all global central banks. The Euro settled close to 1.4050 later in US trading.
Yen
The dollar consolidated around the 106 level on Wednesday as Asian stock markets staged a fragile rally with domestic investors still very cautious.
The quarterly Tankan index weakened to -3 in September from +5 the previous quarter which was slightly lower than expected. The impact will be limited as a serious slowdown has been discounted, but economic fears will limit yen support.
The weak US data contributed to the fresh mood of fear over growth trends while risk aversion also increased further as Wall Street weakened. In this environment, there were renewed gains for the Japanese currency with an advance through the 106 level against the dollar.
Sterling
The UK currency found support close to the 0.7950 level against the Euro on Wednesday, but remained under pressure against the dollar as the US currency found technical support. The UK currency dipped to lows below 1.7650 before regaining the 1.77 level.
The UK banking data will be watched closely and any further difficulties with LloydsTSB’s takeover of HBOS would trigger renewed selling pressure on the UK currency. Despite some reassuring comments, uncertainty will remain extremely high.
The PMI index for the manufacturing sector weakened further to 41.0 in September from a revised 45.0. With the index at a 17-year low, expectations that the economy is in recession will continue. There will be increased pressure on the Bankof England to move quickly towards a cut in interest rates. Nevertheless, near-term Sterling trends will tend to be correlated with domestic and international banking-sector developments.
Swiss Franc
The franc found support close to the 1.5825 level against the Euro and regained ground during the day as risk conditions continued to dominate.
The Swiss PMI index weakened to 47.9 in September from 52.5 previously which was the first decline to below the 50.0 level for over three year and will maintain fears over the economic trends.
There were also some reports that a large Swiss bank was in difficulties, but the franc secured renewed support later in European trading as risk appetite remained low. The franc settled close to 1.12 against the dollar in choppy trading.
Source: VantagePoint Intermarket Analysis Software
Australian dollar
The Australian currencyhad a slightly firmer tone in local trading on Wednesday, but hit resistance close to 0.80. There will be further fears over the impact of a weakening global economy, especially as there will be a negative impact on industrial commodity prices.
There will also be expectations of further interest rate cuts by the Reserve Bank of Australia within the next few weeks. The currency will gain some important support if there is any tentative improvement in risk aversion, but it settled close to 0.79 against the dollar as the US currency retained a firm tone.
